Life Events Guides - Parenting

How can something so small cause such a major upheaval in your life? Not the least of this upheaval is financial. The U.S. Department of Agriculture estimates that the average middle-income family will spend over $190,000 raising a child until the age 17 -- and that doesn't include any college costs.

Planning for Parenthood
Brace yourself. You will be spending much more than expected to buy things you never even thought of. Start planning financially for having a baby as soon as you can - before conception if possible.

Set aside as much as you can every month in a savings account. The actual event of birth can be expensive as well as all the first time purchases you'll make. Don't forget to save some money for your maternity or paternity leave. This is usually unpaid time off work.

How much do you need? As much as you can save. Any funds left over make a great starter for a college fund. If you've amassed a considerable amount well before the due date, you can invest in a short-term CD or other insured investment. But don't tie up your entire fund in investments. Babies will not sign contracts and they have not agreed to your schedule.

Have a brainstorming session with an experienced parent to figure out all the things you need to purchase before the delivery. It will be extremely helpful to have most of what you need before the baby is born. Your spare shopping time after birth is reduced drastically. If you need to shop after the baby is born, try the Internet. Nobody on the Internet cares how loud your baby is crying, what you are wearing or what time it is when your baby gives you a free moment to shop.

Here's a starter list for your brainstorming session. This is far from a complete list, but it will help get you thinking.

• Car seat - By law, you can't even take the baby home from the hospital without one.
• Crib - You want one that meets the highest safety standards.
• Bedding - If your baby's gender is going to be a surprise, consider getting neutral colors.
• Changing table - You could use the kitchen counter. But do you want to?
• Rocking chair - Many mothers feel a special attachment to rocking chairs after spending so much special time with their babies in them.
• Dresser - The baby won't be using it, so feel free to use a spare dresser you already have.
• Bassinet - One with wheels will add to your mobility around the house.
• Stroller - Consider getting one that's part of a stroller/car seat combo. It makes transitions easier.
• Diaper Bag - A diaper bag will be your constant companion. Get one you like.
• Baby monitor - "Baby calling Parents, come in, Parents."
• Diapers - Decide on disposables or earth-friendly cloth diapers. If you go cloth, you might want to consider a diaper service.
• Bath tub - It's easier to bathe baby in his or her own tub than cleaning out the kitchen sink each time.
• Formula - If you decide not to breastfeed, formula can cost up to $1000 a year.
• Safety gate - As soon as your child is mobile (about six to nine months), it will be impossible to keep up with the little speed demon.

Budgeting
When your baby is born, your financial picture changes drastically. Now it's more important than ever to create, maintain and stick to a budget. You now have someone depending on you to keep the family financial matters in order. A well-thought-out budget will be your most valuable tool in managing the family money.

If you already have a budget, you'll need to revise it to fit your new, expanded family. If you don't have a budget, create one right now. This information will be still be here when you're done. So go ahead, click here to create a budget.

Don't throw away your old budget. You can use it as a starting point for a new budget. Go through each of your expenses to see if they will change with your new baby. For example, your rent or mortgage will probably stay the same. But electric bills might increase if one person is planning to stay at home every day.

Add all the extra costs of raising a child into your budget. Another parent can help you identify what extra expenses might come up on a regular basis and what you can expect to spend on them.

Make sure your income is accurately reflected in your budget. If you're going to have only one income and you are used to two incomes, this will significantly affect your budget. If you've been receiving financial assistance, check to see if this will increase with the birth of your child.

It will be important to add even more savings into your budget. Many experts suggest that you try to maintain three to six months of expenses in savings in case of emergency. If you're planning to save for a college fund, make space in your budget right away. It won't get any easier.

