Having children is one of my life’s greatest events. But few great events come without a price tag and in the case of children, the financial shocks that new parents experience are strong. According to the US Department of Agriculture, a middle class family will spend $250,000 to raise a child from birth to age 17. Now if you’re like me and wondering why the Department of Agriculture is commissioning a study on the costs of child rearing, bear in mind that figure doesn’t include college expenses and probably doesn’t include the cost of cell phone data plans, car insurance, cars, wrecked cars, homecoming dresses, etc, etc, etc!

Though most people are first shocked by the lack of sleep and pure exhaustion, the first year’s financial shocks to their budget are just around the corner with some estimates in excess of $12,000. Our first child came as a complete surprise to my wife and me and then our second surprised us even more when she showed up just 12 months and three weeks later! I was COMPLETELY unprepared for either of them from a financial standpoint (and most other standpoints as well), but somehow we made it. I only WISH I had been smart enough to even marginally prepare financially for our three children.

What are the financial shocks that I experienced? What financial shocks will new parents experience at the birth of a child?

Financial Shocks for New Parents

1. Medical expenses
2. Maternity leave
3. Life insurance
4. Diapers and wipes
5. Formula and breast feeding
6. Baby food
7. Clothing
8. Gear
9. Child care

Medical expenses

Our first child was relatively easy on us financially (that first year). Easy delivery, no health problems, and the standard doctor’s checkups. Still, she wasn’t cheap even with my very good health insurance coverage. Our second child was a different story and she required home health care … and we had changed insurance … to one that wasn’t quite so good.

Delivering a newborn can cost anywhere from $5,000 to $15,000 and depending on your medical insurance and your deductible, you could be faced with paying a large portion of it. My advice is to budget NOW for the expenses you know you’ll incur.

Preparation: Contact your insurer or the benefits director at your work to make certain you understand what is and isn’t covered then set up a savings account and make regular deposits into it. You won’t regret it.

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Maternity leave

Many companies offer a short-term disability insurance policy to cover the time Mom is out of work to have a baby or for any complications during pregnancy. Still, the average policy only pays a fraction of Mom’s gross income and then only for four to eight weeks after the birth (policies vary so be sure and check). For a maternity leave beyond the set time, or if Mom or Dad decides to take advantage of the Family and Medical Leave Act (FMLA), it will be at zero pay unless you use vacation or sick leave.

Preparation: Try living on one income for several months prior to your child’s birth.

Life insurance

You should consider increasing your life insurance prior to the birth so that each spouse will be financially able to raise the child through the college years. Go with a level term policy that is convertible to permanent at some point in the future.

Preparation: check out GoInsuranceRates.com to get a quote from a top rated insurer.

Diapers and wipes

Whether you use disposable diapers or cloth, they’re not free. The average baby goes through 10 to 12 diapers each day and if you use disposable wipes, count on spending a minimum of $100 per month to keep that little bottom clean. If you plan to use a cloth diaper service, you may make out a little cheaper but it has its own drawbacks. Be careful what you believe, both have their advantages and proponents (and lobbies and websites and assertions).

Preparation: do your own investigation. Ask friends which system they preferred and don’t be swayed by rabid proponents either way, and possibly consider laundering your own. That will save a lot of cash.

Formula and breast feeding

Formula can be a big shock. A general rule of thumb is that a baby needs 2.5 ounces of formula per day per pound of body weight. While breastfeeding can certainly minimize that expense, it isn’t as free as you may think. There are breast pumps, lanolin ointments, nursing garments, and breast feeding pillows to add to your expenses.

Preparation: find out how much savings you could realize by breastfeeding and then shop hard to find the best prices.

Baby food and cereals

Once your newborn reaches four to six months, he or she will begin to want more solid food and cereals (just wait til they’re teenagers!). Baby foods can get expensive so consider making your own by pureeing fresh steamed organic carrots, broccoli, or other vegetables.

