How to manage finances as a parent

Raising children is an exciting journey. Kids are full of surprises…always keeping you on your toes. And while it’s bound to be fun, adding a family member can also add complexity to your financial life.

Some financial responsibilities of parenthood are obvious, like diapers, childcare and education. But what about all the other costs and financial planning that come with raising a family?

Whether you’re planning for your first child or sending kids off to college, you don’t have to go it alone. Here’s a comprehensive guide to help you manage your financial life as a parent. It includes common expenses of raising a child as well as some money matters you’ll want to consider when it comes to protecting and saving for your family’s financial future.

Things like life insurance and emergency savings funds may have been less important to you before having children. But now they’re a big deal! If a tragedy or financial setback occurs, you’ll want to ensure you and your loved ones are well taken care of.

Emergency funds help cover your most important bills in the event of a temporary loss of income. Some financial experts recommend building up three to six months of expenses, but your specific savings goal could depend on your age, income, whether you have dependents and other factors. An online calculator can be helpful for estimating your savings goal.

When it comes to shopping around for life insurance policies, make sure you clearly understand each policy’s terms and payouts to beneficiaries.

There are two main types of life insurance: term and permanent. While term life insurance is generally less expensive in the short term, permanent life insurance offers additional benefits and provides lifelong coverage. Research the vocabulary before exploring options to ensure you’re asking all the right questions. Shop around and compare beneficiary benefits, premiums, cost differences and investment options—and get a free quote before you commit to any single policy.

You have a child—or you have one on the way. You also have things you want to keep in the family: savings, investments and family heirlooms. Wills and trusts are two possible ways to protect and pass down assets.

When you create a will, you create a written statement that details your wishes regarding your assets. When you create a trust, you create a plan that places your assets into a controlled trust fund. While a will goes into effect only after you’re deceased, a trust takes effect as soon as you create it and can be enacted while you’re still alive.

Whichever route you decide to take, you should consult an attorney and a financial adviser to ensure all your bases are covered.

New humans need all kinds of things when it comes to legal documents and health records. Whether you’re claiming your child as a dependent on your tax return or opening a savings account for them, you’ll need the proper paperwork. 

Here’s a quick paperwork checklist to complete for your newborn:

• Apply for your child’s Social Security number.
• Apply for their birth certificate.
• Gather all their immunization records.
• Add your child to your health insurance. 

Visit the Social Security Administration’s website for information about Social Security cards and numbers. Birth certificates can be requested at the state level—just search for your state’s government site to start the process.

Once you bring a newborn bundle of joy into the world, it’s reasonable to expect a lot will change—including your family’s finances.

According to a 2015 report by the U.S. Department of Agriculture, the annual cost of raising a child was approximately $12,980. Prices may have changed since then, but online budgeting tools can help you estimate potential costs.

In the first few years of parenthood, unexpected costs are hard to avoid—so you may find yourself purchasing things you didn’t know you needed. Here are some of the areas where your expenses are likely to increase:

Almost immediately after you’ve had a child, you may need to think about postpartum care.

Your insurance may not cover every test and service your doctor recommends. And if you need to see a specialist, that could mean spending more money. Support services like help from a lactation consultant or night nurse can add up to thousands of dollars, depending on your situation and specific needs.

If you can, try to create a cushion for yourself and plan for unexpected medical expenses.

You may want to budget a little extra for gear, even if you’re receiving great hand-me-downs or gifts from family and friends. Every child is different, and you might find you need gear you didn’t anticipate. Even small things like bathmats can add up.

The cost of baby gear may vary by what you need. Consider expenses like car seats, nursery furniture and more, as there’s a wide range of price estimates for these items. For example, a car seat generally costs around $80-$500.

Having trouble getting your kid to take a bottle? You might end up buying several types before you find one that works. Have more than one kid? You might need to upgrade your stroller—or purchase two to handle your growing family.

