One new parent’s essentials might be another new parent’s luxury item, but make no mistake: Whether you’re scraping or living comfortably, you’ll likely feel the pinch of parenting.
And although a lot has been said about cost to have a baby and the cost to raise a child into adulthood, a new study suggests that many first-time parents aren’t financially prepared for that crucial first year, no matter how much money they make.
NerdWallet analyzed a child’s first-year expenses in two hypothetical households — one with an annual income of $40,000 and one with an annual income of $200,000 — to illustrate how families with different resources might manage these potential costs. We chose the $40,000 income level to represent a low-income family that would not qualify for substantial government assistance.
In the $200,000 family, we included the costs of life insurance for both parents, in-home nanny support and the recommended amount of annual college savings, but assume the $40,000 family may not be able to devote money to these expenses. For both sample households, we considered expenses, including food, shelter, transportation, diapers, health care costs, and others baby checklist of necessary elements.
To find out how well these estimates aligned with American expectations, we compared our findings with the results of a nationally representative survey, which included parents, non-parents, those who are currently pregnant or expecting to have a child. in the next three years and those who do not currently expect to have a child within three years. This survey was conducted online by Harris Poll on behalf of NerdWallet in February 2017.
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These potential expenses might alarm expectant parents, but every family spends differently during a baby’s first year. Households may be spending less than these estimates, for example on second-hand toys and clothes. To more closely approximate your household costs given your location and spending preferences, visit NerdWallet’s calculator for kids.
Even assuming $40,000-earning families would be savvy shoppers when they clothe the baby, wouldn’t buy life insurance, and start saving for college, the first year of parenthood is potentially expensive — as much as $21,248 in a family with $40,000. an income of $40,000, according to the analysis.
Expecting parents, including those currently pregnant and those planning to have a child in the next three years, drastically underestimate this cost: 54 percent of hopeful parents believe their baby’s first year of life will cost $5,000 or less. Americans in general are only slightly more realistic: 44 percent believe the average American child’s first year will cost that much.
Many of those currently expecting or hoping to have a child in the next few years expect loved ones to contribute to the costs of raising a child: 61% expect friends and family to bear more than 20% of the costs during the first year of the child.
Among current parents, 57% regret not taking further financial action during the child’s first year of life. Their biggest regret: 33% wish they had started or contributed more to a college savings plan for their child.
Misconceptions about the costs of raising a child
Americans often grossly underestimate how much it costs to raise a child in the first year, and women who are pregnant or planning to have a baby within the next three years will be in for the biggest surprise: 36% think it costs between $1,001 and $5,000 to raise the baby. average American child during his first year and 18% think it costs $1,000 or less. By comparison, 10% of parents, 11% of non-parents, and just 9% of those currently not expecting think the cost is $1,000 or less. The chart below illustrates the cost expectations of those who are currently pregnant or planning to have a child within the next three years:
Americans also had difficulty pinpointing the impact of specific child-related costs. Half of hopeful parents — and 48 percent of all Americans — think diaper items, including diapers and wipes, are one of the biggest expenses of a baby’s first year of life. However, we estimate this expense at $743 for the first year, less than nearly every other cost category in the analysis. Conversely, only 37% correctly believe that childcare is a major expense. Full-time care in a center costs an average of $8,059 for the first year of life, more than any other expense analyzed.
Americans also tended to overestimate some costs, including life insurance. Among those who are currently pregnant or expecting to have a child within the next three years, 30% believe life insurance is one of their biggest expenses. But generous policies for two healthy parents cost $762 a year and account for just 1.5 percent of all first-year expenses in the household with an income of $200,000, according to the analysis.
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Planning for the baby
Parents-to-be who underestimate the cost of a baby’s first year are unlikely to prepare as much as they should. Of current parents, 29% had no money saved before the baby was born to help with the costs of the baby’s first year. And of those who saved up, many were probably still short of funds.
Respondents of all income levels also showed marked differences in savings. Of those parents and intended parents making less than $50,000 a year, 38 percent reported having no savings or no savings for their child’s first year; only 21% of those earning $100,000 or more said the same.
This lack of savings could be due to necessity, but it could also be due to people expecting loved ones to contribute. Of those currently pregnant or planning to have a child in the next three years, 61% expect friends and family to contribute more than 20% and 25% expect friends and family to contribute more than 50% of the costs of the first year.
Financial Planning Beyond Childhood: College and Life Insurance
Some of the financial planning steps parents undertake before and during the first year of life concern their child’s long-term future. College savings can account for 11 percent of child-rearing expenses in a household with an income of $200,000, according to our analysis. More than any other income group, 31% of Americans making $100,000 or more say saving for college in their freshman year is a top financial priority, and 33% of all parents regret not starting a fund or that you have saved up more money right away.
When it comes to life insurance for parents, millennials are more likely than any other age group to make it a top priority in their first year. Nearly a quarter (24%) of those between the ages of 18 and 34 said it’s a priority, compared with 19% of all Americans.
According to the survey, parents may not always look back on that first year satisfied with their financial choices: 57% say there are financial actions they regret not taking. Interestingly, those making $100,000 or more and those making less than $50,000 had a similar rate of money regrets — 55% and 54%, respectively.