Most of my clients are in their 30s and 40s, and many of them are either starting families or adding to them.
And many of these soon-to-be parents ask me, “how much do we need to save before having a baby? What should we have in the bank before we start thinking about having kids?”
It’s smart to think of this, and in general, it’s wise to:
- be on track with your retirement goals
- be able to keep saving toward other important things in your life
- have a full emergency savings account
You may also want to put some extra padding in any cash cushion or reserve you have before taking on the financial responsibility of caring for a child.
So, yes, it’s smart to ask how much you need in savings — but the question is just a little misguided. When it comes to planning for children themselves, they don’t need you to have a lot of money saved in the bank.
What matters more with kids is cash flow.
Having Kids Is More About Cash Flow Than Your Savings Account Balance
In other words, the question should be more along the lines of: is your monthly income enough to handle all your current expenses — and then some?
Here are two calculators to play with to get a better idea of what to expect:
Depending on what you and your partner choose for your lifestyle, your costs may need to include the cost of lost income for one or both of you (short- or long-term).
Once you estimate how much your monthly expenses will increase with the addition of a baby to your family, incorporate those costs into your spending plan now.
Even if the baby isn’t here yet, act like those expenses are a part of your budget and “test drive” them while you still have the wiggle room to adjust as necessary.
If you find you struggle to manage a higher run rate with your spending, you might need to do some more financial planning to figure out the best way to manage your costs while still meeting your goals.
It’s your monthly, ongoing costs that will likely go up when you add a child to your family. So while having more savings in the bank is helpful, the more important factor is having the income that will support the added, recurring expenses that come with kids.
How to Financially Plan for a Growing Family: Other Key Factors to Consider
Cash flow is a huge factor when it comes to starting your family or adding to it by having more children. Here are some others you’ll want to think about as part of the financial side of things when you’re expecting a baby.
Ask your health insurance provider for a detailed list of normal out-of-pocket expenses throughout a pregnancy to see if they have one (some offer this to subscribers).
This can help you plan wisely for the increased health care expenses this year, and ensure you’re not leaving anything off your list.
If you find your policy isn’t sufficient for your new or changing needs with your changing family situation, you might need to look into getting different coverage. You can change your medical insurance during open enrollment or once you have your child.
You need life insurance when you have kids. It’s not to protect you — it’s to protect them (and anyone else who depends on your income) from financial hardship should something happen to you.
A good rule of thumb is to estimate that you need 10 times your annual salary in coverage (this number can vary greatly, so be sure to analyze your particular situation before committing to a final amount). You can typically get to these amounts using private insurance, or a combination of group (through your company benefits) and private policies.
To clarify, the policy you get through work usually won’t cover your full need — and you lose the group insurance if you leave (or lose) your job. At that point, getting private insurance can be more expensive, due to age and other factors that are unknowns, like being in poorer health then than you are today.
As far as what type of private insurance you need, look for term insurance. In most cases, it’s the most appropriate option and it’s also the cheapest.
I usually suggest my clients start by getting quotes for 20-30 year level term insurance, and then compare rates across the different options. (And no, Beyond Your Hammock doesn’t sell insurance or any other type of product, which helps keep the advice around this topic objective.)
“Level term” means premiums stay consistent on an annual basis over the term. The actual premium cost is based on your personal health rating, which is determined through existing medical records and a medical exam (including blood and urine test) that you can take for the purpose of getting insurance.
Once you get the results and the actual premium price, you can then determine if you’d like to move forward or if you need to adjust the death benefit amount to reduce (or can afford a higher) premium price.
Depending on your thoughts on education and whether or not you want to pay for it, it may be worthwhile to set aside money for college. You can do this by opening a 529 plan (where growth on your contributions is tax free if used for qualified college expenses) or simply use a brokerage account.
The latter option may not be as tax beneficial, but it certainly has more flexibility to it. If you don’t use the 529 plan money for college, you will pay a 10% penalty (and taxes) on the growth portion.
What About Buying a Bigger Home to Make Room? (Hint: No, You Don’t Need a Bigger House Before You Have a Baby)
Let’s get one thing straight before we wrap up here: if you’re already asking about how much you need to save before having a baby, thinking about your cash flow and how you’re going to handle the increased costs, and looking at all the other financial aspects of growing your family…
Don’t throw a major move AND a new mortgage on top of all of that.
There is plenty for you to plan for if you’re expecting a child, and no matter what your current lifestyle, you can almost guarantee increased expenses are on the way as well.
Here are two opinions that are frequently thrown around as facts:
- You can’t just rent a place when you have a baby; you need your own home. This is not True. It’s an opinion, a feeling, and maybe even your preference — but it’s not a fact. You don’t have to do this.
- If this is your first child, you’re gonna need more space. Better buy a bigger home. Again, this is not a fact. You don’t have to move just because you’re having a baby.
I understand that you might feel a lot of pressure to do things a certain way. Or maybe you don’t feel pressure, and you simply want to do it this way.
But just because you want something doesn’t mean it’s a smart financial move, or even the best move for your family in the long run.
How is it better for your new baby if you act in a financially irresponsible way now, and can’t afford to do what you really want with or for your family in the future because of those actions?
The cost of moving is high, especially when you consider the money that will most likely be put into the house once you do move (whether that’s with new furniture, making repairs or updates when you move in, etc). Any money you put toward a new mortgage or a new house is going to make affording a baby that much more challenging.
And none of this even gets into the amount of stress and exhaustion that inevitably comes with any move. Do yourself and your finances a favor, and focus on the priority: your family.
You can always think about a new house in the future. But, have this conversation once your baby is here, everyone settles into what life is like with the new family member, and you can prove to yourself that your monthly cash flow can handle more expenses.
While you’re planning to start a family and before you have a baby, here’s what I’d suggest doing:
First, keep your savings rate as high as you can right now, before the added financial pressure of a bigger family comes your way.
Then, plug your expected future expenses after your child is born into your budget and test them out today. Make adjustments as necessary (and save or invest the money you set aside for those “expenses” before you actually have to pay them).
Finally, make sure you have all the parts of your financial plan in place — and you feel confident about being able to afford this new phase of life.