To save money, try shopping at consignment stores or tapping into online communities like neighborhood social media groups for gently used secondhand items. After all, many items will only be used for a few months.

While the cost to breastfeed a baby may seem inexpensive, not all moms are able to breastfeed. Only about half of babies are still being breastfed by the time they reach 6 months old—the time when parents typically start introducing food.

Feeding your child baby formula could be a bigger expense than anticipated—one new mom reported spending $1,942.88 on formula during her son’s first year. And when your baby starts eating solid food, you might be looking at about $1 per jar of baby food.

Even figuring in these costs, you might be surprised by how much you need to budget based on your child’s food choices and needs. If your child turns out to be a picky eater or has a food allergy, you might end up paying more for specialty items.

The cost of traveling with children can vary widely depending on your comfort level and budget. For example, if you’re traveling by plane and your child is under 2, some airlines may let your child sit in your lap for free, instead of paying for an individual seat.

If you choose to seat your child in your lap during a flight, make sure to plan for how you’ll reach your final destination. Booking a car service with a child seat could be more expensive, especially if you don’t plan in advance. And don’t assume your kid will always travel for free, even if they do on a flight. Cruises and other forms of transportation often have a fee for infants.

Once you’re buying tickets for your kids, you might want to consider the benefits of road trips (when feasible) to keep costs down. As a bonus, driving makes it easier to pack all the items you’ll need on your trip.

[Curious about other unexpected expenses in your baby’s first year? Read firsthand accounts from new parents.]

Saving for college is easier if you start early. Why? Two words: compound interest. 

Think of stowing away money in a college fund for your child today as maximizing your return for tomorrow. Even if you start small, saving now gives you a better shot at a bigger educational nest egg—and more financial options—down the road.

Have questions about saving for college? Check out these answers to some of the most common questions:

A: Americans from all income levels use savings as a way to pay for college. And in some states, you can kick-start 529 college savings plans with no restriction on minimum contributions. (In other states, contributions can be as low as $25.) Plus, any amount you put aside now could benefit from years of compounding interest.

A: Start by figuring out your ultimate savings goal. The College Board’s College Cost Calculator can help you estimate how much you’ll need to have stowed away by the time your child enrolls in school. Keep in mind that many students now take more than four years to graduate.

Next, calculate the monthly contributions you’ll need to make based on your budget to hit that savings goal. And consider whether recurring deductions from your paycheck could make saving easier.

A: To find the best way to save for college and retirement simultaneously, you may want to consult a financial planning professional, or try using an online budgeting and planning tool to strike a healthy money balance. 

Everyone’s personal finances are different, but remember: While you and your child can apply for student loans, scholarships and grants for college, there’s no borrowing for retirement. So you might want to make sure you’re maximizing your retirement savings opportunities, keeping up with your 401(k) contributions, and taking advantage of employer matches if they’re offered. 

Pro tip: To boost your kid’s college savings, consider asking family members (and even friends) to make contributions to your child’s college savings plan instead of giving other gifts for birthdays and holidays. 

A: There several good options to consider. Here are a few:

