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How to plan your lifestyle when you start having children

These days, having children is more of a choice than it was a few generations ago. That being so, there's no reason not to prepare a financial plan for a family lifestyle.

The basics are the same as any financial plan: Set short, intermediate, and long-range goals, and then work out the numbers.

When planning to raise children, you need to know that children are expensive—very expensive. If you are having your own children—the old-fashioned way—there are increased medical costs for prenatal care. Then there's medical care for newborns, which is followed up by regular pediatric visits.

Registered Nurse Megan Weatherman bathes a newborn baby girl Amaris Trujillo at Littleton Adventist Hospital, part of Centura Health in Littleton, Colorado, U.S. May 3, 2016.  REUTERS/Rick Wilking
Registered Nurse Megan Weatherman bathes a newborn baby girl Amaris Trujillo at Littleton Adventist Hospital, part of Centura Health in Littleton, Colorado, U.S. May 3, 2016. (Photo: REUTERS/Rick Wilking)

If you're adopting, you can skip the prenatal and possibly the neonatal care (though you may need to budget for adoption expenses). Either way, raising children means increased medical care costs or increased health insurance premiums to cover your children.

Then consider costs of clothing and diapers. Young children outgrow clothing very rapidly—especially shoes, which aren't cheap. If you are like most parents, you won't want to wash diapers either—so be prepared to spend a lot on disposable diapers.

Don't forget housing. A child or two means an extra bedroom—now. Do you need to move to larger quarters before starting a family? If you plan to move later, you still need to factor those costs into your plans.

Another thing to consider: it is very likely that one parent is going to have to stop work for a while, which means decreased family income. If you are financially able to hire a nurse or nanny, you may not have to sacrifice job income, but you will have the additional expense of a caregiver.

List your costs and factor the spacing of children

When planning financially to start a family, make a list of all the increased costs and changes in income that will result from having children and the duration that this will last.

Consider too whether you want to raise more than one child and the spacing in ages of multiple children. It may be more economical to have several children close in age to allow the "stay at home" parent to re-enter the work force earlier rather than later.

Having children close in age can also help economize on clothing costs if a younger child uses clothes that an older child has outgrown but not worn out. Children close in age may also be a benefit later when the school-aged children apply for financial aid, since aid is partially awarded on the basis of cost of all children in school during the same academic year.

This applies to private elementary and secondary schools as well as to institutions of higher education.

You also need to prepare for future childcare costs including toys, sports equipment, education supplies, outings, and higher education. Oh, and probably dental braces. You may as well start saving for these now while the kids are still young so you have time to accumulate sufficient resources.

If you are saving for your child's higher education, the IRS offers tax breaks to persons using the Coverdell education savings account or your individual state's sponsored 529 qualified tuition program.

Here are some ways to lifestyle plan when you have children. (Graphic: Hannah Smart/Cashay)
Here are some ways to lifestyle plan when you have children. (Graphic: Hannah Smart/Cashay)

Children can save you money at tax time

You should consider consulting with a tax advisor, however. Some good news is that children are a tax break.

But you will still spend a lot more on the kids than you save on taxes. Up through 2017, each child gave you a dependent exemption. However, the new 2018 tax law removed the dependent exemptions while greatly increasing the standard deductions—nearly doubling them to the following for 2020:

  • Single filers: $12,400

  • Head of household filers: $18,650

  • Married couples filing jointly: $24,800

Direct medical expenses and medical insurance premiums are itemized deductions subject to IRS limitations. You may also qualify for certain tax credits that are a dollar-for-dollar reduction in taxes. These include the child tax credit ($2,000 per child), a new $500 credit for dependents other than children, the dependent care tax credit (up to $1,050 for one child and $2,100 for two or more children), and the earned income tax credit (amount depends on income and number of dependents).

In order to get the credits, you must complete the appropriate federal income tax return and calculate the amount using the IRS's complex methods. However, with a good tax software program or professional help, this should not be an insurmountable problem. If you want to complete your own tax returns, you can obtain IRS Publication 17, which has all the details.

Toddlers take part in a
Toddlers take part in a "Baby DJ School" class, aimed at preschool children. (Photo: EMMANUEL DUNAND/AFP via Getty Images)

If you pay childcare costs to someone who provides the services in your own home, such as a nurse, nanny, or au pair, you may be subject to paying household employer taxes including withholding, Social Security, and unemployment taxes (see IRS Publication 926).

And as with all tax planning, you may want to check with your tax advisor when evaluating the applicability of these tax options.

Raising a family is an awesome responsibility and should be given careful consideration and financial planning. Children will put a great strain on any relationship because of the emotional and financial demands they make. However, if you are properly prepared emotionally and financially, children can be the greatest joy in your life.

Dive deeper: Lifestyle planning: What it is and how to do it

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

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