Your new bundle of joy could cost $200,000
By Kathy Chu
USA TODAY
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The emotional rewards of new parenthood can be joyous. The financial toll tends to be rather less blissful.
Shall we count the ways?
Figure $100 a month for diapers. Budget $125 for baby formula. Count on $175 a month for new baby clothes.
You'll also lose pay if you take time off from work beyond any paid leave your job provides. Don't forget the years of day care costs you'll incur if both you and your spouse continue to work.
A middle-income family with a child born in 2006 will spend, on average, $197,700 to raise him or her from birth through age 17, according to government data. That figure doesn't even include the soaring cost of college.
How to plan for a little one without wrecking the family finances? Shrink debt and build up savings as early as possible - ideally, long before starting a family - so your budget can weather the baby costs.
Realize, though, that you won't be able to anticipate every cost. You might need to travel more often than you think to introduce the baby to friends and relatives. Health costs, too, are hard to project.
"There will be times when everything goes wrong at once, and you'll swear you're on the fast track to financial ruin," says Ann Douglas, author of The Mother of All Baby Books. "It's called parenthood."
Here are 10 tips to baby-proof your finances:
REVIEW HEALTH COVERAGE
Check to see whether routine doctor visits, medicines and serious medical conditions are covered. If you plan to have a child within a year or two, consider upgrading to a more generous health plan, recommends Natalie Michalek, a financial planner in Dallas.
Like most parents, Raj and Anita Nijjer, of Scottsdale, Ariz., had reviewed their health insurance before having their first child last year. But, "We just looked at the basic stuff, like vaccinations, medicine. We didn't look into, 'What if he had this issue, what if he had that issue?' " says Raj, 29.
They started worrying about their coverage when their son, Kabir, was born two months prematurely. The baby spent his first few months in a neonatal intensive care unit, racking up $196,000 in bills.
Fortunately, the couple's insurance plan covered all the costs. But many people have less-generous medical coverage.
GET RID OF CREDIT CARD DEBT
Paying off high-interest card debt will free up cash for baby expenses.
"There are all these unforeseen circumstances that come up" when you have a baby, says Eric Tashlein, a financial planner in Milford, Conn. "If you're already stressed by all the payments you need to make, it's going to get worse."
BUILD UP AN EMERGENCY FUND
Planners generally recommend putting away three to six months' worth of expenses in a cash account in case of an emergency, such as a job loss.
But if you're having a baby, don't stop there. The more you can save, the more financially secure you'll feel once the baby arrives. You'll also have financial flexibility to hire a babysitter when you need a break.
REVISE YOUR BUDGET
That adorable baby can dent any budget you've established for your other household expenses. It'll take a few months to figure out exactly how much diapers, toys and clothes will cost. Once you know, factor those expenses into your budget. Then see where you can cut back.
Babycenter.com has a calculator that will estimate the long-term cost of raising your child, depending on your family's circumstances. Also check out Visa's baby-budgeting tool at www.practicalmoneyskills.com. It will provide the average retail cost of baby expenses.
UPDATE YOUR WILL AND LIFE INSURANCE
If you have a will, it may include a generic provision that says your "offspring" will inherit assets. But after your baby is born, you should revise the will to name him or her as beneficiary. Also, consider naming a guardian for your child if you and your spouse die.
You'll likely need to increase your life insurance coverage.
SHOW FISCAL RESTRAINT
Michalek, the financial planner in Dallas, says the temptation to buy your child - especially your first - every new baby contraption can be overwhelming.
She, herself, went overboard, she says, when her son, Tyler, was born three years ago.
"We bought this swing thing, a buzzing bassinet and a Baby Papasan," which is a musical bouncing chair, Michalek says. "The only thing he ended up liking was the Baby Papasan. I know that if I had (another) one today, I would get him one thing. If he hates it, then we'll return it and get something else."
WEIGH THE COST OF STAYING AT HOME VS. WORKING
The percentage of two-income married couples rose steadily from the late 1970s to the late 1990s, according to the Bureau of Labor Statistics. In 1999, the percentage of two-income families began slipping; it's now starting to climb again.
For many two-income families, day care is an expensive option. On average, putting a 3-year-old child into day care for five days a week, eight hours a day, costs $653.37 each month, up 7 percent from the previous year, according to Runzheimer International, a consulting firm.
Weigh the costs of a shared day care facility against hiring a nanny or having one parent stay home. Consider the emotional costs, too, of whatever you decide.
Also check to see if your employer will offer you a flexible four-day schedule, rather than a five-day workweek. If you don't want your pay to drop, you might have to work 10, rather than eight, hours a day. But you'd also have one less day of child care costs, and likely more time with the baby.
Hiring a friend as a caregiver can be cost-effective. That's what Chris and Liz Lucas of Indianapolis plan to do when she returns to work part time in September.
The Lucases will have Liz's college friend watch their now 4-week-old son two days a week. The savings will be substantial. Chris estimates they'll have to pay just $30 a week to Liz's friend.
OPEN A TAX-ADVANTAGED WORKPLACE SPENDING ACCOUNT
Most large employers offer either a health care flexible spending account or a dependent care flexible spending account. Both let you sock away money on a pretax basis, reducing your tax bill.
Health care FSAs let you pay for unreimbursed medical costs, from aspirin to doctor visits. Dependent care FSAs let you pay for such costs as babysitting, camp and day care.
EXPLOIT TAX BREAKS
See whether you qualify for child and dependent care tax credits or an earned-income tax credit. You should also adjust your tax withholding to reflect a dependent child; this will give you a larger paycheck, which will help cover your new baby expenses.
SAVE FOR COLLEGE
Considering the skyrocketing costs - tuition, fees, room and board have surged 38 percent in the past decade at public four-year colleges, to $12,796 a year, and 28 percent at four-year private universities to $30,367, the College Board says - it's never too early to start saving for college.
One of the most attractive ways is through a state-sponsored 529 plan. You can invest after-tax money and then later withdraw your contributions and earnings free of federal taxes, for qualified expenses such as tuition and books. Many states provide their own tax breaks for contributing to these plans.
Don't save for your child's education, though, at the expense of your own nest egg. Your child can always get a loan for college: You can't get one for retirement.
"We all want to sacrifice for our children, but you've got to take care of yourself as well," says Peter Lengsfeld, a planner in Denver.