1. Standard savings account. This one gets a thumbs-up for flexibility—but you may also get a return that’s lower than other investment options. To help ensure you’re getting the best possible return, shop around for accounts with the best annual percentage yield (APY). You may want to explore money market savings accounts, which can generally earn you a higher savings rate than traditional savings accounts.
2. Tax-sheltered 529 plans. The earnings inside a 529 plan aren’t taxed by the IRS. And while you won’t be able to deduct contributions at the federal level, you may find added tax benefits at the state level, such as deductions for contributions made to plans sponsored by your state of residence. Some states also allow you to purchase prepaid credits for tuition (but not for room and board) at today’s costs as a hedge against future increases. Another potential perk? The tax benefits sometimes apply to other family members, too. Many states offer tax benefits to grandparents who maintain or contribute to a 529 plan. And don’t forget that tax law can change—so consider consulting a tax adviser if you have questions about 529 plans.
3. Brokerage accounts. You won’t likely receive any special tax benefits with a standard brokerage account, but you may find more flexibility than with a 529 plan. You can invest in anything you want. And if your child doesn’t need the money for college, you can use the funds for anything they—or you—need down the road.
4. Roth IRAs. Once your kids are earning money, you might consider opening a Roth IRA in their name. It’s an option that can provide tax benefits as well as versatility. Your child can withdraw these funds when they assume control of the account as an adult (at age 18, 19 or 21, depending on the state), and they may be able to use the funds for qualified higher education expenses. What if they decide not to pursue their studies or don’t need the Roth IRA to pay for school? They can save it for retirement and may even be able to apply a portion of the funds toward the purchase of a first home. Big bonus: In many circumstances, they won’t owe taxes on the funds when they withdraw them. 
5. Your mortgage. If you can pay off your mortgage before your child’s freshman year, you may be able to redirect the amount you previously paid on your home loan to pay for some of your kid’s college costs. This can be a viable option for some parents, but there are pros and cons to this approach, so you might want to consult a financial adviser before pursuing this option.

A: Your financial planning can still pay off even if your child doesn’t go to a four-year college. If you’ve contributed to a 529 plan, you can apply the money saved toward accredited trade and vocational schools. Some plans may even allow you to change the beneficiary or cash it out, but income taxes and penalties may apply. Other options such as savings accounts, brokerage accounts and Roth IRAs may provide more flexibility.

A: Your savings probably won’t affect your child’s eligibility for federal loans. And, if your kid is up for a merit-based scholarship, your savings won’t affect that either.

When it comes to need-based aid, there are three factors that determine how much your child may qualify for: the cost of attendance, outside financial resource contributions and expected family contribution.

In a nutshell, the amount you’ve saved is just one of the factors that decision-makers consider when your child applies for federal or state financial aid.

A: Even if your child gets a full ride or your state offers free college tuition, there are still costs that come with college. Laptops, clothing, laundry, school supplies, gas…it all adds up.

What does this all mean? You may want to start thinking about college savings now. Even baby steps forward will get you moving in the right financial direction. 

By now, you’ve likely covered the basics—but what else should you budget for?

As your kid gets older, they’ll develop different interests, join teams, pick up hobbies and hit certain life milestones. What do ballet lessons cost at the local dance studio? How much does a babysitter charge? And what’s the going rate for a tooth, according to the tooth fairy?

Personal finances are just that—personal. You’ll need to budget based on your unique situation and priorities. For example, if it’s important for you to make a tradition of family vacations, you’ll want to put more into your travel budget.

Here are just a few common expenses to consider throughout the elementary, middle and high school years:

Depending on your work and child care options, you may need to budget for a pre-K or day care program. You may also have other education-related expenses, such as private school or tutoring.

Want a night without the kids? Budget for babysitting expenses. You can find online resources to estimate babysitting rates in your area, based on factors like how many kids you have, how old your kids are and how experienced the babysitter is. Sleepovers and joint babysitting nights with your neighbors can be a fun, easy way to save on babysitting costs.

As you encourage your kids to cultivate their own interests, you might find that their new hobbies come with a price tag. For example, joining a sports team may mean fees, equipment and uniform costs—plus transportation to practices and games. Plan ahead for these interests, and look for creative ways to save, like borrowing equipment from friends or purchasing that tennis racquet from a secondhand sports shop.

Don’t forget to budget for birthday presents and holiday gifts. It’s easy to anticipate and plan for these expenses, since birthdays and holidays happen around the same time each year.

You could even rethink traditions based on what’s most important to you and take a unique approach to gift-giving. Looking for ways to save money? Consider trying out Secret Santas as a family or $5 limits for gifts. These unique approaches could keep spending in check around the holidays while creating a family tradition at the same time.

[Looking for gift ideas? Here’s a guide to giving experiences as gifts.]

