Budgeting for Baby
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| 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. |
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Know What You Need (and What it Costs)
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| 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. |
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Choose the Best of Your Benefits
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| 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. |
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| 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. |
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| 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. |
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Parental Leave -- Your First Fiscal Test
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| 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. |
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Child-Care Costs
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| Fortunately, there are certain tax breaks that were created
especially for parents. |
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| 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. |
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| 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.
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Insure for the Future
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| Your child's arrival should also prompt you to protect against
potential loss of income by obtaining or increasing insurance
coverage. |
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| 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.
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| 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. |
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Ensure Your Family Legacy
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| 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. |
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| 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. |
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Summary
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The cost of welcoming a new child into a
family can run more than $32,000 for the first two years
alone. |
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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.
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Invest ahead of time to pay for expenses
during parental leave, as some companies do not replace all
or any salary during this time. |
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Child care and education costs average
about 10% of a family's pretax income, although tax breaks
can help defray this expense.
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Obtaining life and disability insurance, as
well as naming a guardian for your child, are crucial steps
in protecting your child's future. |
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Checklist
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Increase your household's emergency savings
and look into your employer's parental leave policy.
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Consider your employer's health insurance
options and decide which might best fit your needs. |
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Update beneficiary designations on all
insurance policies and financial accounts. |
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Update your will and other estate planning
strategies. |
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