My wife and I were doing OK on $79K until we had a baby. Now we’re $20K in debt and dying to get back on track. But how?

With the average cost of having a baby in the U.S. at an eye-watering $18,865 across the country (1), it can be easy for new parents to slip into debt. Adding the medical bills to costs like new furniture, baby clothes, diapers and all the other supplies needed can strain any budget.

Imagine the case of Karl. He and his wife Millie brought home a new baby boy, and were able to budget for most of the expenses they expected while they were expecting. However, a few very unexpected surprises popped up: Their washer broke and had to be replaced, a hornet’s nest in their backyard needed professional help to be removed, and just this week, Karl got into a fender bender.

While just a single emergency may have been manageable for the couple, three in a row was hard. They make just $79,000 combined, and are having a difficult time trying to budget for these expenses, the medical bills and their living costs.

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Karl has always been careful with money and has been able to stay out of debt until now, but he is wondering how the couple will be able to manage the family’s budget, and also manage his stress levels, during this trying episode.

Here’s what the couple can do to help avoid more debt, and get the family budget under control.

The budget breakdown

Karl and Millie’s basic living expenses are as follows:

Rent: $1,500 Groceries: $750 Car payments and insurance: $500 Utilities: $250 Savings: $300 Discretionary: $700

Together, the couple brings home about $4,000 per month and has $10,000 in savings. (As Millie works for a day care, she is able to bring their son to work and the cost of his care is deducted from her salary.)

Their debts include:

$4,000 in hospital bills (they were able to qualify for financial aid). $400 for a new washer (paid on a credit card). $500 for the pest removal service. $3,500 for the car accident, as the fault was on Karl’s side.

Read more: Are you richer than you think? Here are 5 clear signs you’re punching way above the average American’s wealth

The budget recommendations

As Karl and Millie have every penny of their existing budget dedicated to keeping up their lifestyle, it’s important for them to find ways to trim their existing expenses in order to pay off their debts as quickly as possible. They may want to consider dipping into their savings to pay off their largest debts — the medical bills and the car repairs — saving the remaining in case any other emergencies arise.

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If Karl and Millie can shave down their food expenses, they may be able to find more room in their budget for their outstanding bills. They can consider local food assistance programs and food banks, especially for costly items like baby formula.

For their auto expenses, they may want to look into cheaper insurance if their policy is set to renew soon, and cut down on their expenses for gas as much as possible by opting for public transit if it is available. They should also consider trimming any extras from their discretionary budget, like streaming services, for example, in the short term.

If they can find an extra $200 in their budget for two months, added to their savings, they can pay off their outstanding expenses quickly. They should then look to build an emergency fund as quickly as possible. Using a budgeting worksheet or app and having frequent conversations about money and budgeting can help them to get creative about their savings.

Popular budgeting models

While budgets are not one-size-fits-all, there are a number of popular methods that are helpful for the majority of savers:

The 50/30/20 budget dictates that 50% of your take home pay should go to your needs. 30% is dedicated to discretionary spending and 20% goes to savings. Pay Yourself First is popular if you don’t like to budget, or you have a larger income. Simply treating your savings as another bill you have to pay each month can ensure that you spend the rest of the month guilt-free. Zero-based budgeting assigns every dollar of your income a ‘job’, with the goal of spending down all your income in a month. Anything left over is added to your existing savings budget.

The need for an emergency fund

While Karl and Millie have managed their small budget fairly well, their underfunded savings made them easy targets for hiccups like the ones they experienced. While it can be tempting to forego savings when you make a small income, a healthy emergency fund prepares you for the unexpected and can be a lifesaver when things go wrong.

According to research from Ramsey Solutions, 48% of Americans say they wouldn’t be able to cover their expenses for 90 days if they lost their income (2). While that is alarming in today's tough job market, 33% of respondents said they have no savings at all. The risk of hitting a bump in the road — or another person’s car — is too great not to set aside some cash for a rainy day.

The rule of thumb is to have at least three months of expenses in an emergency fund. For Karl and Millie, they should ultimately aim for six months considering they’re now a family of three. Emergency funds can help protect you from debt, and thus ensure that unexpected expenses don’t get even more expensive by having to use credit and paying interest as you knock it down.

When juggling the family finances, nn emergency fund can help give you peace of mind — you get to pay in full for whatever comes up, and move on, rather than having an expense hanging over you for months or years.

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Article sources

We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.

UW Health (1); Ramsey Solutions (2)

This article originally appeared on Moneywise.com under the title: My wife and I were doing OK on $79K until we had a baby. Now we’re $20K in debt and dying to get back on track. But how?

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