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The budgeting guide every millennial parent should know
It takes a village and a clear budget to raise a kid.
Presented by Stash
It takes more than just a village to raise a kid—it takes a budget. (What feels like the entire village’s budget, some days.)
Parents can expect to spend about $233,610 on each child from day one through their 18th birthday, according to a recent report from the USDA. That’s not even including college costs. On average, parents spend just shy of $13,000 annually (about $36 daily) per child on housing, childcare, education, food, transportation, clothing, healthcare, and other costs.
Of course, children aren’t just another expense. Besides, most parents would agree that any money spent is a small price for the fulfillment children bring to their lives. Still, it pays to be prepared.
To help you get started, here are some budgeting tips for millennial couples with kids.
1) Create a budget
Millennials are often already in financial hot water before adding kids to the mix: student loan debt, lower employment levels, smaller incomes, and a lack of affordable housing. Parenthood can strain your finances even further. A budget can help you get and stay on track.
Create a yearly or monthly budget. Estimate how much money your household has coming in, and subtract how much money is going out. If you have money left over, decide how to spend, save, and invest it wisely. If you come up short, cut your expenses or find a way to boost your income.
It’s fairly simple to create a budget the old-fashioned way using pen and paper or an Excel spreadsheet. You can also embrace technology and use a budgeting site or app. The Stash app is a great way to start your budgeting plan. Stash offers “Smart-Save”, a free personalized saving tool for Stash users to help them save the right amount of money at the right time.
2) Stay within the budget guidelines
When creating your budget, it helps to know how much you should be spending on certain expenses. Here are some guidelines:
In general, spend no more than 28% of your gross income on rent or mortgage. This will probably be your single largest expenses – whether you rent or own.
Total Monthly Debt
Keep your combined housing costs and debt payments below 43% of your income. (36% is better, if you can swing it.) This is the highest debt-to-income ratio (DTI) you can have and still get a qualified mortgage.
Spend between 10% and 20% of your income on student loan payments. Take advantage of any student loan repayment benefits your employer offers.
Spend between 10% and 20% of your income on auto expenses, including car payments, gas, insurance and maintenance. If you or your partner use Uber, Lyft and public transportation instead of a car, you may end up spending less.
Aim to set aside 10% to 15% of your income for retirement each month, starting in your 20s. (The sooner the better, because of the power of compounding). Save more if you can without affecting your quality of life. An IRA is an easy way to get started. To start investing in an IRA you don’t need large sums of cash. You can start investing in an IRA account with as little as $15.
A 529 college-savings plan lets your earnings grow tax-free as long as they’re used for qualified education expenses. How much you save each month depends on how old your child is now and what type of school you envision them attending (public, private, in-state, out-of-state, etc.). A good starting point is $100 a month if you can swing it.
3) Spend wisely
Making a budget is easy. Sticking to it is more challenging.
If a raise or second job aren’t feasible options, get rid of monthly expenses you don’t need or no longer use: cable TV, magazine subscriptions, club memberships, etc. Then call providers and request a better deal for the ongoing expenses you still have. Sometimes, a company will give you the “new customer” rate if you just ask for it, even if you’ve been a customer for years.
Once you’ve made cuts to current costs, think before you spend again. Consider the consequences of every discretionary purchase you make. You may want that really nice pair of shoes or new toy for your kid, but is it worth cutting into your food budget for?
It’s super easy to buy stuff for your kids, but a lot of it, they don’t need or won’t ever use. Fight that urge. You’ll find you have a lot more money at the end of the month that you can save and invest. It will come in handy in the future.
4) Claim applicable tax credits
Uncle Sam offers several tax deductions that can help parents save money at tax time. Whether you do your own taxes or hire a preparer, make sure you claim any deductions you’re entitled to, such as:
- The Dependent Exemption: You are allowed one exemption for each person you can claim as a dependent, including your children. For 2017, it’s $4,050 per person.
- Child Tax Credit: This provides up to $1,000 for every child under 17 in your care if you meet income requirements.
- Child and Dependent Care Credit: Working parents who pay for child care may be eligible for a child care credit of up to $3,000 for one child or $6,000 for two or more.
- Earned Income Tax Credit (EITC): This credit helps low-income and moderate-income working families by lowering the amount of tax owed and refunding the difference if the credit is more than that amount. Twenty-six states and the District of Columbia also offer earned income tax credits.
Consult a professional tax advisor to further discuss which exemptions/deductions best meet your personal needs.
5) Get your budgeting plan started
Once you’ve committed to better budgeting, actually getting started is easy.
Stash is one app for all your investment and saving needs. Just connect your bank account. You can create a unique, risk-appropriate and diversified portfolio to get you towards bigger goals, like your child’s college education or a down payment on a home. Want to open an IRA? You can do that on Stash too.
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