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Well, my wife is pregnant again, so it's time to ...

Way To Wealth


Way To Wealth


Well, my wife is pregnant again, so it's time to ...

Luke DeBoer, CFP®

Did you know that the financial cost of raising a child is estimated to be approximately $14k per year in the midwest, per this handy tool? If this number were to remain steady, the total cost to get a kid out of the house is $252,000! 

My wife and I have 4 kids and since I'm in finance I'm qualified to do the math and tell you that we are in for over $1m just to, kind of, raise these kids (I say "kind of" because I'm fairly sure it's now the norm to support a kid well beyond the age of 18). So what do we do when we have a $1m liability on our hands? Well, we add another $250k! That's right, we are due in early April, 2018. 

This is actually a pretty good investment though. If I believe that each of my kids are worth more than all the money in the world - and I do - then a $250k cost seems wholly worth it.

With all that being said, the point here is not to talk about the inflows and outflows of cash related to raising a child. The point of this post is to bring up very real action items necessary to consider when one finds out a kid is on the way or if one has recently arrived in your life. And, well, my wife is pregnant again, so it's to time to revisit some things.

So here is the primary list of things to consider/do when you've brought a new child into this world:

1.) Budget

Kids are expensive. Don't believe me? See above.

Already on a budget? Great news, now you just need to make a few tweaks like accounting for some extra medical expenses (ear infections seemingly happen all the time), diapers, and professional photo shoots (only half-way kidding on this one).

Not on a budget? Don't panic. There are a ridiculous number of good budgeting apps and systems out there like Dave Ramsey's Zero-based budgeting and You Need A Budget (YNAB). A lot of people I've met who aren't on a budget think that budgets are tools that restrict you and cause life to be less fun - avoid this thought! Budgets are stress-reducing in almost all scenarios. Life with kids is hectic, budgets make the financial side of this less-so.

2.) Adjust Your Tax Withholding

If your adjusted gross income in 2017 is under $110,000 (joint), then congratulations, you qualify for a $1k tax credit for having that little guy or gal. Additionally, you've added a personal exemption (reduces taxable income by $4,050 in 2017 - if you don't phase out). So all things being equal, you'll pay less in income taxes than you previously would have without the child. As such, you probably are safe to increase your exemptions on your W4 at work, meaning more money in your paycheck.

3.) Adjust Your Savings Approach

Remember point 2 above and how your taxes likely are going down. Well, that means you may want to consider starting or switching to saving your retirement money on a Roth basis. Rule of thumb: save in a Roth when you're in a lower tax bracket than you think you will be in the future. Check out your employer based plan to see if they have a Roth option or if your employer doesn't offer that (or if you prefer a bit more flexibility in regards to withdrawals) you can open up a Roth IRA through Thinking Wealth (or any number of other financial institutions).

4. Review Your Estate Plan

This sounds headier than it probably is for most. Reviewing an estate plan for the vast majority of people simply means checking to see if beneficiary elections are on file and up to date on your financial accounts, establishing or revising a will (check out LegalZoom if you don't have one), and possibly looking at more advanced things like health care directives and trusts.

5. Life Insurance

This is probably the most urgent one. Kids are expensive (see above). If either of the parents dies then the other parent not only has to keep paying those expected expenses but also may incur an extra expense or two (daycare, education if previously stay-at-home, etc). 

My guideline for how much life insurance to have? The greater of: 

  • Total Debt
  • Take Home Pay On Your Paycheck X 1.15 X 26 X 5

You might be thinking, "How'd you make up that equation?" Well, the take home pay portion is because that's what you're used to actually living off of. The 15% bump is to account for retirement savings on the income that is possibly no longer being recognized (or has been impacted), the 26 is for how many times you likely get that paycheck (this is annualizing the number) and the 5X is to account for said child getting to school age - and necessarily to an age in which daycare costs go down substantially. 

There are other ways to account for the right way of equating life insurance needs - in fact, for some I think this equation above leads to too little life insurance - and I think reasonable people can disagree but the thing we probably all agree on is that having it at all is important.

So there we have it. Kids are expensive - though worth it - and cause huge ripples in most people's financial lives. Get a handle on it.

Final piece of advice. Teach your kids well. Read Proverbs 22:6, it's sage though simple advice. When it comes to your kids, teach them to Give, Save, and then Spend (preferably in that order). 

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