Kids are unpredictable—and sometimes accident-prone. So it’s good to have an emergency fund to prepare for an unexpected broken bone or ER visit. In addition, keep in mind age-specific health expenses, like braces. It’s recommended that kids start seeing an orthodontist when their permanent teeth start coming in, around ages 7-10. Braces may not be covered by your insurance, so be sure to check your policy.

Crawling, walking…driving? Your kid’s going places—and it might cost money for them to get there. If you live in a city, they might need a metro pass to take the subway around. And suburbanites might deem a bicycle an essential purchase. Once your child reaches driving age (and secures a driver’s license), you may have decisions to make about car purchases and payments.

Fees for tests and applications can add up, especially when your child starts preparing for their post-high school plans. If they’re interested in applying for college, they’ll likely need to take the SAT^®, ACT^® or other standardized tests. Here are a few of the potential test expenses for high school students: 

• The SAT: The SAT is one of the most common tests for the university admissions process. For the 2018-19 school year, the fee for taking the SAT (with an essay) was $64.50. And some kids take the SAT more than once, which increases the total cost. 
• SAT Subject Tests: These tests are specific to one subject—like history or Spanish—and each test costs around $26 per subject. 
• Score report fees: This is the cost of sending your child’s “score report” to schools. The cost varies, but is usually around $11 per score report sent. This fee may be waived for the first four reports. 
• IB and AP tests: International Baccalaureate^® and Advanced Placement^® are two common tests for advanced high school courses, and they also have associated test fees.
• ACT: The ACT is sometimes taken in addition to or instead of the SAT. In 2018, the fee for the ACT with the essay component was $67.

Consider which tests your student is anticipating taking, and do your research to find the most up-to-date cost estimates. And remember, you may also need to factor in other test-related expenses, like books, study guides and test-prep classes. 

There’s no getting around it: College can be costly. 

For the 2018-19 academic year, the average price of a public, four-year, in-state school was $25,890 per year. (This includes tuition, room and board, books and supplies, transportation, and other expenses.) Meanwhile, the average price of a public, four-year, out-of-state school was $41,950 per year. 

Have you been saving for your child’s education? If so, you’re ahead of the game—but that doesn’t mean you don’t still have questions. Maybe you can help with some—but not all—of the cost of college. Or maybe you’ve saved enough to cover the full expense but want to explore ways to lower the total bill. 

Student loans might be the first thing to come to mind when thinking of ways to help pay for a college education, but there are other options you can explore. From grants to scholarships, here are a few ways to help fund your child’s degree:

When weighing college options, you’ll want to consider factors like campus size, the school’s reputation and your child’s academic interests. But there’s another critical variable: the price tag.

Tuition can vary widely from school to school, and your student may be more likely to receive scholarships from some schools than from others. 

Research tuition and fees for each college your child is interested in, and make sure to explore public, in-state universities where you might find the most bang for your buck. Choosing the right school can make a huge difference for your wallet and your child’s financial future—especially if they’re able to graduate with little to no student loan debt. 

In order to see what financial aid your child is eligible for, you’ll need to fill out the Free Application for Federal Student Aid, or FAFSA^®. 

The FAFSA is used to determine eligibility for a wide range of financial aid, including loans, scholarships, grants and federal work-study. The application is available online Oct. 1. Complete the form as soon as possible—applying early can increase your child’s odds for receiving some forms of aid.

Next, complete the College Board’s CSS profile, which could help your child secure aid outside of the federal government. The CSS profile is also available online starting Oct. 1. This form is a bit more in-depth than the FAFSA and is required by some colleges in order to be considered for financial aid.

You can also look into Parent PLUS loans to support your child’s undergraduate education, but consider speaking with a financial adviser, as these loans can impact your retirement. 

