10/07/2014 03:46 pm ET Updated Dec 07, 2014

Will a Second Baby Break the Bank?

Dear Carrie,

Our first child is two and a half. We're thinking of having a second baby, but it seems pretty daunting financially. We keep reading that it costs more than $200,000 to raise a child. Can this really be true?

-- A Reader

Dear Reader,

For just about everybody (unless, of course, you're the Duchess of Cambridge), having a second baby is a financial as well as an emotional decision. That's because kids today come with a hefty price tag. According to the U.S. Department of Agriculture, the cost of raising a child to age 18 is now upwards of $245,000.

But when it comes to those big numbers, I feel the same as I do about retirement estimates. The actual cost depends on your personal circumstances and your own choices. You do have a certain amount of control -- as long as you plan wisely.

Just as in retirement planning, to be financially ready for a second baby, you have to think ahead and prioritize. Of course, it doesn't hurt to start saving -- starting now.

Plan for the big expenses first
These are the expenses that you can anticipate and plan for. They include:

  • Childcare -- This is often one of the biggest expenses, so be sure to look at all of your options. Having one parent stay at home is a choice for some. But that doesn't make financial sense unless one of you is making less than what childcare would cost. Are you lucky enough to have a family member cover a day or two a week? Some childcare providers give a family discount. And there are co-ops that can be less costly. What about "nanny sharing" with another young family? And don't forget to check your employee benefits. Some employers offer discounted childcare and other savings perks. Do your research now so you're working with real numbers.
  • Health insurance -- Contact your current provider. Often there's a flat "family" rate so your premium may not increase, but realize that you'll most likely pay more for care over time.
  • Housing -- Will a new baby mean you have to move? If not, you can trim some costs from those big estimates, which include housing. If you're cramped for space, be realistic about how much more room you can afford.
  • Education -- This isn't even included in those general estimates. Fortunately college costs can be handled in a variety of ways, such as loans and grants. But get a head start by opening a college savings 529 account as soon as your child is born and start saving something each month. Even a small amount can grow significantly over time. If you're planning on sending your kids to private schools, you've got some additional saving to do. An Education Savings Account, which can also be used for elementary and secondary school, could offer some tax advantages.

Put day-to-day expenses in perspective
Day-to-day costs for a second child can be pretty reasonable at first. You probably already have many of the basics, so there shouldn't be a big "set up" expense. And the proliferation of moms' groups makes it easy to get good quality things secondhand.

The expenses will grow, of course, right along with your child. However, consider that if your kids move on to public schools, the amount you spend on childcare can eventually be directed to other expenses such as after-school lessons, bicycles, computers, summer camps -- all the things that now seem to be synonymous with childhood.

Ramp up your emergency fund -- and all your savings
Hopefully, you already have an emergency fund. Now's the time to start adding to it so that you'll have an even bigger cushion against unforeseen events. And don't forget about life insurance.

But don't stop there. Focus on other ways to save. For instance, consider starting a special savings account for each child. If grandparents or other relatives ask how they can help, don't be shy about suggesting monetary gifts towards your kids' accounts.

Factor in the tax advantages
As you add up the dollars, remember that Uncle Sam gives you a bit of a break. On top of the extra dependent exemption, if your modified adjusted household income is under $110,000 (married filing jointly), the Child Tax Credit can reduce your tax liability by up to $1,000 per child.

There's also the Child and Dependent Care Tax Credit, which allows working parents to claim qualified childcare costs up to $6,000 for two or more children ($3,000 for one child). This credit also comes with income and percentage limits, so another option is a Dependent Care Flexible Spending Account (FSA) that allows a family to contribute up to $5,000 pre-tax annually.

Don't short-change yourself
At the same time, I want to remind everyone that saving for your own retirement should remain your highest saving priority. It's not selfish; it's practical. You don't want taking care of your kids now to mean they have to take care of you down the road. Once again, it's about planning ahead.

Enjoy every moment
We're talking about numbers here, but the joys of having a child are too numerous to count. Don't let financial concerns completely outweigh your desire to increase your family. Just do it with your eyes -- as well as your heart -- wide open.

Looking for answers to your retirement questions? Check out Carrie's new book, "The Charles Schwab Guide to Finances After Fifty: Answers to Your Most Important Money Questions."

Read more at You can e-mail Carrie at This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager.


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