5 Financial Steps You Should Take Before Having Kids

by Angelica Leicht | Updated July 25, 2021 - First published on March 2, 2021

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A newborn baby lying in a crib and yawning.

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Thinking of having kids in the future? You may want to start preparing now or you can wave goodbye to the money in your bank account.

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Think you could see yourself with a few kids tugging at your pant leg in the near (or not-so-near) future? Being a parent is a rewarding experience, but it can also be an extremely expensive one. Your typical middle-income family will spend more than $233,000 in total to raise a child -- and that doesn't include those college expenses either.

That said, the payoff of raising children is well worth the hit to your bank account. But, as with any expense, it's always good to be prepared if you can. And if you can start those preparations well in advance, you will help to minimize the impact on your bank account.

So, if having kids is something you may want to do in the future, take these five financial steps to prepare. They can help get you on solid financial footing before your little one arrives.

1. Tackle your existing debt

Most Americans have some type of debt to deal with, whether it's a house note, a car payment, credit card debt, or student loans. These payments can have a huge impact on your finances and expendable cash. So if you can, try to get rid of your debt or pay it down as much as possible before taking on an expensive new proposition -- like a baby. If you have a lot of debt, you can use the snowball method or another debt repayment strategy to get on the right foot well before you have kids to fit into the budget.

That said, it may not be possible to completely pay down a major debt like a home loan before a baby makes an appearance. But while you still have extra income, you may want to consider putting it toward those more manageable debts. And if possible, hold off on any unnecessary purchases. Not only will it help free up money in your budget for kids, but it will also help you get set on the right financial footing in general, which is never a bad thing.

2. Start a parental leave fund

The Family and Medical Leave Act allows for eligible employees to take up to 12 weeks of unpaid time off following the birth of a baby. Some companies will even offer paid parental leave benefits after a child's birth or adoption. If you're fortunate enough to have this benefit, you should still start socking money away in a parental leave fund to cover your expenses when it's time to step away from work. Besides having a new baby, job changes and life changes happen. You never know where you'll be or what benefits you will have going forward. Better to be safe than sorry.

It's a good idea to put away at least 12 weeks worth of income to cover your expenses if and when you need to take time off to care for a new child. And if you wind up going down a different path, you'll have a nice cache of cash to add to your emergency fund. Either way it's a win.

3. Start saving for college

College is an important but extremely expensive proposition for many people. If you think you want kids sometime in the future, you might want to start putting aside some money now for college. It may seem like that's too far out of the picture to fathom, but starting early has benefits. If you choose an investment account that offers compound interest, you'll earn interest on top of your interest and contributions over time. Plus, you'll get to watch that college fund grow alongside your child as you maintain it over time.

There are a ton of different ways you can save for college, and many of them are tax free. You can opt for a 529 plan, which is a special type of state-offered investment account that's designed to help you save for educational expenses -- but you'll only have this option if your state offers this type of plan. Not all do.

If a state-backed 529 plan doesn't exist in your state, don't panic. You have other options, or you can just put some money into a high-yield savings account each month. If you go the savings account route, just be sure to earmark the money for possible college tuition and don't touch it. In order to make it easier to keep the money in the college fund, the account should be separate from other savings accounts like your emergency fund.

4. Invest in retirement

While you've got extra cash on hand, you may want to put some of it away for retirement. You may be young and carefree right now, but life comes at you fast and so does retirement. And, the reality is that Social Security will only cover about 40% of your pre-retirement income, which isn't enough to live on. So start saving for retirement now while you still have some wiggle room in your budget.

Most experts recommend that you have at least $1 million in retirement before you're ready to let go of work, which means you should be setting aside at least 10% of your income for retirement to reach your goal.

However, if you can set aside more before kids enter the picture, do it. That 10% may not be enough to get you to your goals -- and if you wait until you're 35 to start saving, you'd need about $820 per month to get there. That can be tough to come up with if you're also shelling out for diapers, daycare, and other child-related expenses, which tend to flatline the old budget quickly after each paycheck.

Once you have kids, their expenses will take precedence, but it's important to remember that your financial future matters, too. Make sure you're on strong footing as early as possible and contribute as much as you can to your retirement while there's still room to do so.

5. Plan ahead and be ready to invest in decent insurance

Investing in the best medical and dental insurance for your family may not be a priority when you're young and footloose, but it's actually extremely important to make sure that you plan ahead and think about what you'll need for when you do become a parent.

Your child will need checkups, dental care, and other important medical attention. So be sure to do your insurance-related research in advance and be ready to invest in the right plan when the time comes. That could mean swapping out your higher-deductible work plan with a more comprehensive plan when open enrollment comes around, or it could be double checking your dental insurance to make sure it covers pediatric dentistry or braces. You don't have to take the leap from one insurance plan to the next right away, but make sure you have that plan in place for when you need to.

Same goes for life and disability insurance. If you don't have a life insurance policy and think you want kids, it would be wise to get one or at least have an idea of the plans that work for you. You need to be prepared for what could happen if you're no longer around or able to provide. As a bonus? Both of these types of insurance are extremely cheap when you're young, so if you start paying into decent life and disability policies now, you won't have to shell out nearly as much as you would if you took one out when you're older.

One final piece of advice

Ask any new parent and they're likely to tell you it's hard to feel prepared when you're adding a child to the mix. So whatever you do, don't feel like everything has to be perfectly aligned before becoming a parent. Do what you can to set your family up for financial success, but remember that you can always keep working at it, even with a tight budget and diapers to factor in. Create realistic goals, focus on your savings, and roll with the punches when they come. That's what parenting -- and money management -- is all about.

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