If your child pursues student loans, make sure they understand how the loans work and what they’ll eventually owe. They won’t need to pay back loans until they graduate, but it’s a good idea to make small payments before graduation when possible. If they can find a job, they could pay down their loans while the interest is accruing and save money over time. 

[Learn more about the benefits and disadvantages of working while in college.]

Scholarships are often a better option than loans because, unlike student loans, your child won’t need to pay back the money they receive from scholarships.

There are a wide variety of scholarships available to students based on factors such as academic achievement, field of study, special talents, ethnicity and financial need. These typically fall into one of two categories: private scholarships or institutional scholarships. Consider exploring both options.

• Private scholarships. Search and apply for scholarships awarded by private foundations. Even if the applications aren’t due until senior year, encourage your child to start thinking about their application during their junior year (or earlier). Many applications open the summer before your student’s high school senior year, with deadlines following quickly in the fall.
• Institutional scholarships. Most colleges and universities provide a range of scholarships for their students. Start investigating these options while researching and touring campuses. Your student may automatically be considered for some scholarships but need to apply for others. Ask the admissions office about opportunities available at their school as well as requirements and deadlines for each.

Grants for college students fall into two categories: need-based grants and merit-based grants. Grants can be applied to tuition, housing and other expenses for school. The U.S. Department of Education offers many different grants and provides online resources for each, so that’s a good place to start your research. 

To be eligible for a grant, your child needs to fill out the FAFSA forms. Many grants are awarded on a first-come, first-served basis. And like scholarships, grants don’t need to be paid back.

Some common grants are available for students with excellent grades, students with disabilities and students who choose certain careers. For example, the Teacher Education Assistance for College and Higher Education (TEACH) Grant from Sallie Mae^® is geared toward students interested in pursuing a career in education. So if your kid has a career path in mind, search for grants specific to that field or industry. 

Your student’s financial aid package may include a federal work-study option. Schools that participate in the federal work-study program provide part-time jobs to both full- and part-time students to help them earn money toward their education.

Your child’s job hours will depend on their course schedule and academic progress. They’ll probably be paid by the hour, earning at least the current federal minimum wage. When possible, work-study jobs are designed to relate to your child’s field of study or connect to civic engagement. Common on-campus positions include school library jobs, tutoring, and research roles.

Funding for work-study programs is limited, so encourage your child to apply early. 

Living on campus can provide an enriching social experience for students, but commuting from home could be more affordable in some circumstances. For the 2018-19 school year, the average annual cost for room and board at a four-year, public, in-state school was $11,140.

If commuting isn’t feasible—or it doesn’t sound appealing—consider apartment living as another alternative to the dorms. Living off campus and sharing expenses with roommates could potentially cost less than university housing. 

Another option you could consider: buying an investment property and having your child as one of your first tenants. Your child could live in the house with roommates, and you’ll be the one collecting rent. When they graduate and move on, you’ll still have the property. If you have the resources—and an interest in becoming a landlord—it’s a housing option that might pay off in the long run. 

[For a deeper dive on student housing, read more about where your kid should live in college.] 

Lowering your tax bill is another way to make paying for college more manageable. According to the IRS, there are tax credits and tax deductions available to those paying for qualified higher education expenses. 

Two popular tax credits that may help you offset the costs of education are the American Opportunity Tax Credit and the Lifetime Learning Credit. If you’re eligible for these tax credits, you can reduce the amount you owe on your tax return—which means more savings for school. 

There are also several options for tax deductions, including deductions for student loans, tuition and fees, and business deductions for work-related education. You may want to consult an expert around tax time to make sure you’re maximizing your return. 

In addition to tuition and housing, expenses for things like books, lab fees, furnishings and social activities can add up quickly. So it’s important to plan early for college spending and to think about your student’s total budget. 

Here’s a list of common—but often unexpected—college expenses, along with a few ways to save:

The average cost of books and supplies for an undergraduate student attending a four-year college during the 2018-19 school year was $1,240 per year. 

