It’s estimated that the total child-rearing expenses from birth to age 17 for a middle-income family is $233,610. Although the range of expenses across families is wide, adding a little one to the family is expensive. Whether you’re expecting a baby or adjusting to life as a parent, consider this checklist your starting point for adapting to your new financial reality.
With a new child comes new expenses. Baby clothes, diapers, food, and childcare expenses add up quickly, in addition to the prenatal and postnatal medical expenses. Some expenses, like diapers and new toys, are recurring, while others such as a stroller or car seat might be a one-time investment. It’s helpful to understand what upfront costs may be a temporary hit to your wallet and what recurring costs will influence your budget over the long haul. Online budgeting apps help.
Unemployment is stressful. That’s why it’s smart to have an emergency fund to cover 6–12 months of living expenses in the event of a layoff or unexpected change in employment. An emergency fund provides a cushion for a new parent while searching for a job, and should be calculated based on the new family budget.
It’s not unreasonable to think your health insurance provider might contact you or automatically add your newborn to your health plan. But it doesn’t always work that way. Fortunately, having a baby is a “qualifying life event,” which allows for an enrollment period during which you can make changes to your health policy. Most plans require that your child is added within 30 or 60 days post-delivery. If done in that time frame, your child should be covered retroactively.
The American Rescue Plan, signed into law by President Biden on March 11, 2021, expands the Child Tax Credit for 2021. First, 17-year-old dependents can qualify. Second, the credit is increased to $3,000 per child ($3,600 per child under age 6) for many families. Third, the $2,500 earnings floor is removed. Fourth, the credit is fully refundable. And fifth, half of the credit can be received in advance by having the IRS send periodic payments to families from July 2021 to December 2021. Make sure you update your tax forms to claim your Child Tax Credit.1
HSAs are a type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses. By using untaxed dollars in an HSA to pay for deductibles, copayments, coinsurance, and other expenses, you may be able to lower your overall health care costs. The annual limit on HSA contributions for 2021 is $3,600 for self-only and $7,200 for family coverage. If you’re a member of a qualifying employer-sponsored health plan, HSAs can be taken out of each paycheck and used for qualified health-related products and treatments, including doctor’s fees, infant formula, and even breast pumps.
A dependent care flexible spending account (FSA) is a pre-tax account used to pay for eligible dependent care services such as preschool, summer day camp, before or after school programs, and child daycare. It's a smart, simple way to save money while taking care of your loved ones so you can continue to work. Contributions are automatically deducted from your paycheck, and the funds can be used for qualifying child care expenses. The maximum contribution in 2021 is $5,000 for families.
The average tuition and fees for private four-year institutions were $36,880 for the 2019–20 academic year, according to The College Board. Even when adjusting for inflation, that’s more than double what it was 30 years ago. Even so, only 39% of parents list college savings as one of their top financial priorities—perhaps because the expense seems so far off. While it might not be an immediate priority, the sooner you start saving, the more options your child will have.
ScholarShare 529 is a state-sponsored, tax-advantaged 529 college savings plan that’s helping families like yours plan for the cost of higher education. It’s available to any citizen or taxpayer, and just about anyone can contribute including grandparents, family members, and friends.
A ScholarShare 529 college savings plan helps you save more over time. Any ScholarShare 529 earnings grow free from federal tax.2 Withdrawals for qualified higher education expenses at approved institutions are tax-free at both the federal and state level. The earnings portion of any withdrawal used to pay for tuition expenses at a public, private or religious elementary, middle, or high school is taxable at the state level for California taxpayers. See the Plan Description for details. As a 529 Plan, ScholarShare 529 also offers certain gift and estate tax planning benefits; consult your tax advisor.
1Consult your legal or tax professional for tax advice.
2If the funds aren't used for qualified higher education expenses, a 10% penalty tax on earnings (as well as federal and state income taxes) may apply. Non-qualified withdrawals may also be subject to an additional 2.5% California tax on earnings.