Prepare For Budget-Busting Babies In 4 Steps

Raising a child from sweet baby to hormone-riddled teenager will cost a typical American family nearly a quarter-million dollars, according to government data -- and that's not even including college.

However, before you toss the idea of being a parent out the window, understand that with some forethought and advance planning, you can handle those costs. Just don't expect it be easy.

According to a 2011 U.S. Department of Agriculture study, a middle-income family will spend $226,920 raising a child born in 2010 from birth to age 18. (Add in the cost of college and that number could possibly double.) Those with lower incomes can expect to pay about $163,000, while the more affluent could pay more than $350,000. 

The cost is up 60% from just 10 years ago, the report says. Numbers such as those demand parents have a plan well before a baby comes into the equation. Here are four steps you can take to help you plan for the costs of that new, little bundle of joy: 

1. Break Down The Costs

The good news is that $226,920 number is a little bit more palatable when you break it down into yearly and monthly costs. If you break down the price over 17 years, the yearly cost for raising a child averages about $13,000 -- roughly $1,100 per month. That's still a significant amount, but it certainly appears to be more manageable than the prospect of coming up with a quarter-million dollars.

The Department of Agriculture report also breaks down the expenses into seven key categories:

The majority of the cost is reflected in housing. Sharing a room with a child is not a long-term option, so if you don't already have a multiple-bedroom home, having a baby will probably require a move at some point in the following few years. 

It's also important to realize some of these expenses aren't evenly dispersed through the child's life. Health care expenses might be greater at early ages while food, transportation and education costs might kick in a little later. These are averages, but retooling your budget to consider these costs will help in the long run.

Get started with your budgeting as soon as possible and think of ways to trim expenses and earn extra income. Remember, when the baby comes, at least one parent will likely need to take time off, whether that comes through vacation, family medical leave or other unpaid leave, so it is crucial to consider how that will impact your financial situation. Additionally, parents have to weigh the pros and cons of having one parent stay home with the child versus paying for childcare. 

[InvestingAnswers Feature: 5 Reasons One Parent Should Stay Home]

2. Set Up An Emergency Fund

You can prepare an emergency fund well before the baby's arrival and should continue adding to it after the child is born. The emergency fund can be used in the event of a large, unplanned expense, such as a major illness or job loss. Experts suggest building an emergency fund that amounts to three to six months' salary -- a pretty healthy chunk. 

Start by putting away cash in a regular brokerage account that will give a larger return than a traditional savings account but can still be easily accessed when needed. Additionally, consider tax-deferred ways to pay for expenses -- for example, employee-sponsored flexible spending accounts for health expenses or 529 plans for education.

One word of caution: Don't raid the emergency fund for non-emergencies. When the number gets big, it can be tempting to forgo a budget and dip into those funds for things such as down payments on cars or other expenses for which you can budget. Fight the urge. Save this for true catastrophes so when they come, you are prepared.

3. Insure Your Family

Parenthood means putting on your big-boy (or big-girl) pants and acting like a grown-up. Responsible adults take steps to make sure that if something happens to Mom or Dad, the other parent will have the financial means to still take care of the child and stay in their home.

Setting up an emergency fund is a key step to take. So is acquiring life insurance, If you don't already have life insurance, now is the time to invest in some. (And, yes, it is an investment). 

How much do you need? Bankrate has a great life-insurance calculator that will get you on your way.

4. Plan For College

Yes, college is a big expense not included in these statistics, but that doesn't mean you don't prepare for them. As mentioned before, a 529 plan is a great way to put the power of compound interest at work toward college expenses. Contributions qualify for tax exemptions and can be used to cover tuition, fees, room and board, books and computers.

#-ad_banner_2-#The price of higher education has gotten so expensive, it is tough to fund on your own, so it's worth considering enlisting the help of others. Instead of receiving gifts the kid doesn't need and won't play with after about a month, encourage family to contribute to your child's 529 plan. A child won't know the difference when they have one fewer Buzz Lightyear doll, but they will appreciate money toward college education for years to come.

Do know, however, that experts differ on the importance of saving for college. While many say you should start as soon as possible, others say that saving for college should be near the bottom of your priority list. Why? Because while people can take out of loans for college -- as unappealing as they may be -- they can't take out loans for retirement. Save for yourself first, these experts say, and secure your own retirement future before stashing funds away for college. 

For example, putting $25,000 more into a 401(k) over the years -- instead of putting the money in a separate 529 account -- can have a major impact on your retirement savings, especially when compounding interest is factored in. It can help you feel more financially secure in your retirement. And once you've accomplished that, experts say, you can consider helping out your young student with a college loan.   

[InvestingAnswers Feature: 5 Money Rules That Are Just Plain Wrong]

The Investing Answer: Raising a child is a joy, but it doesn't come without financial responsibilities. Begin to get your financial house in order as soon as possible by retooling your budget. The early you begin to prepare yourself for the high cost of parenting, the better off you'll be in the long run.

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