As most parents know, raising a child is a wonderful experience but can also be expensive, climbing easily into the six figures in no time at all. This estimate may seem daunting, but with the right financial planning and early saving, you can plan for the future responsibly and be better prepared for the cost.
The average cost of raising a child
Most people know that a child's upbringing isn't cheap, but it might surprise you how expensive it really is. The U.S. Department of Agriculture (USDA) estimates that the average cost of raising a child born in 2015 today is $233,610, which includes the cost of basics and necessities. That means the cost of raising a child per year comes out to $14,000. Additional estimates from NerdWallet put the figure at $260,000 for just the essentials, such as food and housing, and a higher estimate of $745,000 when you throw in extras, such as childcare, sporting activities, electronics, birthday parties and vacations.
None of these figures include the cost of college. College Board reports that a moderate college budget for an in-state public college for the 2017-2018 academic year averaged $25,290.
You might think that costs decrease over time, but it's actually the opposite. As children age, these expenses increase. The USDA report shows that total annual expenses averaged about $300 less for children under 2 years old, but averaged $900 more for teenagers, who cost more to feed and typically have expenses such as car insurance.
Contributing factors to rising costs
Here's a closer look at how the cost of raising a child breaks down. With respect to housing, families usually need more space when children come into the picture. As a result, the USDA calculates that housing is the largest expense, accounting for 29 percent of a family's total child-rearing costs.
How much you will spend not only depends on your lifestyle but also on the region of the country where you live. In urban areas, for example, the cost is usually more than in rural areas. The USDA report estimates the annual housing cost per child in urban areas is $3,900, while it's $2,400 in rural areas.
Warning: These numbers are not for the faint of heart. The actual figures by category for the essentials per child from birth to age 18 might give you a bit of sticker-shock. NerdWallet estimates that parents will spend $84,420 on housing, $60,192 on transportation, $40,214 on healthcare, $34,895 on health insurance and $28,509 on food.
Are you financially prepared to have children?
Having a baby is a decision that will affect every aspect of your life, especially your finances, but the high costs can be manageable with the right planning.
You'll want to take a look at your household budget and make a list of what you're going to need to buy for the new person coming into your life, such as food, clothes, medicine, furniture and diapers. Keep in mind that if you or your significant other takes time off work, your income will probably decrease. By examining your current household budget, you can start to estimate the extra costs from your baby to see if your current income will cover the new expenses. You might want to consider cutting down on your discretionary spending, too.
Also, it's a good idea to check your health insurance policy and find out what type of pregnancy coverage you have to see what insurance will cover. Setting up a health savings account (HSA) can be a way to save money and plan for the future, especially if you have a high-deductible health care plan.
Keep your family life insurance up to date
Welcoming a new baby into your home could be a good time to consider a life insurance policy or to reexamine your current policy. And whether your policy is new or existing, make sure it is adequate to financially support your growing family in the event that you or your spouse dies unexpectedly. Protective Life has a calculator to help you better understand how to evaluate your life insurance needs. Research indicates that people overestimate the costs and underestimate how much they need. In fact, 44 percent of millennials overestimate the cost of a $250,000 Term Life policy by six times the actual amount, according to the LIMRA 2017 Insurance Barometer Study.
If you've never shopped for a policy before, know that there are many different types of life insurance you can choose from. Protective Life has a tool to help you determine what type of life insurance may best suit your needs.
There's clearly a lot to take care of when a baby comes into your life, but this information and these tips may help get you started. For a little more information, take a look at seven smart ways to budgeting for a baby.