The New Parent’s Guide to Taking Control of Your Money

Farnoosh Torabi

The rewards of parenthood are priceless. The opportunity to have your own child, raise a family, and be a role model is simply extraordinary. Overnight you become the most entrusted and needed person on the planet and—while it is overwhelming, life-altering, tiring (10% of new parents sleep an average 2.5 hours straight per night¹) and nerve-wracking at times―you couldn’t imagine life any other way.

While preparing for the birth of your newborn and tending to him or her in the first year, between late night feedings and juggling your work and home life, it’s easy to get swept away, both emotionally and financially.

Let’s review the general financial picture of a first-time parent. A 2009 survey found that “money worries” rank as the greatest challenge for new parents. In fact, about one in five first-time parents said that was their highest concern―more than sleep deprivation (11%), balancing work and family (9%), and just being a new parent (9%).²

On average, a new baby in the first year costs parents roughly $10,000, according to a recent survey of 3,000 moms done by BabyCenter.com, a site for new and expecting parents.³ This doesn’t include child care, which can easily run an extra $1,000 to $3,000 per month, depending on whether you use a day care center or hire a personal nanny. An occasional babysitter will run you another $600 a year. Add in a jogging stroller ($180), baby room decorations ($150), and an electrical breast pump ($250), and you can see how baby-related expenses can quickly add up.

Now for the emotional overview: It’s normal to panic when you’re about to become a new parent. After all, you’re embarking on a roller coaster of a journey, since you will suddenly be responsible for a new life―all without training wheels.

Your relationship with your spouse or partner will also go through a transition. “Having a baby changes everything,” says Amy McCready, the founder of Positive Parenting Solutions. “Parents underestimate how much time it takes to care for a baby and how little time you have for yourself and for each other.” During this change, you may forget to check in with each other regarding your needs as a couple, as well as the family’s financial needs.

Your scattered emotional state as a first-time parent may cloud your own judgment on what you need and don’t need to happily raise your child. You may make irrational decisions with your money―even more than you may already do just being human. You may feel guilty for not spending enough time with your child, so you overspend on wasteful things―like another stuffed animal or more clothes your baby will outgrow in 15 days―to compensate. You may feel pressure to buy the best and newest for your child, because that’s what the media says makes a good and thoughtful parent. Who doesn’t want to get their newborn the best crib, the snazziest convertible car seat, and a top-notch jogging stroller? “Now that you are holding this bundle of joy, you want everything for him,” says Alyson Schafer, a psychotherapist and parenting expert. “You drop into Pottery Barn and Gap Kids, and it all looks so adorable!” But, of course, that can lead to unfortunate financial consequences. You mistake your wants as needs.

Rest assured, this is not meant to discourage you from parenthood. I promise you that much.

We’re going to explore how to financially prepare for and manage the early stages of becoming a new mom or dad. You’ll learn the steps necessary to put your mind and money at ease so that you can go about doing what you really want to do, which is to be a great parent to your child. After all, you’ll have many new responsibilities when your child arrives. You don’t want to be obsessing and stressing over dollars and cents every day.

Preparing boils down to three fundamental steps. You and your partner (if you have one) want to

1. Specify your goals and expectations.

2. Reprioritize and readjust your finances.

3. Take care of yourself.

Goals and Expectations

Recognizing what you hope and intend to achieve as new parents and envisioning life during the first 12 months of your baby’s arrival are key steps toward becoming mentally prepared for parenthood.

Structuring your finances to cover your wants and needs as a new, bigger family is imperative. Before you tackle budgeting, saving, and spending, you want to become mindful of your goals and expectations as first-time parents. Without goals, your money has no meaning. And, as explored in my book Psych Yourself Rich, the mind is incredibly powerful. How we think and envision life can greatly influence our actions. Having determination and a vision of our goals can greatly influence and guide our financial choices. They can help take us down healthier, more fulfilling paths in life.

Parenting is, of course, unpredictable to a degree. There’s only so much you can prepare for. But, much like life in general, it’s always helpful to have some sort of action plan. As you craft your goals and expectations for your new family, try to answer the following questions as best you can:

• How will you manage the day to day? Will you have child-care assistance? Will one of you stay home? Will relatives help out? A combination of the three?

• How do you want your lives to change? What adjustments do you want? This is a far better way to view the inevitable changes that are about to take place in your life. Rather than asking yourselves, “What will we need to give up?” ask “How do we want things to be different?” How can you feel more in control and ultimately better about the transition? Will you want to move to a different neighborhood? Move closer to family and relatives? Will one of you become a stay-at-home parent?

