Budgeting for Baby
|
|
As the saying goes, "Parents are people who carry
pictures in their wallets -- where their money used to
be." While the cost of welcoming a new arrival can be
about $32,000 for the first two years alone, that
doesn't deter many would-be parents from starting a
family. Knowing in advance what expenses a new child
adds can make your growing family's finances easier to
handle and, in many cases, save you a considerable
amount of money. |
|
|
|
|
Know
What You Need (and What it Costs)
|
|
A new baby makes creating a budget (or adjusting your
existing one) a top priority, as conservative estimates
peg the cost of raising a child at $9,200 to $10,300 per
year to age 17. Many families will spend more than
$230,000 over 18 years. As you consider your growing
family's fiscal needs, take a look at key areas to
address before and after your new child comes home. |
|
|
|
|
Choose the Best of Your Benefits
|
|
If you and your spouse plan to keep working after your
child arrives (and you both have company-provided
benefit plans), your first baby-planning step is to
choose the benefits you need from each plan, at the
lowest out-of-pocket cost possible. For instance, if you
plan to switch health plans for better and/or
less-costly maternity benefits, consider whether the
plan you favor offers the pediatric coverage and
providers you prefer for infant care. |
|
|
|
A managed-care plan, such as a health maintenance
organization, can reduce out-of-pocket expenses over a
traditional plan, which often requires you to pay at
least 20% of care costs. The savings can be substantial
for pediatric care, as managed care offers cost
incentives for the preventive care children often need,
such as well-baby check-ups, inoculations, and treatment
of flu and ear infections. |
|
|
|
For medical expenses not covered by your health
insurance, find out if your firm offers a medical
reimbursement account. Your pretax contributions can pay
for items such as orthodontic care, insurance
deductibles, and eyeglasses. You'll have to determine at
the beginning of the year how much to contribute. In
addition, you'll lose any money you don't spend. |
|
|
|
|
Parental Leave -- Your First Fiscal Test
|
|
Your money-saving skills take center stage when you or
your spouse (or both of you) take time off to care for
your new child. Some companies provide little or no paid
maternity leave -- but you still need to pay bills (and
give your child the time you both need). Plan ahead by
putting as much as possible per paycheck into a
conservative account that is easily accessed (important
if baby arrives early). Even if you can only save $100
monthly beginning in the second month of pregnancy,
finding an account with a 4% rate of return (compounded
monthly) would give you $821.40 seven months later. |
|
|
|
|
Child-Care Costs
|
|
Fortunately, there are certain tax breaks that were
created especially for parents. |
|
|
|
For example, Uncle Sam offers some help with day care
bills via tax breaks. The federal income-tax credit for
day care expenses permits you to deduct about 20% to 35%
of child care expenses (within limits), depending on
your income. Some states also offer additional tax
breaks for child care costs, so check with your tax or
financial advisor for details. |
|
|
|
An even better deal, if available, could be an
employer-sponsored dependent-care account, where you
contribute an annual amount in pretax dollars to be used
for qualifying dependent care expenses. But keep in mind
that you must decide before the beginning of each year
how much you will contribute, and you lose what you
don't spend. Also, account contributions reduce
dollar-for-dollar your federal child care tax credit,
making it impossible for many parents to take advantage
of both tax breaks. |
|
|
|
|
Insure for the Future
|
|
Your child's arrival should also prompt you to protect
against potential loss of income by obtaining or
increasing insurance coverage. |
|
|
|
Your greatest chance of losing family income is if you
or your spouse is disabled -- making disability
insurance a must. With this coverage, try to replace
about 60% of your income. The most inexpensive way is to
purchase coverage through your company's group policy,
if possible. If this isn't an option, consider
purchasing an individual disability insurance policy.
|
|
|
|
Life insurance is your next consideration. Assume you
will need coverage equal to 5 to 10 times your family's
annual income. If life insurance isn't available through
your or your spouse's benefit plan, an affordable
alternative is term insurance. (These policies are
generally written for a specific time -- when they can
be renewed -- and pay benefits if the policyholder
dies.) For example, a term policy with $100,000 coverage
may cost about $200 in yearly premiums. |
|
|
|
|
Ensure Your Family Legacy
|
|
Though costs can vary from $500 to $2,000, it is
especially important now to draw up a will designating a
guardian for your child should you and your spouse die
together. If you or your spouse dies without a will
(intestate), a judge decides who will be appointed your
child's guardian. As a result, it could be someone you
hadn't wanted as a guardian. Finally, your will should
provide for guardianship that applies to both your
current and future child or children. |
|
|
|
Your will can also be a vehicle for creating a trust to
hold your child's inheritance. The trust allows you to
specify what you want the money to be used for (such as
college education costs) and at what age you want the
principal distributed to your child. That way, you can
delay distributing money to your child until he or she
is old enough to handle it responsibly. |
|
|
|
|
Summary
|
|
· |
The cost of welcoming a new child into a family
can run more than $32,000 for the first two years
alone. |
|
· |
If both you and your spouse plan to continue
working when your child arrives, consolidate the
best and most cost-efficient features from both
your employers' benefit plans.
|
|
· |
Invest ahead of time to pay for expenses during
parental leave, as some companies do not replace
all or any salary during this time. |
|
· |
Child care and education costs average about 10%
of a family's pretax income, although tax breaks
can help defray this expense.
|
|
· |
Obtaining life and disability insurance, as well
as naming a guardian for your child, are crucial
steps in protecting your child's future. |
|
|
|
|
|
Checklist
|
|
· |
Increase your household's emergency savings and
look into your employer's parental leave policy.
|
|
· |
Consider your employer's health insurance options
and decide which might best fit your needs. |
|
· |
Update beneficiary designations on all insurance
policies and financial accounts. |
|
· |
Update your will and other estate planning
strategies. |
|
