From One Child to Two: How to Financially Plan

September 08, 2017 · 3 minute read

From One Child to Two: How to Financially Plan

From diapers and childcare to driving and college, the costs of raising children are big. So, when you’re deciding whether you want to have more, whether or not you can afford it is usually a major factor.

But what, specifically, should you consider? You’ll need to make some estimates on the costs of raising that child from birth through financial independence, which is (hopefully) when they graduate from college. Here are a few of the largest expenses to think about.

Do you need more space?

Housing-related costs (mortgage, insurance, and property tax or rent) are the largest expenses for most families. In planning for Baby #2, ask yourself if you need more space to accommodate your growing family. Remember, babies are small and don’t need a lot of their own space in the first year—so you may want to wait and see how it goes.

If staying in your current home isn’t an option, research the cost of moving to a bigger space and determine the impact it will have on your monthly spending before making any decisions.

How about childcare?

For most dual-income families, childcare is the second largest expense after housing. Even if you or your partner stay at home, you may have your first child in preschool or want some childcare to maintain your sanity. Look at data on the Economic Policy Institute to find average costs for your state, and read up on how to decide between childcare options.

Of course, keep in mind that these costs are temporary. Your kids will grow up and go to kindergarten before you know it—and, depending on the age difference between them, you may not have many years of paying for childcare for two.

What about paying for college?

If you have two children under the age of three, the full cost (room, board, tuition, etc.) of a four-year public university education will be approximately $565,000 by the time they are in college. This assumes the costs of college grow 5% each year until they start school, which has been the trend.

This means that you need to be saving over $22,000 per year to fully pay for college by your kids’ respective freshman years, or $15,000 per year to cover all qualified expenses. Of course, you can take out loans and apply for financial aid or scholarships, but if you’re planning to pay for college, you should be aware of the magnitude of savings required.

Decide if you have room in your spending plan to save for college now or whether to wait until your children are out of daycare. For most parents, it makes sense from a cash flow perspective to wait until kindergarten to start saving for college.

What else do you need to buy?

Here’s some good news: Many families find that the costs of a second baby’s first few months are much lower than those of the first’s. After all, you probably already have most of the supplies you need. Plus, you probably have a lot of new friends through playgroups or pre-school who may have already gone through Baby #2 phase and can give or loan you things you need.

Of course, you may need (or want) some new clothes and toys. To save, check out kids’ consignment shops. Some items have never been worn, and books and toys are available at steep discounts. Nextdoor and Craigslist are good resources to find baby gear at rock bottom prices or for free!

What about the tax benefits?

While all of these costs add up, Baby #2 also brings certain tax benefits. Depending on your Adjusted Gross Income, a new little one may enable you to increase your Dependency Exemption by an additional $4,050 (2017), and provide up to $1,600 in tax credits ($1,000 Child Tax Credit and $600 Child and Dependent Care Credit).

Taking the time now to calculate the financial implications can provide a sense of control, enabling you to let go of any financial anxiety, and enjoy your growing family.

Want help financially planning for your family? Set up a free appointment with a SoFi Wealth advisor to help you navigate the joys—and financial implications—of parenthood.

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