Citi Personal Wealth Management

Financially Preparing for a Baby:
Diapers, Life Insurance and
Education Savings

HomeFinancial GuidanceFamily & Money

A baby can bring joy, wonder—and a substantial expense. According to U.S. Department of Agriculture figures, annual costs for raising a child born in 2015 through age 17 is $284,570 (inflation–adjusted) for a married couple with a before–tax income between $59,200 and $107,400.

And that doesn't take into account saving for college. Based on the 2019–20 academic year, on average a four-year tuition would be $87,800 for a public university and $199,480 for a private college, according to the College Board.

As you prepare for your baby, consider the expenses you may face. There are the health–care costs not covered by insurance. You might need a larger home, car, and more life insurance, and you may want to start an education fund. And, of course, there is baby food, clothing, diapers, and daily necessities.

Consider taking the following steps before and after the baby arrives to make the financial side of parenting a little easier:

  • Start saving for a baby. Try to get a head start by putting some money aside. If you're both working and one parent is planning to stay home indefinitely after the baby arrives, you might practice living on one paycheck and using the other paycheck to boost your savings.
  • Estimate expenses. Jot down all the one-time and recurring expenses that you will face, and then figure out whether these are manageable—or whether you need to trim or eliminate some costs.
  • Look into company benefits. Many companies have a range of benefits that can help cover pregnancy, childbirth and parental leave. While employers may be required to give you time off under the Family Medical Leave Act, they aren't required to pay you during that time. If they do pay, the percentage of salary—as well as the length of time this pay continues — can vary from employer to employer. Find out how much it might cost to add a new child to your employer's group medical coverage. If your employer offers a pretax health savings account, consider funding an account or upping your existing contribution. Many companies also offer a dependent care account for pretax savings for child care expenses.
  • Check your life and disability insurance. Even if you have life insurance, it may not be enough to provide for your now-growing family. You may want coverage equal to five times your annual salary and possibly more. The exact amount will depend on factors such as your income, your current level of savings, and how much mortgage and other debt you have. You may also want insurance on the life of a nonworking spouse, since his or her death would likely mean significant expenses for childcare and other costs. In addition, consider disability insurance to replace some income in case you are injured and can't work for an extended period. Your employer may provide short-term disability coverage at little or no cost. These plans typically cover 60% of your salary, and you may be able to extend that coverage by paying an added premium. You might also consider buying a supplemental policy on your own.
  • Consider starting an education fund. If, after all your other added expenses, you can afford to put something aside each month for your new child's primary or college education, you may wish to consider a 529 education-savings plan (ability to deduct from taxes varies by state). If grandparents or other relatives want to help, you might suggest they establish their own account for the child's benefit or contribute to the education plan account you set up.
  • Evaluate your retirement planning. While a decent–size college fund can be a great help when your baby turns into a college-bound teenager, keep in mind that you may also be able to pay college costs with loans and grants. Until then, you will still have daily and long–term financial goals to consider. This may be a good time to evaluate how these expenses may impact your retirement funding goals. Your Financial Advisor can assist you in understanding and evaluating strategies available to fund college expenses and the impact they may have on your retirement planning.
  • Name a legal guardian. You probably had a will even before you had a baby—but now it's essential. Both parents need wills that name a legal guardian in case you both die prematurely. Your will should also specify who is to manage the money left to your child, if different from the guardian and also how or when your child can spend that money if you were to pass away before they are old enough to responsibly manage their finances. You may want to name one person to take care of your child and someone else who is better with money to handle the finances.