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 raising a child can easily run between $11,000 and $13,000 per year,* 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 to age 18 at between $226,000 and $286,000 for a typical middle-income family - and that doesn't include the cost of college tuition.* 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 (MRA) or a health savings account (HSA). Your contributions can pay for items such as orthodontic care, insurance deductibles, and eyeglasses.
|Expenses: Year by Year|
|Crib with mattress||$455|
|Bedding and accessories||$300|
|Nursery misc., high chair, toys||$540|
|Stroller, car seat, baby carrier||$400|
|12-week maternity leave (six weeks unpaid)2||$3,461|
|Day care (40 weeks)3||$6,110|
|Term life insurance premiums4||$270|
|Drawing up a will||$267|
|Day care (50 weeks)3||$7,236|
|Day care (50 weeks)3||$7,453|
Your circumstances will vary, but these estimates give you an idea of how much to budget for a new family member, and how costs can shift from year to year. Remember, too, that using employer-sponsored benefits and any tax breaks efficiently - and shopping for discounts - can help save substantial dollars for your family.
1Price estimates from www.SureBaby.com, 2011.
2Based on $30,000 annual income for mother taking leave.
3Source: www.Costhelper.com and the U.S. Department of Labor.
4Based on quote from Quicken Insurance Market.
6Numbers for years 2 and 3 assume 3% annual inflation.
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 Child and Dependent Care Tax Credit provides a credit of between 20% to 35% of up to $3,000 ($6,000 for 2 or more children) 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 a low of $20 to $30 for will-creation software up to hundreds or even thousands of dollars depending on the complexity of your situation, 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.
Points to Remember
- The cost of welcoming a new child into a family can run between $11,000 and $13,000 for the first year 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 pre-tax 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.
*Source: U.S. Department of Agriculture, 2011.
**Source: Accuquotelife.com, 2012. Rate listed is for a 30-year-old nonsmoking male resident of Massachusetts opting for a $100,000, 20-year term policy.
© 2012 McGraw-Hill Financial Communications. All rights reserved.
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