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6 Steps to Financially Prepare Before Having Kids

It's no secret that kids are expensive. According to the U.S. Department of Agriculture, it costs most families nearly a quarter of a million dollars to raise one child (you can use this calculator to determine the cost in your area specifically).

But take a deep breath: Before your babies even arrive, there's plenty you can do to get ready financially. You can never plan for everything, but if you follow these steps, you'll be prepared to weather the ups and downs of parenthood with more ease.

1. Create a Baby Budget

Before your child arrives, do your research and get a sense of the costs you'll be facing. For starters, talk to your health insurance provider to understand how much you'll be on the hook for with the hospital bill, since labor and delivery can be expensive even with coverage. You don't want to be blindsided by an unexpectedly expensive medical bill.

Then get a sense of ongoing costs, including diapers, clothes, bottles or formula, daycare and any other anticipated near-term expenses that you will need to integrate into your budget. For some of the larger items, such as car seats and strollers, consider putting them on a registry so family and friends who want to contribute can.

If you can get an accurate idea of some of the expenses in advance, you can better prepare. It might mean cutting some current costs to make room for new ones. It could also mean spending less so you can set aside more savings and create a buffer.

2. Increase Your Emergency Savings

On that note: The majority of Americans lack any significant savings, which makes it easy to slip into debt when unexpected expenses crop up. And kids are full of surprises! Even if you have debt you're working to pay off, try to set aside a little every month so you have a cushion and can handle emergency expenses.

It's ideal to save at least three to six months of living expenses in an emergency fund so you don't have to rely on credit cards or other forms of debt if the car breaks down, you or your spouse gets laid off, or any other unexpected events occur. Some banks allow you to set up automatic transfers from checking to savings accounts so you don't even have to think about it, or you could use an app like Digit that automatically moves small amounts of money into savings with the goal of you not noticing it.

3. Start Saving for College

It might seem premature to start thinking about college when you're worried about finding daycare. But with the costs of higher education ever-increasing, it's smart to get a head start on saving for your children's higher education now. The sooner you start, the more your money will grow over time due to compounding interest, so you don't even need to aside that much each month to make a big difference by the time your child graduates high school.

There are several different types of college savings accounts and plans, but one of the most popular is a 529 savings plan. These accounts come in several different flavors; some let you set aside money that grows tax-free and can be withdrawn tax-free for education, and others allow you to prepay tuition at today's rates.

4. Consider Disability and Life Insurance

Once you have kids, your household's monthly expenses will increase. If you don't have disability insurance through your job and something happens to you, your family might struggle to pay the bills. This coverage protects you by giving you a portion of your income to help your family make ends meet while you're unable to work.

As you start a family, also consider investing in life insurance, so if you pass away, your spouse and children have some financial security. This is especially important to consider if your family is somewhat or fully dependent on your income. Keep in mind that life insurance is typically cheaper to purchase the younger you are.

5. Know Your Credit

Before having kids, it's also a great idea to check your credit to know where you stand. Having good credit makes it easier to get approved for and get favorable rates on auto loans, mortgages and credit cards. Employers and landlords also typically check credit to make sure you have a track record of responsibility. Your credit is also sometimes run when you're applying for cell phones, cable service and other utilities.

To help ensure your family's financial stability, stay on top of your credit and work to improve your credit score, if necessary.

6. Utilize Workplace Benefits

If you get benefits through your job, make sure to familiarize yourself with them and take advantage of whichever ones make sense since they can help your family financially. For example, consider setting aside money in a flexible spending account (FSA), if your employer offers one, which allows you to save pre-tax dollars for medical expenses. You can also put aside money in a dependent care FSA, which allows you to set aside tax-free money for childcare and preschool.

If your employer offers a 401(k) retirement account, contribute to it. It might be difficult to save for retirement in addition to all your other expenses, but setting aside even a little bit each month will help your nest egg grow over time. It will also take financial pressure off your kids so they won't have to worry about you in your older years. You should especially consider contributing if your employer offers a 401(k) match—it's free money!

Lastly, make sure you add your new baby to your health insurance soon after they're born so they can be covered for all of their health care needs.

Get Prepared

Starting a family can be incredibly exciting, but it can also be overwhelming and expensive. Reduce your stress and the impact of surprises by preparing as much as possible. There are some things you'll never be ready for when it comes to parenting. But by saving, planning ahead, getting insured and working to improve your credit, you can be financially ready for kids. Well, as ready as one can be!

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