Most of my clients are in their 30s and 40s, and many of them are either starting families or adding to them.
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 do some financial planning so you can feel confident that:
- You’re on track with your retirement goals
- You can keep saving toward other important things in your life even after having a baby (or adding another child to the family)
- You have a sufficient emergency savings account or cash reserves on hand
It’s absolutely a good idea to ask how much you need to save before having a baby — but the question is just a little misguided.
A better question to ask is: what’s the state of my 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? You’ll likely see your expenses increase on an ongoing basis once you have a baby or add additional children to the family.
It’s important to know how much you need to save before having a baby because there are some upfront costs. We’ll get to those in a moment. But the reason cash flow might be the more important question is because it’s the ongoing costs of raising a family that make the bigger impact to your finances.
Having a baby may require adjustments to where your money currently goes to make room for new child-related costs. Here are two calculators to play with to get a better idea of what to expect in terms of the financial obgliations:
The best financial planning for having a baby would ensure that your cash flow can handle additional expenses without forcing you to sacrifice other critical elements of your financial life, like your savings rate. You probably don’t want to make dramatic changes to your fixed costs, either (like being required to pay far less than you currently do in housing).
To “practice” managing the financial impact of having children, estimate the ongoing costs you expect after adding a child to the family and then act as if you need to pay those costs now.
So, for example, let’s say you expect to spend an additional $1,250 per month on an ongoing basis, on average, after you have a baby. This figure is based on the rough estimate we often use for our own financial planning clients of about $15,000 per year (this does not include expenses like full-time childcare).
Plug that figure into your cash flow now. You won’t actually need to spend that money, so we recommend setting up an automated contribution to a cash savings account to simulate what it would be like to have that money leaving your checking each month. You’ll feel the impact of not having it available (this is the “practice” part), and get the benefit of growing your savings at the same time.
Depending on what you and your partner choose for your lifestyle, your “costs” may also need to include lost income for one or both of you (either in the short-term or over a longer period of time).
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.
What You Need to Save Before Having a Baby: One-Time Costs to Consider
The bottom line here? Cash savings is important… but with financially preparing to have a baby, cash flow is probably king.
That being said, there are upfront, one-time costs associated with having a baby (especially your first, when you may not have a bunch of baby gear just lying around). These should be accounted for as well, once you’ve determined that your cash flow can handle the ongoing costs of supporting a larger family.
Insurance costs associated with pregnancy and labor & devliery can be a big upfront, one-time expense as well as a cash flow issue; you may need to switch from an individual health plan to a family one once your baby is born, which could mean higher premiums or bigger deductibles.
Take some time to talk with your health insurance company to understand what the best plan options would be for pregnancy and childbirth. Various plans might offer better coverage for specific prenatal needs and hospital stays; you’ll want to ask about deductibles, out of pocket max costs, and so on.
Once you determine the maximum your plan would require you to pay out of pocket, that gives you one part of a specific savings target of what you need to save before having a baby. For example, if the deductible is $7,000 then you should have at least this amount available i cash to use for medical bills, just in case.
You may also want to price out what you need to purchase to prepare for having a child in the family. This can vary wildly from household to household, depending on a number of factors: if you already have kids, if you have extended family with older children who can gift you their no-longer-in-use baby gear, if you’re a minimalist or if having ALL the things is important to you, and so on.
What you need could include both physical items (bassinet, crib, diapers, a stroller, clothing, etc) as well as service providers for before and after the baby arrives (doulas, nannies, lactation consultants, etc).
Don’t forget about other ways you could leverage your finances to make life a little easier once the baby arrives: you might want to consider hiring a housecleaner once a week for the first few months after the baby is born, or subscribe to a meal delivery kit in the early days when you’re adjusting to parenthood and figuring out the whole baby thing.
Finally, you may want to take into account any gifts that friends and family may provide to offset some of your own costs, whether that’s cash, big-ticket nursery items like furniture, or smaller but necessary purchases from a baby registry.