One Income vs. Two
One of the hardest decisions for new parents is whether to have one parent stay at home full-time. As much as we wish it wasn't the case, this decision is often made based on financial considerations rather than emotional and developmental considerations. Here are some questions that might help guide your decision:

Are both jobs paying off?
A job is more than just income - it also includes expenses. There's gas and/or other expenses related to transportation. You may eat out much more when working. You will need to pay for childcare while you are at work as well. Add up all of these work-related expenses to figure out how much you would really lose by staying home. It may not be as big a loss as you thought.

Can you afford not to work?
Subtract your income and work-related expenses from your budget. If that produces a deficit, see if you can cut any expenses but keep your savings as high as possible.

If you need to start scrimping, it's best to start slowly. Reduce expenses while you continue to work, thus boosting your savings. Keep trimming expenses and eventually, you may have cut enough to quit your job. Even if you can't, you will have learned to live more simply and have saved up some money in the process.

What are the emotional costs?
Some parents can't wait to get back to work after maternity or paternity leave. As beautiful and enjoyable as the parent-child relationship is, it can get stifling. Parents often yearn for the company and conversation of another adult, the satisfaction of working and the structure of a regular day at the office. If you decide to be a stay-at-home parent, make sure you receive the stimulation you need by getting out of the house once in a while, spending time with friends, or arranging a trusted babysitter so that you can spend some time taking care of only yourself.

On the other hand, many parents feel guilty leaving their child at daycare and have a hard time going back to work. They fear that they aren't good parents. But happy parents make the best parents. So working and coming home to spend happy, quality time with your child may be a better option than scrimping to spend 24 stressed hours a day with your child.

Childcare
A caregiver is more than a babysitter for your child. The caregiver will take part in some of the earliest development and education that your child will receive. For that reason, choosing childcare can be a hard decision.

Childcare can be one of the largest costs of raising a child. So the choice often comes to finding a balance between what's affordable and what's the optimal setting in which your child will spend five days a week.

Day care centers
Day care centers are a moderately priced option for childcare, but averaging between $400 to $1,000 a month, they are still expensive. You may be lucky enough to be employed by a company that offers day care as part of its benefits package. Churches, schools and community centers often offer lower-priced day care. The center should be staffed by trained and licensed day care professionals.

Day care centers are an attractive childcare option because they provide a stimulating environment for children and typically have several caregivers working at any given time. They also welcome unannounced visits, helping parents feel comfortable with what goes on while they aren't there.

But day care centers are usually closed on holidays and if your child is sick, they won't be allowed in day care so you'll have to take the day off, too. They also have stiff monetary penalties for early drop-off or late pick-up so if something unexpected happens, you'll pay for it.

Family day care
Family day care differs from traditional day care in that the caregiver provides care in his or her own home. Since they are run from a residence, they are often located more conveniently than other centers and can be much less expensive, around $300-$400 a month. You should still insist on licensed caregivers. Family day care is often less structured so you'll want to make sure the caregiver's ideas on playtime, feeding, napping and other issues as well as their value system are a good fit with your own ideas and values. You'll also want to inquire about and possibly run a background check on the other people that live in the home, even if they are not caregivers.

Nannies and au pairs
While usually the most expensive option, costing $1500 a month and up, both live-in and daytime nanny and au pair childcare have definite advantages: One-to-one attention, the familiarity and convenience of your own home, a consistent companion for your child. You also don't have to worry about getting your child ready and out to day care before you leave for work. If you pay enough, light housekeeping chores may be included in the deal, too. Keep in mind that you will be an employer, so legally you are required to withhold money for taxes and pay Social Security, unemployment insurance and any other costs according to your specific state and local laws. Nannies and au pairs get sick occasionally, so you will either have to find a substitute on short notice or stay home.

The Baby's Future
One of the greatest wonders of a newborn is that a whole world of opportunity is open for your baby to grow into. And one of the greatest challenges you face as a parent is keeping the world open to him or her, no matter what happens along the way.

Education
When your baby is just learning to smile and grasp your finger, college education may seem too far away to think about. But to fund your child's education, you'll need to amass a large amount of money. If you plan ahead, you'll provide your child with a much wider array of education options.

