Having Your First Child? How Finances Change for New Parents


infant (Photo credit: soupboy)

Everything changes when you have your first child. For one, you learn the true meaning of sleep deficit. You also learn how to accomplish any task with only one hand. While you can expect these changes, you’ll have to wait until after your newborn arrives before you can adapt.

On the other hand, think of all the ways family finances change when having children. Suddenly you are thinking about college savings, day care or single income, tax changes, more insurance and larger grocery bills.  Yet, unlike a new parent’s trial by sleep deprivation, these financial concerns are one’s that you can plan for in advance. You just need to know what to expect.

This installment, of our weekly interview, is with Elle Martinez. She helps families at Couple Money to achieve financial freedom by sharing tips for reducing debt, increase income and building net worth. Learn how to live on one income and have fun with the second.

(Me) How has your finances changed since having a baby? What didn’t change? What expenses were surprises?

(Elle) Yes and no.  Month to month our expenses haven’t changed. Money saved by not eating out as much is reallocated towards baby expenses.

Thanks to advice from other parents and bloggers ,diapers and other baby gear are less expensive than what we estimated.

Another reason why expenses are about the same is that I work from home and take care of our daughter – saving us a great deal with time and money.

I was working from home before my daughter because my husband and I have a goal of both having income streams that would allow us to be location independent. We could do this because we wanted to keep all of our necessary expenses under one income.

Our long term goal is for both of us to be able to work from home.

(Me)  How do you expect your family’s finances to change over the next five or six years? How can families prepare for those changes?

(Elle) One thing we’ve learned once we became parents was not having too specific plans. However we do have some financial milestones that we’d like to achieve within the next 5 years:

  • Pay off our student loan and avoid taking on new debt.
  • Have the financial means for both us to work part time
  • Be able to maximize our retirement contributions

Looking at how things have been going this past yer, I think it’ll be adjusting and streamlining our finances just a bit each year. Our goal is to keep expenses about the same as we increase income.

(Me) Saving for your child’s college: important to start sometime or right away? What types of savings are you using/considering?

(Elle) I do think saving for your kids’ education is a noble goal. However I do believe that risking the family’s finances for college is not.

I read this and it made me realize how some families are missing the point of saving for college:

“About 30 percent of adult children in the United States contribute financially to their parents’ care, according to the Pew Research Center.”

The sad truth is if parents don’t get their retirement finances together, then they can be a burden on their children – which is what most parents were trying to avoid in the first place.

I believe that as parents we have to lead by example and that means getting our finances squared away before saving up for college. I think if you really want to help pay for your child(ren)’s college education AND  take care of your own finances, you realize that there has to be some sacrifice on your part.

Keep your expenses low now – don’t have two car loans. Don’t take on debt for family vacations. Be a parent and decide what’s more important to you.

Wow- I got a bit sidetracked there. Sorry :)

We do want to help our daughter out with her education.  We both worked while in college and received scholarships that paid for most of our education. If our daughter decides to go to college, we would like for her not to take out huge student loans.

Right now our plan is to pay off our remaining student loan before saving up for her college. If we’re aggressive on this we should be finished within 3 years. We would then have regular contributions set aside.

(Me) Are you planning on using a 529 plan? Do you have any reservations about saving too much in a 529 and if so, what kind of savings target are you using/considering?

(Elle) We still haven’t decided whether we’re going for a 529. I don’t think we’ll be concerned with saving too much.

We don’t feel like we should pay for all of our daughter’s college expenses. We do want to pay for the essentials, but part of becoming adult is taking on more responsibility. Our plan is to give her more and more freedom as she graduates from high school so it’s not a huge shock to her when she does have all these options.

We’re using the in-state tuition  of the better rated public schools to get an idea of how much we’d need to save. Since we’re in North Carolina, we’re using UNC as a guideline.

We don’t feel like we should pay for all of our daughter’s college expenses. We do want to pay for the essentials like tuition and books. Ahead of time, we plan on sitting down with her and showing her what the budget is, so she can decide how she’ll spend the money.

(Me) Let’s talk taxes for a moment, because having a child can have huge implications, especially if one parent is going to leave the workforce long-term. What are some tax considerations and what kind of effect can they have on month-to-month budgets?

(Elle) I believe that if one parent is a stay at home parent, the family finances should be able to accommodate it comfortably.  It may mean cutting back immediately so one of the parents stay at home or they could work towards it as they reduce their family’s expenses.

I think parents can minimize the financial impact of having kids by getting certain tasks out of the way:

  • Amend your health insurance: The first two years can be expensive with all the doctors visits. Check with HR and ask other parents on the job what their typical expenses are and see if you can sign up for a Flexible Spending Account to offset some of your new expenses.
  • Child and dependent care credit: the two of you may decide that having two incomes for the time being will help you get rid of unnecessary debt and allow one of you to stay at home with your child without it being on a hardship. Taking advantage of this credit can be a smart move.
  • Adjust withholding at work: Kids can reduce your tax burden, so adjusting accordingly can help you get bigger paychecks through out the year.  ( In reality I think adjusting our withholdings just covers the higher insurance premiums :) )

(Me) Let’s talk specifically about W2s, because they can be confounding even for finance professionals. Nothing will ever be hard and fast, but are there any tricks/guidelines to aide families in how they should change/keep the same exemptions?

