How can that very small person cause such large changes in your finances?

The Costs of Children

by Gary Foreman

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Your friends are planning a baby shower. Mom's tummy is growing and she looks more radiant every day. The happy parents are making plans for the baby's room. All this activity and yet there well may be something that they've forgotten.

How can that very small person cause such large changes in your finances? Let's take a look and try to help our new parents get financially ready for the big day.

The first item on the agenda is to recognize the fact that the methods you used before may not be sufficient now. When you first got married you might have said, "you pay the rent and I'll use my paycheck for the groceries". But that won't get the job done any more.

According to the U.S. Census Bureau, the average mid-income family (with income between $57,600 and $99,730) spent $11,950 on a child less than two years old. Obviously every family will be different. You'll need to do some research. Prices vary from city to city. You'll make choices like disposable diapers vs. cloth. That will affect how much money you spend. Talk to your friends and find out what their bills look like.

If both parents have been working, the biggest question is whether one of them will stay at home with the baby. The alternative is using a daycare arrangement.

Choosing whether to have a stay-at-home parent is not an easy decision. Many parents are surprised at how little money is actually earned by the second breadwinner when expenses are deducted. For instance, someone earning $40,000 per year ($19.23 per hour) could find their take home pay reduced by as much as 75% when taxes and the additional expenses of working are factored in.

The 'stay-at-home' decision is one that needs to be discussed thoroughly. It involves much more than just money. Some parents are very happy staying home with children. Others are not. Career plans, the pace of family life, baby's health and more can all be affected by the choice you make.

Related: Can Your Family Make It On One Income?

Once you've made that decision it's time to look at a proposed budget. If a family is used to spending all of the current income, some adjustments will be required. You can't take a budget that's tight now and shoehorn in the extra expenses of a baby.

Begin with your current budget and talk about how the baby will affect your life and your finances. You can expect to find changes on both the income and the expense side. Even if both parents will continue to work, wages may be affected. A sick baby may need either Mom or Dad to stay home from work. For many employees that means that they won't get paid. Some parents will choose to take advantage of the "family leave". That can mean up to three months of lost income.

Not sure where to start with making a budget? The affordable Home Budget Spreadsheet from makes budgeting simple.

If both parents will work the next big decision is what type of day care to seek. You'll need to call around to find costs in your area. They'll vary widely. According to in 2011 the average cost for childcare was $972 per month, with infants being higher.

Related: Childcare Tips and Solutions

You'll also want to consider whether that bundle of joy will consume any of the savings that you've been accumulating.

It's also a good time to think about what happens if Mom or Dad should die prematurely. Our new parents should take a look at their insurance requirements. Younger parents don't expect to get sick or die. And, while it may be permissible for someone without children to have minimal insurance, it's not OK for our new parents. Should one parent die, the survivor will not only face the loss of income, but will find that it's more expensive to raise a child in a one parent home.

And the cost of insurance isn't that great. For instance, if our young mother is in her 20's and doesn't smoke, she should be able to buy $1 million in term life insurance for less than $50 per month.

Is your family protected? Get your free term life insurance quote from PolicyGenius, a Dollar Stretcher trusted partner.

There's more than financial issues to consider. It's essential that you have a valid will. You may know that you want your sister to take care of the kids if something should happen to you and your spouse. But, without a clear statement to that effect in a valid will, the state will follow their own rules. Their choice may be dramatically different than yours.

And don't forget to look at disability insurance. Losing income for a number of months can put a financial hurt on any family. But, for a family with small children, it can be especially hard. And roughly one in seven full-time workers will endure a disability lasting five or more years before reaching age 65.

Bringing a new life into the world is a wonderful time. It's a time of great joy, but also a great responsibility. You love that baby. Please don't forget that part of demonstrating that love is caring for their needs.

Updated February 2015

Gary Foreman

Gary Foreman is a former financial planner and purchasing manager who founded The Dollar website and newsletters in 1996. He's the author of How to Conquer Debt No Matter How Much You Have and he's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, and Gary shares his philosophy of money here. Gary is available for audio, video or print interviews. For more info see his media page.

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