How to Prepare for Kids When You Have Student Loan DebtMay 27, 2021
Having a child while paying back student loan debt can feel incompatible. Can you really take on life’s greatest responsibility while still paying for a loan you took out as a teenager?
But the fact is, student loan debt follows plenty of people into their 30s, 40s and even 50s. An extra loan payment will always make things trickier, but there’s no reason why it should stop you from starting a family. Here’s how you can prepare ahead of time to meet the challenge.
Start a Budget
Having a monthly budget is crucial to financially planning for a baby because it shows how much you can afford to spend in each category. If you don’t have a budget, you may wind up spending more than you earn – and making up the difference with a credit card or money from your savings account.
To create a budget from scratch, go through your transactions from the past three months. After that, sort each expense into one of the following categories:
- Utilities, internet and cell phone
- Entertainment and eating out
- Clothing and personal care
- Gifts and charity
Then, as part of your pre-baby financial planning, add a category for your new addition. Include the cost of daycare, clothes, food, diapers, nursing supplies and more. According to Care.com, the average cost of daycare per month is $931, but this depends on where you live. Get an accurate figure for daycare and baby expenses by asking local parents how much they spend every month.
Figure out how much you spend for each category on average. Finally, add up the total expenses and compare that figure to your monthly take-home pay, which is your income after taxes and payroll deductions. If you’re spending less than you earn, you can decide what to do with the difference.
But if you discover that your expenses outpace your earnings, you’ll have to make some changes. Start by canceling any subscriptions or services you don’t use regularly. Then, contact your car insurance, internet, utility and cell phone providers. Ask them if you qualify for any discounts or specials. Don’t be afraid to switch companies if you can’t get a better deal with your current provider.
Create an Emergency Fund
An emergency fund is a savings account you can use to pay for surprise expenses, like a trip to the hospital or a job layoff. Most families need at least six months of expenses in an emergency fund, which should be kept in a savings account.
While you’re financially planning for a baby, write down your essential monthly costs, like rent, groceries, utilities and loan payments. Include the average cost of daycare.
An emergency fund becomes even more critical when you have kids because your fixed expenses will be higher.
Contribute to an HSA or FSA
Having a baby is expensive, but there are ways to minimize the cost. Opening and contributing to a Flexible Spending Account (FSA) or Health Savings Account (HSA) can reduce your taxable income, lowering your total tax obligation.
You can use the money in an FSA or HSA to pay for prenatal care, delivery costs, baby supplies, doctor’s visits, lab work and other qualified expenses.
FSAs are only offered by some employers. If your company provides access to an FSA, they may contribute to it as an employee benefit. If you decide to add your own money, it will be taken directly out of your paycheck. The annual FSA limit is $5,250.
Funds in an FSA need to be used that year, or they will disappear. That’s why it’s often best to underestimate your medical costs, so you don’t waste any money.
HSAs have fewer restrictions, and you can roll money over from year to year. HSAs are only available if you have a high-deductible health plan (HDHP), which has lower premiums and higher out-of-pocket costs.
If you’re still a year or two away from having kids, your pre-baby financial planning could include opening and contributing to an HSA now and switching to a different insurance plan later. HDHPs have higher maximum out-of-pocket costs compared to gold or silver health plans.
Start a Sinking Fund
Unless you have a healthcare plan that covers all the costs of prenatal, delivery and postnatal care, having a baby will leave you with a hefty bill. According to a survey conducted by the University of Michigan, the average out-of-pocket cost for a vaginal delivery was $4,314 in 2015 and $5,161 for a C-section.
Financially planning for a baby is one great way to mitigate these costs. You can start saving in an FSA, HSA or regular savings account. When you do give birth, try to negotiate with the hospital or provider.
Start a College Fund
Just like you contribute to a 401(k) or IRA for your retirement, your pre-baby financial planning can include saving for your child’s college education with a 529 plan. Plus, 34 states provide tax deductions or credits for 529 contributions.
To start a college fund, visit your state’s 529 website and create an account. Before your child is born, you can list yourself or your partner as the beneficiary. You can change this as soon as your baby is born.
Encourage relatives and friends to contribute to the 529 instead of buying toys and other gifts. Most 529 programs provide a custom link that you can send out with your baby shower invitations. Set up automatic contributions from your bank account to the 529.
Buy Life Insurance
As a soon-to-be parent, you need to start thinking about financially planning for a baby. Part of that includes buying a life insurance policy for you and your partner. If you die without a life insurance policy, your family’s financial future could be devastated.
The coverage amount should include any debts, such as student loans, credit cards, auto loans and your mortgage. If your spouse couldn’t afford their current lifestyle without your salary, factor in how much extra income they would need.
New parents may choose to stick with term life insurance, which is more affordable than whole life. The average monthly premium for a 35-year-old male is around $30 a month for a $500,000 20-year policy, and the monthly premium is about $25 for a 35-year-old woman. Shop around for a quote to ensure you get the best rate.
Refinance Your Student Loans
Reducing your expenses frees up money that can be used to pay for baby essentials. Refinancing your student loans can lower your monthly payment and help you pay less in total interest.
Contact ELFI today to connect with a personal loan advisor who can walk you through the refinancing process.*