(Elle) If a family is not happy with their withholding, perhaps they prefer to get a smaller refund and more in their payments, then they should use a free tool like TurboTax’s W4 calculator.

Note: I’m a contributing blogger at TurboTax, but my recommendation is based on what we actually did this past year.

However, if they’re hoping to go big and optimize their finances, I would suggest hiring a Certified Financial Planner to look over everything and make sure they’re taking the tax credits and deductions they deserve.

We tend to err on the side of caution and typically have a refund when we file, but we’re working to make it smaller rather than a big lump sum. Having bigger paychecks through the year will help us pay off the student loan faster.

(Me) Is there anything that you’d like to add?

(Elle) First, thank you for the interview. It was a great conversation starter for us :)

I do think that many couples and families struggle today because they feel like they need to do it all at once. My advice is to sit down as a couple and talk openly about what is the most important to you and start with those goals. Have a family financial game plan and check on it regularly.


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16 comments for “Having Your First Child? How Finances Change for New Parents

  1. February 12, 2012 at 2:34 pm

    I’m really curious to see how my expenses change when I have a child. I’m no where close the having a child fyi, but as Elle pointed out – the money I currently spend eating out, on drinks, etc. will be shifted to the baby. I’m hoping my cashflow will stay the same :/

    • Shaun
      February 12, 2012 at 8:16 pm

      I found that my family didn’t go out less at first. It wasn’t until my daughter was a toddler before we noticed that our expenses were increasing.

  2. February 12, 2012 at 10:22 pm

    I totally agree, Shaun – it wasn’t until my daughter turned three and started dance classes, swim lessons and preschool that I really saw an impact of having a child in my day to day budget. I cringe to think of the impact on my budget when my infant son “comes of age.”

  3. February 13, 2012 at 6:09 pm

    Guys, if I have to rank my liabilities the children (even the grown up ones) come way high on the list. In fact, our three sons are our main libility. Now, I wander what the folks at Control Your Cash will say about this one! Since they are right that the way to wealth is to sell liabilities and buy assets…

  4. February 13, 2012 at 6:31 pm

    I like Elle’s rant about making sure your own house is in order before saving for college. While college is important, not being a burden to your kids later is probably a better idea.

    • Shaun
      February 14, 2012 at 5:37 am

      It’s a great point and definitely one worth thinking about.

  5. February 13, 2012 at 6:57 pm

    It’s a whole new world becoming a parent, and that includes finances. When you’re totally responsible for a helpless little child, you tend to think of yourself much less and the child much more as a priority. You might spend less on yourself, accordingly, but quite a bit on the child of course. It impacts your total expenses a lot, the way your expenses are allocated, and perhaps your income as well if one person stays home for a while.

  6. February 15, 2012 at 1:08 am

    Oh my, this is my post for tomorrow :( Mine just asks the questions, ask the readers type as we are planning to start a family and will be going from 2 income to one. So I want to be prepared as much as we can and we are having a lot of discussion around this topic. It will be interesting to see what all changes for us and what we miss in our own planning, as I am sure we will. Yours have answers, in fact this answers a couple of my questions too. I will link to this in my post.

    • Shaun
      February 15, 2012 at 2:18 am

      Thanks Suba! I’m always very impressed at how thorough your posts can be. I feel like we only skimmed the surface in this interview. There’s taxes, budgeting, employment, college savings, insurance and food.

  7. February 15, 2012 at 9:31 pm

    Not to scare you anything, but I read somewhere that it costs around $1M to raise a child until their 18 years old. Sounds a bit stretched, turns out to be around $55k/year. Sound about right or way off?

    • Shaun
      February 15, 2012 at 10:49 pm

      I think it is way off, but I don’t know what they are including: college for example.

      • February 17, 2012 at 4:00 am

        Way off as in..over or under? I don’t think it includes college costs. Now I’m really curious, I’ll have to dig up this article that I read.

        You should send this article to Ben @ MoneySmartLife, he just had a baby girl! :)

  8. February 16, 2012 at 5:40 am

    I am expecting and we are going “make money” this year by having #4. We received a gift of money – $1000. We were not planning on a fourth kid, so I had to rebuy baby items that I had previously given away. However, after having 3 kids…I know what I need and what will sit around just looking pretty in the corner. #4 is coming in March and I made a budget to cover all of #4’s expenses through 2012. (FYI- Mr. Super Frugalette’s insurance covers all birthing expenses…so we aren’t paying for any medical expenses.)

    With the child tax credit, I will be able to cover the cost of the maternity clothes I purchased and get money back.

    • Shaun
      February 17, 2012 at 3:35 am

      Congrats! My youngest is just 8 months now.

      I personally didn’t see a big change with my kids, but I do have young children. I imagine that costs increase with age.

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