How to Save What You Need to Save Before Having a Baby
To recap, what you need to save before having a baby should include:
- Your portion of expected medical bills that you are responsible for paying as per your health insurance plan
- Physical items that you need (or want) to purchase for the baby
- Prenatal and/or postnatal services for the baby or for you as the parent
- “Extras” like housekeeping help, a bigger takeout/meal budget, etc
Estimate each category’s total cost. Then, add them all up to give yourself a grand total. Here’s a quick example of what this could look like:
- Medical costs not covered by health insurance: $7,000
- Physical items, bought brand-new: $2,500
- Hiring a doula: $1,500
- Additional services including housekeeping, lawncare, and a meal kit for 2 months: $1,000
= $12,000 total to save for a baby (before they arrive!)
Bear in mind, these are just examples and certainly not what everyone needs to save before having a baby. Your life and its specific circumstances are unique to you. What you actually need to save may be much less than this — or it could be significantly more, depending on your needs and desires.
Now the question is not how much do you need to save before having kids, but how do you accomplish that savings goal? The ideal answer is: with some planning.
You can take your total estimated upfront costs and divide that by the number of months between today and when you want to have this cash savings available. If you plan to have a baby in about a year, then with our example above, you’d need to set aside $1,000 per month ($12,000 divided by 12 months = $1,000 saved per month).
If you have less than 12 months before you expect to have a child, this approach can still work. You can either save more per month — or, stick to the $1,000 per month goal, knowing that you probably don’t need to pay for all your costs at a single point in time. You might need to pay for a doula upfront, but you might not need to pay medical bills until after the baby is born.
You can also look at what you already have in savings. Many of our clients actually have more cash than they technically need to keep on hand; if you’re in a similar position, then you can simply earmark a portion of that money and dedicate it to the upfront costs associated with having kids that you identified.
Other Considerations to Help You Financially Plan for a Growing Family
Cash flow is a huge factor when it comes to starting your family or adding to it by having more children. Cash savings is important too, but we see it as a secondary concern. The number-one question we want to answer is, can your cash flow support the cost of a bigger family?
To help manage the ongoing costs and new financial obgliations of having kids, we also want to look at some other considerations that play a role in financial planning when you’re expecting a baby:
Health Insurance and Health Savings Accounts: Ask your health insurance provider for a detailed list of normal out-of-pocket expenses throughout a pregnancy. This can help you better plan for some of the upfront costs having a baby might create.
You might also want to look into a health plan that allows you to use a health savings account. These can be useful tools as part of an overall financial plan, regardless of whether or not you want to have kids.
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.
Life Insurance: 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 a combination of group plans (through your company benefits) and private policies.
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.
For private insurance, we almost always recommend term life insurance. Whole, variable, or universal life typically isn’t a good fit for most people. (And no: as fee-only financial planners, we don’t sell insurance or products of any kind. That keeps our advice objective.)
For the term length, we suggest starting with quotes for 20-30 year level term insurance, and then compare rates across the different options. “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.
Education Expenses: 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.
You can also plan to contribute to a regular, taxable brokerage account. That may not be as tax-efficient as a 529 plan, 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.
We often suggest clients take their total college savings goal, and split it 50/50. You can contribute 50% of what you want to save to a 529 plan, and 50% to a brokerage. You have full control over how and when you use the money in the brokerage account, so this approach gives you a bit more flexibity to adapt to whatever happens in the future.
This helps protect against unexpected outcomes around your child’s college plans. That could be anything from your child going to a cheaper college than you expected or college costs finally falling rather than rising, to your kids not going to college at all or your family needing to use that money for another purpose.
What About Buying a Bigger Home to Make Room? (Hint: No, You Don’t Need a Bigger House Before You Have a Baby)
There’s one last thing we should cover 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 to a new home, 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.
You might feel a lot of pressure to do things a certain way. Or maybe you don’t feel pressure, but you simply want to do it this way. Just because you want something doesn’t mean it’s a smart financial move, or even the best move for your family, including the new baby, in the long run.
How is it better for your kids 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 that come from a bigger family.
Final Tips to Help You Plan Financially for Having Kids
While you’re planning to start a family and before you have a baby, here’s what we’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.
Considering parenthood or starting that journey is a major step and life milestone. It’s an exciting time, but it can also create a lot of financial pressure.
Do yourself, your family, and your cash flow a favor. Start working on getting your finances in order now.
Be proactive; it will be one less thing you need to worry about once the baby is here, and can free up your time and energy to focus on what’s most important: your growing family.