The Costs of Parenthood: Budgeting, Insurance, and Education
Raising children changes both your spending and the amount of money you need to keep available. Alongside groceries and child care, there are expenses that arrive less regularly, such as school costs, medical bills, and summer activities. A useful plan also considers how the household would manage if a parent could not work.
Build the budget around your household
Start with your take-home income and actual expenses. If a parent will reduce hours or take unpaid leave, use that lower income in the budget before deciding what you can afford to save or spend.
| Type of expense | Examples | How to plan for it |
|---|---|---|
| Regular bills | Child care, housing, groceries, insurance premiums | Include them in the monthly budget. |
| Less frequent costs | School expenses, activities, clothing, medical bills | Estimate the year's costs and set money aside each month. |
| Changes in income or care | Unpaid leave, fewer work hours, a new child care arrangement | Compare the change in take-home pay with any increase or decrease in expenses. |
Leave room for costs you cannot predict exactly. The amount to keep in savings depends on your income stability, insurance, regular bills, and available support.
The USDA child-rearing cost report often cited in discussions of family expenses was published in 2017 and estimates costs for children born in 2015, from birth through age 17. It is a historical estimate, not a current budget for your family.
Life insurance
Life insurance can provide money for surviving family members if an insured parent dies. Consider the income that would be lost, outstanding debts, and the cost of care or household work the parent provides. Review the amount of coverage, its duration, and the named beneficiaries as your family changes.
Life insurance death benefits paid to a beneficiary generally are excluded from federal taxable income. Interest paid on the proceeds is taxable, and special rules can apply to a policy transferred for payment. This income-tax rule does not mean that every payment from a life insurance policy is tax-free or that estate-tax rules never apply.
Disability income coverage
A disability policy may replace part of a parent's income during a covered illness or injury. The policy's terms determine when benefits start, how much it pays, and how long payments can continue.
| Policy term | What to check |
|---|---|
| Definition of disability | What condition or loss of ability qualifies for benefits? |
| Waiting period | How long must you wait before benefits become payable? |
| Benefit amount and duration | How much can it pay each month, and for how long? |
| Exclusions and other benefits | What is excluded, and can other payments reduce the benefit? |
Social Security Disability Insurance has separate requirements. In addition to sufficient recent work covered by Social Security, you need a qualifying medical condition that prevents substantial gainful work. You must be unable to do your previous work or adjust to other work, and the condition must have lasted, or be expected to last, at least 12 consecutive months or result in death. The program does not pay partial or short-term disability benefits.
The tax treatment of disability income also affects the amount available to spend. Benefits attributable to employer-paid or pretax premiums generally are taxable. Benefits attributable to premiums you paid with after-tax money generally are not. A policy funded both ways can produce a partly taxable benefit.
Education savings
For college planning, compare each school's full cost of attendance, including living expenses, with the grants and scholarships offered. The remaining amount is its net price. Loans can help finance that amount, but they do not reduce it.
Regular savings can reduce future borrowing, though they cannot guarantee that a child will graduate without debt. If you use an investment account, consider fees, the risk of loss, and how soon the money will be needed. The SEC's guide to 529 plans explains those considerations for education savings plans.
Your retirement
Decide what you can contribute toward education after reviewing emergency savings, debt payments, and your retirement plan. The balance will depend on your resources and goals. Revisit those amounts when income, child care costs, or other major expenses change.