• What do you want for your child(ren)? Basically, what do you hope to provide for your newborn? You don’t need to think 18 years out, but what about in the first year or two?

• What’s your parenting style? Aggressive? Laid-back? Who will you want to consult for help and advice when you feel stuck?

Filter the Advice

If you want to stay on track with your goals, you may need to filter the multidirectional advice you’re likely to receive. As parents-to-be, it’s possible you will become influenced (or, maybe, over-whelmed) by the expectations of others, including the media, your relatives, neighbors, and friends. Be careful. Don’t mistake others’ goals as yours. You may, at times, feel bombarded by their advice, techniques, suggestions, and thoughts. Does the ideal mom stay at home or does she work? Should you breast-feed or go the formula route? Natural birth or C-section? Your parents, in-laws, aunts, and siblings with children will have plenty of opinions and stories. Some will surely be helpful, so don’t dismiss everything. But not all their advice may apply to how you and your partner envision your new life as parents and what you ultimately want and need for your family. It’s okay to disagree. Filtering the “noise” is an important step in getting emotionally and mentally confident as a new parent.

Focus, instead, on just how―on your terms―you and your partner will define happiness and fulfillment as a new family. What are your needs and wants? Having a lengthy discussion about your goals and expectations when baby makes three is crucial.

As you prepare yourselves for this next incredible chapter in life and establish goals, create an emotional support system that you trust. Reach out to close family and friends for advice and help, but always check in with yourself and your family to make sure the advice aligns with your own parenting philosophy and your baby’s real needs.

Retool Your Finances

A reader recently wrote to me asking the following:

“I DON’T UNDERSTAND HOW PEOPLE CAN ACTUALLY AFFORD A BABY. MY HUSBAND AND I BOTH WORK AND PULL IN AROUND $125,000 TOGETHER. AFTER RENT, CAR PAYMENTS, RETIREMENT, SAVINGS, BILLS, AND FOOD, WE BARELY HAVE ANYTHING LEFT OVER FOR OURSELVES. WE DON’T HAVE ANY AREAS WHERE WE CAN DOWNGRADE: WE LIVE IN A ONE-BEDROOM SO WE’D MOST LIKELY HAVE TO GO UP IN SIZE WITH A BABY; CAR PAYMENTS WON’T GO AWAY AND NEITHER WILL RETIREMENT.”

The first step in preparing your finances for a new child is to re-assess your lifestyle and your current spending and incorporate the realities of having a new baby. Of course, it is more than possible to raise a baby on a six-figure salary, but only if you accept that you will need to reprioritize your needs and wants. You’ll need to set new spending limits and free up space in your budget.

Without children, you may have a different tendency to spend and save. You may not think twice about buying a pair of black heels (when you already have four). But now your financial priorities include a third person―who will be very demanding. One thing is certain, it will be much easier to save when it’s just you and your partner, when you don’t have the responsibilities and pressures of raising children.

While it may seem difficult to give up the life you have, re-prioritizing your needs and wants to make room for the baby will seem worth it in the end. Says McCready, “Any parent will tell you that the rewards of having kids far outweighs the personal sacrifices that have to be made in the process.”

Here’s a financial checklist for getting your finances in order before your baby’s arrival:

• Put pen to paper. Estimate how much you’ll spend for necessities. Be realistic and remember that the devil is sometimes in the details. Will you breast-feed or pump? Nanny or day care? For help, go to the cost calculator tool at www.babycenter.com/baby-cost-calculator.htm to get a ballpark estimate of how much you’ll need to cover costs during the first year. The site reviews the usual expenses including child care, diapering, feeding, clothing, toys, toiletries, and more.

• Begin a baby savings program. Once you’ve figured out how much you’ll basically need for the first 12 months, start saving immediately by taking a percentage of your paycheck and depositing the money into a separate bank account automatically every month. At SmartyPig.com, you can set up a savings account attached to specific goals, such as saving up for baby #1. The website lets you share your progress with friends and family and invite them to “donate” to your goal. Not a bad way to boost your savings.

• Eliminate debt. Try to start parenthood with a clean slate, since you’re likely to incur a heap of additional costs pre-paring for and raising a child; not to mention if you need to take on any loans over the next few years as a result of needing a bigger home or a bigger car. Banks prefer borrowers whose credit reports and credit scores are in good shape. You’ll want to have a low credit utilization ratio, which comprises 30% of your overall credit score. That ratio is equal to your level of outstanding debt over your total available credit. Keep that ratio to less than 15% and pay all your bills on time to keep your credit score strong. According to John Ulzheimer, credit expert with Credit.com, the folks in this country with the best credit scores have utilization ratios of 7% or less. The lower your utilization ratio, the higher your score can be. Know that these days, a score well in the 700s helps nab the best auto loan and mortgage interest rates.