Preparation: invest in a quality baby food maker and learn to make your own baby food.

Clothing

The cost of children’s clothing is ridiculous, rivaling the cost of adult clothing ($34.99 for baby Nike’s?). Babies grow so quickly that they need new clothing regularly and even when friends give you clothing as gifts, many times your child has outgrown them by the time the season is right!

Preparation: shop at consignment shops and yard sales and remember: since children outgrow their clothes so fast, it doesn’t make sense to splurge on the latest fashions.

Portable gear

The amount of gear babies need will blow your mind. Strollers, car seats, toys, swings, monitors, bouncy seats, changing tables, cribs, baby beds, cradles, pacifiers, bottles, plates, bowls, sippy cups, high chairs, bibs, bathtub seats, safety supplies, blankets, sheets, and of course, the giant backpack (or little red wagon) to haul it all around.

Preparation: don’t be afraid to have second-hand gear. Shop at yard sales, consignment shops, and thrift stores to find some great deals. Also network with other parents or family to use gear they no longer need or use.

Child care

If both parents work, or plan to, they better be prepared for one of the largest financial shocks associated with having a child – child care. Paying someone to care for your child can cost anywhere from $5,000 per year for a family day care center to $20,000+ for a live out nanny (and don’t dare forget the taxes). My wife quit work 18 years ago when our first daughter was born so we didn’t have this shock, but we did have the shock of losing her salary.

Preparation: investigate the childcare options available in your city and decide which one meets your needs and values. Be sure to evaluate whether you or your spouse’s income will be vaporized by childcare, work clothes, transportation costs, meals, and other items associated with having a job.

No one is ever really prepared … you can’t be

Sure, maybe a lottery winner is prepared, but for rest of us having a baby has its own financial shocks. The fact is that few families begin thinking seriously about the money a child requires until after they become parents, so you are not alone if you haven’t considered these types of expenses.

But … you are in a LOT better shape than I was. You know what to expect and if you’re willing to follow the preparation recommendations above, you’ll be miles ahead of other newborn parents.

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Kids grow up fast. Eventually, the time will arrive to use the money you and your soon-to-be college student have been saving. That time will get here sooner than you think — I know it is for me. When that time does come, you’ll need to know which types of withdrawals to make from those accounts … and when to make them.

Withdrawals for Qualified College Expenses

In an ideal world, you would only withdrawal from your college savings plan for qualified education expenses since you’re charged penalties for non-educational  distributions. Most college education plans simply require you to submit a form to make a withdrawal and you can generally download these forms from your plan’s website, then print them out, and fax or mail them to the plan’s administrative office. The plan’s office will then issue a check, which you can deposit in your regular checking account. Make certain you keep good records of these distributions and how you spend them.

Why track your educational expenditures?

Once you receive the funds from your college savings plan and deposit the money into your checking account, it’s your responsibility to keep accurate records of all qualified expenses that you pay with that cash. You don’t have to open a separate checking account for these expenses — you can even commingle the money with your personal funds — but it is critical to keep track of how you spend it. Why? Because no one monitors or dictates how you spend money withdrawn from your college savings account, not even the government (yet). But if the IRS does decide to take a look at your finances by conducting an audit of your personal income tax return, you’ll need a record of your qualified expenses to avoid the steep penalties triggered when you cannot show where you spent the funds.

Which expenses should I track?

Keep track of expenses such as:

• Tuition (obviously)
• Fees – some programs have fees for labs or equipment
• Books – figure at least $700 per semester unless you use College Book Renter
• The laptop or tablet he or she will need
• Supplies – backpacks, paper, notebooks, binders, and other office supplies
• Housing – probably the second largest expense
• Food – even a meal plan may not be enough!
• Laundry – it never seems to end, does it?
• Cell phone – if you’re planning to keep them on your plan or pay theirs
• Internet service – many schools provide it while on campus
• Parking and transportation – don’t forget car insurance, fuel, and parking fees
• Clothing – take into account the climate and culture of your child’s school

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How to track education spending

One of the best ways to keep a record of your education-related spending is to keep a file of all canceled checks that you write to fund qualified expenses. Many banks will still mail your canceled checks to you each month, but it’s easier to print copies of canceled checks on your bank’s website, especially with the PerkStreet Checking Account.

