Although raising a child can be incredibly fulfilling, it can also be expensive. Without factoring in what parents would additionally spend on education, the U.S. Department of Agriculture pegs the average cost of raising a child from birth to age 18 at $233,610.
New parents can steer clear of some potentially expensive blunders both now and in the future by making a solid financial plan.
Making no budget for a new baby is error number one.
Underestimating the expenses of having a child is one of the riskiest financial pitfalls new parents can encounter.
That covers expenses incurred before the birth, such as medical visits and baby gear, as well as costs associated with the actual birth and delivery as well as costs incurred later, such as diapers and other infant necessities.
A baby’s potential impact on household income must also be taken into account. If a parent decides to stay at home with the child, a two-income household can lose one of those earnings.
For individuals who are solely responsible for raising their child, having a newborn may need rearranging your schedule or even changing jobs, all of which could mean lower earnings.
Although the Family Medical Leave Act (FMLA) permits up to 12 weeks of unpaid parental leave for childbirth or pregnancy, this is not possible unless you work for the government.
Different factors may influence a parent’s decision to go back to work after the birth of a child. Others may be driven by a desire to further their careers, while some parents cannot afford to lose a source of money. Who will watch their child while they are at work, however, is now in doubt?
There are other possibilities, including daycare, hiring a nanny, and enlisting the assistance of friends and relatives.
Each one has advantages, disadvantages, and expenses. Child Care Aware of America estimates that the average cost of daycare in America is $10,174 annually, which is more than 10% of the median income for two-parent families and 35% of the median income for single-parent households.
Budgeting following the birth of a kid may provide difficulties if the expense of daycare is understated.
It could make it difficult for parents to decide how much money to spend or even whether they will be able to find new employment.
Parents can find a practical and reasonable answer by researching the costs and benefits of various childcare services while they are expecting.
For families who are eligible based on their income and financial resources, childcare voucher programs can help make daycare more affordable.
It makes sense to believe a bigger house is required as a family expands. However, making improvements to your home could be a mistake if doing so entails taking on a greater mortgage payment, which could hurt your finances.
It’s crucial to think about your whole financial condition before looking for a larger property. You might not have much flexibility to raise your loan payment if you’re paying off college loans or other debts on top of a mortgage, for example.
Your capacity to pay a higher mortgage could also be impacted by changes in income, whether anticipated or unanticipated.
But if you’re renting, you might think about buying a house. If doing so would allow you to reduce the cost of your housing, then it might make sense.
Additionally, you would need to have enough cash saved up to pay your closing costs and down payment. You can use a mortgage affordability calculator to run the numbers and determine if it’s the perfect time to move from renting to buying.
For parents who qualify for specific tax credits or deductions, having a kid might be advantageous during tax season. New parents may be eligible for the following tax benefits:
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Tax credit for earned income. For lower- and moderate-income families with one or more dependent children, the Earned Income Tax Credit (EITC) is available. On a dollar-for-dollar basis, the credit lowers the tax liability. To be eligible for this credit, parents must meet IRS income requirements.
Kiddie Tax Credit. Parents who have a qualifying dependent child and meet the annual family income requirements are eligible for the child tax credit. Additionally, this credit lowers your taxes by the same amount. Even if you generally don’t submit tax returns, you might still be able to claim this benefit.
Credit for child and dependent care. Parents who pay a qualifying organization or person to provide child care so they can work or look for work are eligible for the Child and Dependent Care Credit.
Not only can you deduct the cost of daycare, but also that of babysitters, day camps, and before- and after-school activities. Parents can deduct half of the expenses totalling up to $8,000 for one child or $16,000 for two or more children for the 2021 tax year.
