Budgeting for a baby

In short

A friend of mine once told me he had planned for everything except the diapers. You have probably wondered how much a baby really costs, and the honest answer is that it depends on you. Start by writing down what you spend each month right now. Then add the new costs you can see coming, like care, food, and doctor visits. Look at your health plan and your leave benefits before the baby arrives. Set aside a small cushion each month, even if it is modest. You do not need a perfect plan. You need a written one.

The whole of it

What it is

I once watched a neighbor build a barn without drawing a single line. It went up crooked, and he spent the next year fixing it. A baby budget is the drawing you make before the building starts. It is a simple plan for the money that comes in and the money that goes out once a child joins your home.

You are not doing anything wrong if you feel unsure about this. Nobody is born knowing how to do it. The good news is that the cost of a baby comes in a few clear pieces. Once you can see the pieces, they get much less scary. You are a caring person to be looking at this before the baby comes, and that habit will serve you well.

How it works

If you are holding a pen and a stack of bills, you are already halfway there. The plan works in three steps. First, you learn what your household spends today. Second, you guess what changes when the baby arrives. Third, you close any gap you find.

Start with today. Add up rent or mortgage, food, power, phone, gas, and debt payments. Look at a few months of bank records so you catch the small stuff that slips by. Most of us spend a bit differently than we think we do.

Now think about what changes. Some costs are one time, like a crib, a car seat, and a stroller. Others repeat every month, like diapers, formula if you use it, and child care. Health costs are a third group. There are doctor visits, and there may be a hospital bill on the day of the birth.

Then look at the income side, because it can change too. If a parent takes leave, pay may drop for a while. A friend of mine was surprised when his wife's leave paid only part of her salary. Check what your employer offers, and ask your human resources office how leave pay works. The federal Family and Medical Leave Act may give eligible workers job protected leave, and the Department of Labor explains who qualifies on its Wage and Hour Division website. That leave is often unpaid, so plan for it.

Last, close the gap. If costs will exceed income, you can trim something, earn a bit more, or draw on savings. Pick the mix that feels right for your family. It is your call.

The numbers, and where to find yours

If you want real figures for your own family, there are good places to find them. Each one is a document or a phone call away.

Your health plan lists what a birth costs you. It shows the deductible, which is what you pay before the plan pays. It also shows the out of pocket maximum, which caps what you pay in a year. Your plan's summary of benefits lists both. The number on your insurance card connects you to someone who can quote what a delivery would cost you. A newborn may need to be added to your plan within a set window after birth, so that call can cover the baby too.

For taxes, a child may lower what you owe. The Child Tax Credit is set by law. The credit amount is the current figure, which the official source publishes each year, and the income level where it starts to phase out is the current figure, which the official source publishes each year. The Internal Revenue Service explains it at IRS.gov, and the site fills in the checked figure with its date. Your own result depends on your income and filing status.

For child care, the number varies a lot by where you live. Rates from two or three providers near you make the best guide, and a written quote beats a guess every time. If your employer offers a dependent care account, the yearly limit is the current figure, which the official source publishes each year. That is money set aside before tax for care costs, and your benefits office can tell you if you have one.

For the everyday costs, the United States Department of Agriculture publishes a report called Expenditures on Children by Families. It estimates what families spend raising a child. Read it as a rough guide, and trust your own receipts more.

A worked example

I want to tell you about a couple I will call Maria and Daniel. They live in a small rented house, and they are expecting their first child in the spring. Maria earns 52,000 dollars a year. Daniel earns 46,000 dollars a year. Both figures are before tax, and I am using round numbers to keep the math easy to check.

Their combined pay is 52,000 plus 46,000, which is 98,000 dollars a year. After tax, they take home about 6,200 dollars a month. Their current bills, including rent, food, power, phone, car costs, and a student loan, come to 4,900 dollars a month. So they have 6,200 minus 4,900, which is 1,300 dollars left each month.

Now they guess at the baby's costs. They figure diapers and wipes at 80 dollars a month. Formula and food add 120 dollars. Extra health costs add 100 dollars. Child care is the big one. They called two local providers and got a quote of 1,100 dollars a month. Adding it up, 80 plus 120 plus 100 plus 1,100 gives 1,400 dollars a month.

Compare that to the 1,300 dollars they have now. They are short by 1,400 minus 1,300, which is 100 dollars a month. That is small, and they were glad to see it.

Then they looked at leave. Maria will take twelve weeks, and her employer pays half her salary during that time. Half of her monthly take home of about 3,700 dollars is 1,850 dollars. So she loses 1,850 dollars a month for about three months. That is 1,850 times 3, or 5,550 dollars in lost pay.

They also plan one time purchases of 1,500 dollars for the crib, car seat, and other gear. Their health plan has a 3,000 dollar out of pocket maximum, so they plan for that whole amount to be safe. Add it all up. The lost pay of 5,550, the gear at 1,500, and the health cap at 3,000 total 10,050 dollars.

They had 4,000 dollars in savings. They have about six months to prepare. If they save 1,300 dollars a month for six months, that adds 7,800 dollars. Together with their 4,000 dollars, they would hold 11,800 dollars. That covers the 10,050 dollars with room to spare.

Notice what Maria and Daniel did. They did not panic. They wrote the numbers down and let the numbers talk. You can do the same with your own.

Where it goes wrong

I have seen good people trip on the same few stones. Knowing where they sit helps you step around them.

The first is forgetting child care. It is often the largest new bill, and people leave it out because it feels far away. Get real quotes early, since some providers keep waiting lists.

The second is counting on leave pay that turns out smaller than hoped. Ask your employer for the exact terms in writing. Do not go by what a coworker remembers.

The third is skipping the health plan details. A birth can bring bills from a hospital, a doctor, and other providers. Some of them may be billed apart from each other. Ask what is in network, which means the providers your plan has agreed rates with.

The fourth is planning for the baby but not for surprises. Babies get sick, and cars break. A small cushion is worth more than a fancy nursery.

The fifth is being too hard on yourself. No plan survives contact with a newborn. Your budget is a living thing, and you will adjust it. That is fine.

Questions to answer before you leave this page

Do you know what your household spends in a normal month, and have you looked at real bank records to check? Have you called your health plan to learn your deductible and your out of pocket maximum? Do you know how your employer handles leave, and how much pay you would keep? Have you gotten at least two written quotes for child care? Have you looked at what tax credits and any dependent care account might do for you? How much can you set aside each month between now and the birth? And what small step could you take tonight, before you close this page?