When to Withdraw

You can withdraw money for qualified college expenses as soon as they come due. If you have more than one college savings plan, it makes no difference whether you draw from one account before the other, or from both at once, I’d advise you to withdraw from the account with the highest fees first — that way you’ll drain your costliest accounts as soon as possible, pay fewer fees, and still cover your expenses

Withdraw from Coverdell accounts first

There’s one more important rule of thumb concerning withdrawals: if you own more than one college savings account and one of those accounts is a Coverdell Savings Plan, withdraw from your Coverdell first. Coverdells treat the beneficiary rather than the contributor as the owner of the account. Since assets held in the student’s name make it harder for the student to qualify for financial aid than assets held in the parent’s name, you should spend the money in your Coverdell account as soon as possible—ideally during the student’s first year or two of college. That way, you can increase your child’s chances of qualifying for financial aid while continuing to use and contribute to another college savings plan that lists you as the owner.

Withdrawing funds for other purposes is expensive

If you withdraw funds for any purpose other than a qualified expense, you’ll pay tax on the investment earnings plus a 10% penalty on any funds you withdraw. Unless it’s a dire emergency, withdrawals from a college savings plan for any reason other than education expenses is a bad idea.

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I was recently asked by an email reader named Susan about how to handle the needs of her own retirement in light of her kid’s needs AND her parent’s needs for financial support.

I honestly never expected my parents to live as long as they have … and they didn’t either. Today I and my husband part of the “Sandwich Generation” — squeezed between our own savings for retirement, my elderly parent’s need for financial support (his parents passed away 14 years ago), and my two boys needs while they’re in college (one is 19 and the other is 21). Which of these three demands should take priority?

Note: This is an increasingly common problem, one exacerbated by a lack of good financial planning on the part of her parents and by the ever escalating demands and expectations that parents should foot every bill a child incurs until the age of 26, or 30, or even older.

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Here is my advice: Your parents need food, water, shelter, and probably health care. If they can’t meet those needs on their own, then Susan, you and your husband, along with any of your siblings, are going to have to help them. It won’t be easy. One sibling may not agree or my contribute less than another, despite earning more. One sibling may feel he or she “cares more” and spends more time taking care of your parents. One may want to send them to an assisted living facility and another may not. Regardless, there will be disagreements, so FIRST sit down and outline on paper what you all can … and will … do from this point forward, as well as plans for all contingencies you can think of like:

• A sibling or their spouse losing a job
• One parent passing away
• One sibling or their spouse passing away (consider life insurance)
• Who will handle your parent’s finances and how will they be audited (for lack of a better term)?
• Reluctance on your parent’s part in accepting financial help despite needing it
• How to handle the sale of any parental assets including their home

If your parents DO own any non-performing assets such as a large home or two vehicles, those should possibly be sold or downsized. Also, any cash sitting idle in a bank account or any other financial assets may have to be liquidated to pay for your parent’s needs. And don’t forget that if you can afford it, you can give them up to $13,000 in cash or property each year without having to worry about the tax implications.

Once you have your mother and father taken care of, your next priority should be your own retirement funding.

The needs of your children must come in third in this personal finance triage. Why? Kids can always get scholarships, grants or borrow for their college education. There are no scholarships for retirement and the last time I checked, there wasn’t a retirement loan program either.