Some schools let students use financial aid specifically for books or let them bill book purchases directly to grant or scholarship money. But there are several other ways to save when buying books:

• Consider alternatives to the university bookstore, which may have higher prices.
• Purchase used books, e-books or older editions, which are typically cheaper than new textbooks.
• Attend the first class before buying books, in case the student adds or drops a course from their schedule.
• Split the cost and share the book with a classmate.

If your child isn’t the type to highlight or dog-ear books, they’ll have more options. They may be able to save a significant amount on the cost of books by renting instead of buying. And your student may even be able to borrow books from the local or school library. Sometimes students can earn money by selling used books back to the bookstore or online at the end of the term—and they’ll typically receive a higher price when the books are in good condition. Just remember, they’ll need to keep rented or borrowed books in excellent condition or pay extra fees when returning them. 

Colleges can charge fees for orientation, technology, changing classes, parking permits, using the sports center, using the campus bus system, commencement and more. Some schools allow you to use financial aid to cover mandatory fees, but they may not allow you to use financial aid for course fees. Similarly, scholarships sometimes cover only tuition, not fees. If that’s the case, you may be able to petition the financial aid office to cover fees before your student registers.

Knowing what you’ll be charged can help you determine where you can cut back. For instance, a college may not assess a course change fee if you drop within the first two days of a class. Or it might make more sense to pay for a bus pass rather than a parking permit.

From computers and software to cellphones and data plans, new tech can be costly for students. To keep costs down, take advantage of educational discounts from manufacturers and compare prices online and in retail stores.

And to ensure your child doesn’t rack up an unmanageable phone bill, consider a family plan where you share unlimited data and minutes. Or get your child in the habit of sticking to a budget by opting for a prepaid plan.

Hobbies, clubs and social organizations can be an important part of the college experience, but they often come with added expenses. 

Even if your student is working and receiving financial aid, you might want to chip in and help cover some of their extracurricular costs. In addition to membership fees, there may be additional costs to participate in special events. However, some organizations offer grants, scholarships and financial plans that make membership accessible for students living on a tight budget.

If your kid is musically inclined, they might want to join a band, the pep squad or an a cappella group—and that could mean new instruments, uniforms or travel expenses. Creative pursuits like photography or art require supplies, cameras and equipment. They may also have additional costs related to their coursework or major—like gear for their scuba elective, or notebooks and audio recording equipment for their journalism degree. Plan ahead so that these costs don’t come as a surprise throughout the semester. 

The cost of travel to and from college can soar quickly, whether your child is commuting by car or flying home during peak travel times like holidays. And remember, you may want to visit them at school, too.

If your child has a car on campus, factor the cost of gas and a parking permit into your budget. If your child doesn’t have a car or needs a safe ride home after a night out, add in ride-sharing costs.

Want to minimize travel costs? Consider these options:

• Plan ahead and research airfare trends to get the best deals.
• Use student discounts when possible to purchase tickets.
• Check out alternatives to hotels, like peer-to-peer home rentals, for overnight lodging.

Furnish frugally
Dorms typically have basic furniture like a bed and a desk, but students will also need toiletries, towels, bedding and a laundry bag, at a minimum. (And don’t forget to add the cost to do laundry to your list of expenses. Doing your wash with dorm machines or at laundromats typically costs $1.50 per load.)

Students who decide to live off campus may need more furniture and housewares. To keep expenses down, consider these cost-saving tips:

• Look for a furnished dorm or apartment.
• Avoid overlapping purchases with roommates, and split the cost of big-ticket items like couches or TVs.
• Rent furniture, shop at thrift stores or borrow items from friends and relatives.

Having a child can be rewarding, exciting—and expensive. But with a little planning, you can help ensure that you’re in a good position to support your growing family. And now that you’ve considered everything from life insurance to college costs, it’s time to move on to the next phase: teaching your kids about money.

Read part two of this series on parenting and money and learn how to teach kids about money at any age.