How to budget with a new baby on the way

Parents smiling at infant.

Image source: Getty Images

Organize your finances so you can focus on your new arrival.

I’m a financial writer, but also a mother and grandmother. As such, I feel compelled to share some of the many mistakes I made and, I hope, help young parents avoid the same traps of early parenthood.

1. Believing little ones need the very finest

Whether you were financially established when your child came into the world or, like me, you didn’t have much, you may have the urge to give your baby the “very best.” For me, that meant costly clothes, a nursery that cost an arm and a leg to outfit, the most expensive diapers, and brand new everything.

And that’s where I went wrong. Neither of my sons could tell you what their nurseries looked like, what they wore, or where I bought their toys. If I had it to do over, I would buy almost everything gently used, give things a good washing, and stick the money I saved in a savings account for the future.

2. Thinking you’ve outgrown your home

Even if you don’t usually watch house-hunting shows, give it a try some time. Not because you’ll learn anything (hard to know how much is real or staged), but to see the number of young parents who insist they’ve “outgrown” their homes. You may say, “Well, clean up some of the junk you have lying around, and you’ll find plenty of living space.” (Though it won’t do any good, because you’re talking to the TV. I know. I’ve tried.)

One of the biggest financial mistakes my husband and I ever made was buying a big house before we were ready — and frankly, before we needed it. I still regret that purchase. That was a financial turning point. We went from paying cash for everything to using credit to buy the things we needed. We traded a low, manageable mortgage for one that stretched us thin every month.

Looking back, I realize we could have made that first small house work a few years longer. The truth is, we wanted our kids to live in a more prestigious area with a more prestigious zip code. We were foolishly willing to close our eyes to practicalities to make it happen.

As long as your current living situation allows you to bank money and focus on your child rather than juggling bills, count yourself lucky. You’ll know it’s time to move when your budget is flush enough at the end of the month to cover a larger house payment and bigger bills (like utilities and higher taxes).

3. Underestimating the cost of childcare

The federal definition of “affordable” childcare is 7% or less of annual household income. So, if you earn $60,000 per year, it’s considered affordable if you pay $4,200 a year, or $350 a month. The problem is that the average cost of center-based childcare of an infant in the U.S. is $14,760 per year, or $1,230 per month. It would take an annual income of $210,000 to make $14,760 “affordable” for childcare in the eyes of the government.

If you don’t earn $210,000, paying childcare costs may be a scramble. I’m not sure how much I appreciated that until I witnessed the role childcare plays in my grown children’s lives. My son is a partner in a law firm, and his wife is a doctor of psychology. They make a great living, yet they live in a starter house in a starter neighborhood and drive cars until the wheels fall off.

But that’s okay, because they have a plan. They’ve always known that this will be their lot until both of their daughters are in school full-time. Before the girls were born, they planned to spend a large chunk each month on childcare and to save everything, like bonuses and raises, toward the life they’ll have “someday.”

Here’s what I wish I’d known when I was young: Kids don’t care so much about the particulars and how expensive they might be. They’re happy, safe, and surrounded by love. They will have some great memories, no matter what things cost. Other stuff, like a bigger house, may come later. In the meantime, their parents can find some peace and lower stress by living below their means.

By understanding the high cost of childcare, you can better plan for it.

4. Believing the here and now is all that matters

All we’re guaranteed is today, so there is wisdom in living for the moment. Still, I wish someone had shaken my husband and me, reminding the young versions of us that we would indeed get older. It’s easy as a new parent to believe it’s okay to postpone things like saving for retirement or investing in your child’s college education. In those early years, we missed out on the power of compound interest. Even if you can only tuck a few dollars a week into a college fund or put a small percentage of your income into retirement, you’re going to be miles ahead by the time you need those funds.

And as long as I’m offering advice: Remember to build an emergency savings account. You never know when your car could break down, you suddenly need an expensive prescription, or you could find yourself out of work for a few months. As you create a budget, pay yourself first by putting money into an emergency account until you have enough to cover bills for three to six months. It can sound like an impossible task. But you might do it by dropping your next tax refund there, and adding at least part of your monthly Child Tax Credit through the remainder of the year.

The goal is to take care of business in a way that allows you to pour your energy into enjoying your new child rather than worrying about your finances.

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