Welcome to Saving Money with Andrew!
Kids change everything. Pre-kids, I thought nothing of wasting entire days on the Internet. Or binge-watching seasons of mediocre television. Working long and unpredictable hours was pretty manageable. And financial planning was simple - max out our retirement accounts to the extent we could, and then put most everything else in passive index funds (please don’t trade stocks).
Four years ago, we welcomed our first child, and now we have two. Having kids is (mostly) great, but it’s a major financial responsibility. For context:
In our first full year of parenthood, our annual spending increased 31% year-over-year. Three years later (with two kids), our annual expenses are more than double our pre-kid level.
27% of our annual expenses are directly kid-related, including daycare, kids classes (three year olds can’t teach themselves Brazilian Jiu-Jitsu!), babysitting, school meals, and adding the kids to our insurance plan. We also moved into a larger home so that we could have more space, which is another larger expense not counted in the 27%.
Aside from preparing for higher expenses, there are a number of important financial steps to take before having kids. Here are a few tips we found helpful, along with some things we wish we’d done differently.[1]
Don’t Buy New Things Unless You Have To
In the lead up to our first child’s arrival, we made a huge mistake - we bought too many things brand new, including multiple strollers ($$$), a bouncy chair and a bassinet. We hadn’t realized how quickly babies (and toddlers) grow and cycle through clothes and toys (that $50 baby walker was awesome…for the 8 weeks our kid used it). In the process we easily wasted a couple of thousand dollars.
If we could do it again, I would reach out to all of our friends and acquaintances about these secondhand items, especially for items used for only a short time. In my experience, friends are delighted to get baby items out of their garages and closets (we found ourselves pushing items on our own friends as soon as we found out they were expecting). There are also many local Facebook groups for parents to swap or resell baby and kid items. There are some items you’ll want to buy new for safety reasons (e.g., car seats), but plenty of opportunities to save, particularly on strollers that can cost hundreds of dollars.
Private Label Formula and Diapers
The infant formula companies are devious. Three weeks before our first child arrived, a large Enfamil package came in the mail. And the morning after delivery, the nurse brought Similac samples into our room at the hospital. This isn’t charity! The formula companies are trying to get you on the hook, because once parents find a formula option their baby likes, they are not going to switch. And formula is expensive!
Our second child used formula for several months, and we were glad we went with a private label brand rather than one of the name brands. And private label does not mean lower quality - Costco, Target, and Walmart all sell store-brand formula at 25-50% lower prices that include the same ingredients mandated by the FDA.[2] And there are private label organic options too (such as Earth’s Best, which we used). I wrote at length earlier this year about how we saved hundreds of dollars by going with private label formula and diapers.
Review Your Health Insurance Options
For many employers (as well as Affordable Care Act plans), open enrollment periods are coming up. Take the opportunity to closely review plans. It’s very tempting to choose the low-priced options (and sometimes it is the right move), but cut-rate plans can also have troublesome features (such as restrictive networks or maximum coverage limits) that can be a big problem if mom or baby has complications, or your child has special needs.
A useful thing to do before delivery is to call your insurance company in advance and run through the possible expenses. While the health care system is so convoluted they likely won’t be able to guarantee anything in advance, they may offer tips on how to make sure the hospital stay is as affordable as possible.[3]
Do Some Basic Estate Planning
This isn’t just about money, it’s about critical things like who becomes guardian to your children if something happens to you, making sure you have health care proxies and power of attorney in case you’re incapacitated, advance directives (such as a living will) if someone needs to make medical decisions on your behalf, and so on. It cost us about $1500 to prepare everything which is on the higher end. You can shop around and find something a bit cheaper, and plenty of well-reviewed DIY solutions exist at much lower price points, albeit with some pitfalls. This Wirecutter article is a useful overview of your options.
Consider A 529 Savings Account
If you have room to set aside more, 529 plans are an incredible way to start saving for college for your kids when they are very young (and sometimes even earlier). They’re also a great way to save money on taxes, both at the time you make contributions (in many states) and when you withdraw to pay educational expenses. Check out my earlier post on 529’s to learn more.
Unfortunately, daycare is extraordinarily expensive and represents our largest single expense (other than rent). For most people, us included, the increased expenses of daycare are a financial burden that makes us *really* look forward to our kids starting kindergarten.
There aren’t many money-saving steps I can offer here, but the single thing that saved us the most money here was to open (and max out) a Dependent Care FSA, which lets us set aside $5000/year pre-tax and use it for daycare expenses, saving us over $1000/year in taxes.
And now…Andrew’s pick of the week:
The Guardian calls it “America’s most body-positive contest.” The competitors are none other than Katmai’s brown bears, who compete annually in what is known as Fat Bear Week. Weighing in at over 1,000 pounds, the Katmai bears owe their incredible, um, robustness to the “largest, healthiest runs of sockeye salmon left on the planet.” While some root for defending champion Holly, I’m all-in on Team Otis.
I hope this has been helpful. If you liked it, please share it with a friend who is expecting or has a new child! Also, please send me your feedback, requests, and success stories.
[1] An important note: I understand that some of these are luxuries that are out of reach for many people struggling to make ends meet right now, but regardless of your financial situation, there are tips here that can help anyone save.
[2] This Wirecutter article discusses many of the ingredients, quoting a medical journal article that states “Brand-name and store-name formulas are nearly identical”.
[3] Unfortunately, one thing most insurance companies are unlikely to cover is a private room at the hospital. This was a major expense (hundreds of dollars), but was worth it for us so that I could be with my baby and help my wife overnight.