Don’t think of this as being selfish. Think instead: Do YOU want YOUR kids to have to take care of YOU like you’re having to take care of YOUR parents today? I’m guessing no. Putting your own retirement needs ahead of your kid’s demands for more cash from the Bank of Mom and Dad will actually benefit them in the long run. When they’re your age, they won’t be faced with the same dilemma you’re facing. Chances are they won’t understand, but that’s part of being a parent — seeing a bigger picture and having the wherewithal to put it into place amidst a flurry of protests and emotional threats and guilt trips.

Also, don’t forget that if you ARE taking care of your parents financially and are providing more than 50% of their support, you may be able to claim them as dependents on your tax return — even if they don’t live with you! (check with your tax advisor)

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When I was a kid growing up in Birmingham, Alabama, money seemed to always be in short supply. My children today cannot fathom what it’s like to come home to a supper of turnip greens and cornbread … and nothing else. Or to spend ALL of Spring Break doing yard work around the house and planting the family vegetable garden. Or going on vacation by traveling to a cousin’s home in another state and sleeping on their sofa and eating their food. No, growing up, we didn’t go on the nice vacations, didn’t eat at fancy restaurants, and didn’t have the latest fashionable clothing. I didn’t even know what fashionable clothing was until the 8th grade when everyone at the private school I began attending wore shirts with those little alligators on them and tennis shoes with a swoosh on the side. I didn’t have one of those shirts and I certainly didn’t have those shoes. It was Kmart and Keds for me.

What I did have though, was a burning desire to be successful and money was the best way to measure that success. I sold greeting cards door to door, mowed lawns, babysat, and as soon as I was able, began working at a supermarket sacking groceries for tips. My parents didn’t teach me a lot about money, probably because their parents didn’t teach THEM. It’s difficult to know what your children need to learn when you weren’t taught those lessons yourself.

After my wife and I were married three years, our first child was born and I decided that I wanted to teach my daughter (and later her sister and brother) that money is a tool and it should be mastered. Not only that, but that she COULD master it if she learned basic money management strategies like the ones I’ve listed below:

Money Lessons For Your Children

Money can help you meet your goals

Money helps you obtain the things you need as well as the things you want. As a matter of fact, Maslow’s Hierarchy of Needs may not match Ron’s Theories of Motivation — that the things you “want” can sometimes be more motivating than the things you need and people will occasionally sacrifice their needs FOR their wants. At any rate, having money can contribute to the fulfillment of your dreams, whether those dreams are to sail around the world, build a cancer research hospital, or live a quiet peaceful life on a beautiful trout stream — all these dreams require cash.

Do you know what your dreams and passions really are? Get started here.

Earn it, don’t burn it

You can burn through cash 1,000 times faster than you can earn it. Always evaluate (as objectively as a teenage mind can), whether you really need to buy X. Why are you buying it? What do you hope it will do for you? Has it done that for anyone else? Do you really believe it will work for you? Really?

Money doesn’t grow on trees

When a teenager gets their first substantial paycheck, reality usually sets in. Money IS limited and must be spent wisely. It must also be budgeted, saved, and invested for the future. My daughters learned this lesson early and paid half of the cost of their first cars! No, I didn’t buy my kids a car when they turned 16 but I did tell them that I would match half of their first one, up to $4,000 out of my pocket. Both took me up on it but neither paid more than $5,000 total. Thank you girls!

Understand opportunity costs

Money is a scarce resource and what you spend today, is unavailable to be spent tomorrow. I’ve tried to condition my son to understand that when he has some cash and we go to a fair or the mall, he can’t buy everything he sees. I keep telling him, you never know what’s around the corner that you may want more than what you’re looking at right now. Wait. See if the impulse passes. If it does, you just saved yourself some regret. If it doesn’t, you can go back and buy it, knowing that you didn’t shortchange yourself

Handle paychecks with care

If you’re child’s paychecks are not direct deposited (hopefully into an Ally savings account), they’re like dynamite. The spark of one “I want that” and that paycheck can be completely gone, exploded forever.

Free lunch? Forget about it.

