Budgeting for baby

Key Points

• Know What You Need (and What It Costs)
• Choose the Best of Your Benefits
• Expenses: Year by Year
• Parental Leave — Your First Fiscal Test
• Child Care Costs
• Insure for the Future
• Ensure Your Family Legacy
• Points to remember

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 more than $6,200 for the first year alone,¹ 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)

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 $10,220 to $11,290 per year to age 17. Many families will spend more than $260,000 over 18 years.² 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

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.

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Expenses: Year by Year

YEAR 1

Items4
Crib, mattress, dresser, and rocker	$1,500
Bedding and accessories	300
Clothes	500
Diapers (disposable)	600
Maternity/nursing clothes	1,200
Baby food/formula	900
Nursery misc., high chair, toys	400
Stroller, car seat, baby carrier	400
Miscellaneous items	500
Other
12-week maternity leave (six weeks unpaid)5	3,461
Day care (40 weeks)	8,000
Term life insurance premiums 6	270
Disability insurance/individual 7	1,284
Drawing up a will	1,000
Total:	$19,315
YEAR 23
Items4
Clothes	515
Diapers (disposable)	618
Food	927
Toys	412
Miscellaneous items	515
Other
Day care (40 weeks)	8,240
Insurance premiums	2,121
Total:	$13,348
YEAR 3*
Items4
Bed	500
Clothes	530
Food	955
Toys	424
Miscellaneous items	530
Other
Day care (40 weeks)	8,240
Insurance premiums	2,121
Total:	$13,348

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.

³ Numbers for years 2 and 3 assume 3% annual inflation.

⁴ Retail prices and estimates on all items from Baby Bargains, 2006.

⁵ Based on $30,000 annual income for mother taking leave.

⁶ Based on quote from Quicken Insurance Market.

⁷ Source: Insure.com, estimated for a couple earning a combined total of $70,000 annually.

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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).

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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.

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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.³

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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.

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Points to Remember

1. The cost of welcoming a new child into a family can run more than $6,300 for the first year alone.
2. 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.
3. Invest ahead of time to pay for expenses during parental leave, as some companies do not replace all or any salary during this time.
4. Child care and education costs average about 10% of a family's pretax income, although tax breaks can help defray this expense.
5. 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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