• Get life insurance. When you’re single with no depend-ents, life insurance is not as critical. But now that you’re about to become a parent, it’s time to cover this critical financial base for the security of your new family. Life insurance can be a major financial life preserver for your children, since it will be a source of income for them after you pass. There is no “one-size-fits-all” way to calculate how much life insurance you need, but you can get a solid estimate by analyzing your family’s financial needs. Calculate how much replacement income your family or dependents will need to maintain their current lifestyle. Remember to factor in your expenses, all outstanding debt, a mortgage, funeral costs, and the cost of sending your children to college.

• Draft a will. It’s not pleasant to think about the “what ifs” in life but, as new parents, it’s your responsibility to make sure your child is protected and cared for in case of an unexpected death. You can work with an estate-planning attorney to help draft a will, or you can get help (for a fee) at websites like RocketLawyer.com and LegalZoom.com.

• Start a college savings fund. The earlier you begin, even if it’s just $50 a month to start, the more you’ll have come the first year of college. There are a few options geared specifically for the college-bound. The 529 “qualified tuition” plan is a popular place to start. It works much like a 401(k) or an IRA where your money is invested in mutual funds. The 529 savings plan is a state-sponsored, tax-advantaged savings plan; every state has at least one type of 529 plan. It is free from federal taxes, and many states offer state income tax deductions for all or part of the contributions made by the donor. Many plans have con-tributions in excess of $300,000. Withdrawals must be used for school expenses including tuition, room and board, textbooks, supplies, fees, and so on. According to a survey by Fidelity Investments, parents who save in a 529 plan can afford to pay for 36% of the expected college expenses.⁶ You can buy a 529 plan either directly from the state or through a broker.

• Check in with your health-care provider. Make sure you have sufficient health insurance. This is a biggie. Find out how much the cost of the delivery of your baby will be covered by the health-care company and how much your co-pay will be, or what you’ll need to pay out of pocket. If you’re not going to be working after you deliver, find out if you and baby can piggyback on your husband’s health insurance plan. Delivering a child, including a last-minute epidural, can be very expensive if your insurance com-pany isn’t completely onboard. Definitely look into that by speaking with your husband’s company’s human resources (HR) department and health-care provider.

• Check in with your HR department. Midway through your pregnancy or earlier, check in with your HR department at work to learn about maternity/paternity benefits. With the Federal Medical Leave Act, you are eligible to take off 3 months, but that may not include getting paid, so make sure you understand your income situation during your leave of absence from work. While you’re at the HR office, explore your health benefits to see if it makes better sense to enroll your child under your plan or your spouse’s (if applicable).

• Have disability insurance. In case you become disabled and can no longer work, disability insurance will help replace your income. Too many Americans are under-insured or not insured at all because of their belief that they are unlikely to become disabled, let alone disabled for an extended period of time. But, according to MetLife Insurance, people have a 45% chance of being disabled for 90 days or longer before their 65th birthday.⁷ You may already have some disability insurance through your employer, but double check and find out if you need more adequate coverage. Popular group insurance carriers include Unum, CIGNA, MetLife, and Prudential.

• Stock up on the small stuff. When you see sales or deals for the small, staple items that you’ll need a constant supply of in the first year—such as bibs, bottles, diapers, and formula—start building your inventory now. You’ll save some money and minimize stress. “Stockpiling over time will ease the financial burden after the baby arrives,” says parenting expert McCready. Just be sure to check expiration dates as needed to ensure you’ll be able to use the products down the road, she adds.

• Invest wisely in baby gear. If you’re going to purchase top-of-the-line baby goods, do so with safety products like car seats where quality does make a difference, or items that you’ll use all the time like a jogging stroller, says McCready. “Your baby won’t know he’s wrapped in a $200 blanket, so the $20 one will be just fine.” In fact, according to Stacey Bradford, author of The Wall Street Journal Financial Guidebook for New Parents, you only need to invest wisely in the following five items in the first 6 months of a child’s life: car seat, crib, stroller, bouncy seat, and baby bottles.⁸ Meantime, according to Consumer Reports, the five items not to buy for your baby, due to possible safety risks, include bedside and other co-sleeping devices, baby bath sheets, sleep positioners, crib bumper pads, and sling carriers.⁹

• Have a big baby shower. Think about all the baby showers you’ve attended. Now is your chance to collect some baby booty. Register at a few stores where your guests can easily find your top must-haves. The cost of a car seat and a crib can really add up. If your friends and family want to help, don’t be shy!