There is no such thing as a free lunch! If it sounds to good to be true, it IS. Everything costs something, even if YOU didn’t pay for it personally. Never forget that. There is no such thing as free housing, free medical care, or free transportation.

Time IS money

Don’t be late for work, especially if you’re paid hourly. Along those same lines, don’t spend 2 hours to save $5.

Remember the needs of others

This one is the most difficult for kids OR adults to learn. We work hard for the money we get, then we get a large chunk removed from us in the form of taxes. We want to keep what’s left for ourselves and that’s completely understandable. But there are others who can benefit when we give just a little. Where you give or to what cause isn’t important. What is important is that you give something (and it doesn’t always have to be money) because what you’re giving is a piece of yourself and you’re connecting yourself to those in need. We all benefit from stronger connections. I don’t believe in enforcing a law about how much my kids should give. Even though I do encourage them to give, how much is entirely between them and God.

Many times it’s difficult to talk to kids about money

Why? Perhaps because we feel like hypocrites because we’ve made so many mistakes in the past. Telling them NOT to do something YOU did feels slimy. But kids can really benefit from the wisdom of our experiences … and it will make them better prepared for the world ahead of them.

And that is why you’re a parent.

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One of the biggest myths surrounding the purchase of life insurance is that you’re only insuring income. Nothing could be farther from the truth, just ask anyone who’s lost a loved one and had to get back to work the day after the funeral.

I know someone who lost his young son in a tragic accident. His high deductible medical insurance had a $2,500 deductible and a family maximum cost of $15,000. Those numbers were quickly surpassed prior to his son passing away at the hospital. The Life Flight helicopter alone was over $8,000 but his medical insurance only paid $250 (standard). His son’s funeral was bare bones since he had no cash to handle the medical expenses AND the funeral costs … and he had no life insurance at all on his son.

Life insurance is about more than insuring income … much more

Life insurance isn’t just about families insuring the income of the main breadwinner. It’s also about three other often overlooked costs:

1. The final medical expenses
2. The funeral costs
3. The cost of your mental stability

Final medical expenses

If you lost someone close to you, especially a minor, would you be able to foot the entire bill not paid by your medical insurance? Or would you have to declare bankruptcy like my friend did? When he and his wife arrived at the hospital, he had to fill out and sign all sorts of forms. To this day he doesn’t remember much about what he signed but he agreed to be financially responsible for the bills. You won’t get around this one.

Funeral costs

The average cost of a bare bones funeral today can range from $7,000 to $10,000. Do you have that amount sitting around, ready in a savings account? My friend didn’t and had to plead with the funeral home to do the cheapest funeral possible.

Your mental health

This one is the big unknown. A small life insurance policy may be able to let you get some professional counseling or take some time off from work to grieve. My friend was forced to go back to work just days later, leaving his wife to grieve alone at home while she answered the phone calls from the bill collectors. She almost couldn’t handle it and considered suicide just to get some relief from her sorrow.

I can assure you, if I lost one of my children, I would need some time off and possibly some counseling. And don’t feed me that line about getting back to work right away being the best thing for me.

Life insurance on kids isn’t immoral

I personally find the morality argument extremely offensive. No one wants to “get rich” from a child’s death. That’s just sick. But insuring a child’s life isn’t any more immoral than insuring their health, their car, or their home. You’re insuring against the risk of loss and life insurance on a child helps prevent the parents from experiencing more loss, financial and otherwise.

It isn’t expensive

Fifteen year level term insurance with a $50,000 death benefit on a healthy 10 year old boy only runs about $7.50 per month. On a girl it’s only about $7.20 per month. But still, you’ll find financial gurus who claim that life insurance on a child is a poor investment. Sure, it’s a poor investment if you’re looking for a return. I’m not looking for a return on my “investment,” I’m looking to insure against the risk of losing my child.

One size DOES NOT fit all in personal finance and it sure doesn’t fit all when it comes to life insurance … including life insurance on your children.

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