• Stay put. Perhaps the biggest misnomer of having a baby is that expecting parents need more room (that is, need to buy a bigger house) to provide for the child. False. Save your time, energy, and money while pregnant. An infant can probably sleep in a bassinet in the parents’ room for the first 6 months.

• Schedule money meetings. “In terms of finances, with a little homework and planning, parents can reasonably budget for those first few years. However, sticking to that budget takes renewed commitment and honest discussions between both parents,” says McCready. Schedule “family finance meetings,” she suggests, once a month to assess how you’re doing compared to your budget and make course corrections as necessary.

Tackling this checklist now, before baby arrives, will ensure not only that your financial security will be addressed but can also ease some of the financial anxiety. As McCready explains, “Money concerns create huge amounts of stress in the home―and that’s not what you need when you’re already sleep-deprived from caring for a new baby.”

Take Care of Yourself

Stress is inevitable as a first-time parent, but you can mitigate the stress and still feel in control with the help of the following few exercises:

• Switch night shifts. You will probably lose sleep during the first few months of the baby’s arrival (okay, maybe the first year). Sleep deprivation will only add to the stress of being a first-time parent. And that’s a recipe for making rash decisions, including financial ones. Between you and your partner, share the duties of waking up in the middle of the night to tend to your baby. At least if you don’t get much sleep on Monday night, there’s always Tuesday night.

• Spend quality time with your partner. Two words: date and night. Save money by rounding up another family or two and take turns babysitting the kids so you and your partner can enjoy each other’s company without the stress of being parents. “The marriage has to be attended to constantly,” says Schafer. “No matter how much you discuss parenting in advance, differences you didn’t expect will arise and you have to be able to deal with them. You can’t let your love go dormant while you attend to junior’s needs or there will be no relationship to return to.”

• Give yourself time and space. All work and no play...and you know how the rest plays out. It’s okay to meet up with friends after work before rushing home. It’s okay to get a haircut on a Saturday. Remember to take care of yourself so that you can then take better care of your family and your financial house.

• Welcome “the village.” It takes a village to raise a child, right? Embrace this concept by reaching out to family and friends for emotional support, advice, help with the baby, or a home-cooked meal—all can make a huge difference in the first few weeks, says McCready.

Endnotes

1. Silentnight Beds. “New parents ‘lose 6 months sleep over first 2 years.’” July 23, 2010. www.silentnight.co.uk/news_ext/19904796/new-parents-lose-6-months-sleep-over-first-two-years

2. Visa. “Money management biggest challenge for new parents—ahead of sleep loss—Visa surveys find.” February 19, 2009. http://corporate.visa.com/media-center/press-releases/press911.jsp

3. BabyCenter.com. “By the numbers: Key stats from our Moms and Money survey.” August 2007. www.babycenter.com/0_the-real-cost-of-raising-a-baby_1744454.bc

4. Twenge, M. Jean, and Keith M. Campbell. “Parenthood and Marital Satisfaction: A Meta-Analytical Review.” Journal of Marriage and Family 65(3): 574-583.

5. Bianchi, Suzanne M., John P. Robinson, and Melissa A. Milkie. Changing Rhythms of American Family Life. Russell Sage Foundation Publications, 2006. p. 126.

6. Fidelity.com. “Fidelity College Savings Survey Finds Tough Economic Conditions Forcing Families to Make Trade-Offs to Meet College Costs.” September 9, 2009. www.fidelity.com/inside-fidelity/individual-investing/fidelity-college-savings-survey-finds-tough-economic-conditions

7. Weighted averages based on MetLife disability insurance sales applied to calculations from Milliman, Inc. on disability experience results for 1990–1999 from the Individual Disability Experience Committee of the Society of Actuaries.

8. Bradford, Stacy. “Baby Gear: The Only Five Items You Need.” April 30, 2010. http://moneywatch.bnet.com/saving-money/blog/family-finance/baby-gear-the-only-five-items-you-need/2027/

9. ConsumerReports.org. “Five Products Not to Buy for Your Baby.” April 22, 2009. http://blogs.consumerreports.org/safety/2009/04/unsafe-baby-products-bath-seats-slings-sleep-positioners-bumpers-cosleepers.html

10. Brown-Worsham, Sasha. “Money Saving Tip: Think Like a Second-Time Mom!” September 24, 2010. http://thestir.cafemom.com/pregnancy/110017/money_saving_tip_think_like