In the year 2000, tuition for a bachelor's degree program, including housing, at a public university averaged between $20,000 and $50,000. A bachelor's program at a prestigious private university may cost more than $150,000. By the time your child is ready for college, it will be much more than that.

Start a college fund as soon as you can for your child. A small amount invested 18 years in advance will grow to much more than a larger amount saved a year before it's time for college.

Coverdell education savings accounts
You can contribute up to $2,000 a year to a Coverdell education savings account for your child, as long as your income is under $190,000. Each child can receive a contribution of only $2,000 a year. So if Grandma puts in $2,000 this year, you won't be able to contribute until next year. These accounts can be opened with any financial institution and invested in anything from savings accounts to mutual funds.

529 education plans
A 529 plan is an investment for a child's education that is put aside in a mutual fund and grows in the account free of federal income tax. The money is withdrawn from the plan when the beneficiary is ready for college and used to pay tuition and other school related costs.

The 529 account does not affect the beneficiary's eligibility for financial aid. It remains an asset of the account holder and not the beneficiary. These accounts do have strict limitations on what they can be used for, including tuition, fees, books and equipment required for class. The money may be used for room and board only if the beneficiary attends school at least half the time and the amount is dictated by what the educational institution uses to compute the cost of attendance.

An investor can start a 529 account for any child, related or unrelated. The investor can change the beneficiary at any time. So if you start a 529 for one of your children who later decides not to attend college, you can designate that money to be used by any other college-bound child.

The amount you can contribute to a 529 funds for a child differs from state to state, but they can be as much as $265,000.

Other financial planning
The variety of investment tools that you can use to save money for your child's future is too large to cover here. But it is important to understand the basic philosophy of saving for your child's long-term future. Put simply - a little goes a long way. Save anything you can now and your child will benefit greatly from it in the future.

Wills
Though hard to discuss and think about, there is the possibility you will not be able to raise your child because of your unexpected death. It is important to update your will and provide for the well being of your child in case something happens to you. A will allows you to designate who will receive your assets and, more importantly, who will be the guardian of your child.

If you die without a will, the government makes these decisions for you. Though this will be done with good intentions, government officials will not have the background and understanding of your family's individual circumstances to make as informed a decision as you can. An estate lawyer can help you work through the intricacies of creating a will.

A will distributes assets among beneficiaries, but if you want particular items to go to specific people, those need to be listed in a separate testamentary letter which is mentioned in your will.

Be sure to update your will on a regular basis. Life changes quickly, especially with a growing child. You want to be sure your will still fits your needs.

Life insurance
While contemplating your own mortality for writing a will, you might also want to purchase life insurance. Life insurance can provide for a child in case both parents die, and can provide for a spouse or other caregiver so that he or she won't have the sudden and overwhelming financial burden of raising a child alone.

The size of the life insurance policy that's right for you depends on a lot of factors. Try to figure out how much your family would need to continue their lifestyle if you were to pass away. Many experts suggest six to ten times your yearly salary. Take into consideration the following:

• The usual expenses of your family (including your expected expenses for your new baby)
• Large amounts of money needed in your child's future - college costs, for example
• How much income you usually provide for your family.
• The extra expense of raising a child alone (childcare, domestic help, etc.)
• Your assets and investments that will be available to pay these expenses. That will reduce the amount of life insurance needed.

There are many different types of life insurance, but two of the most common are term insurance and whole life insurance. Term insurance is like auto insurance. You pay a premium, and if you die during that term, your beneficiaries will be paid. The rates increase as you get older because your chance of death is higher. Whole life insurance guarantees a level premium over your whole life. A whole life policy accumulates cash value, but to tap that value you must cancel the policy or borrow against it. When you die, the insurance company pays only the face value of the policy, not the face value plus the cash value. If you cancel the policy, you will be taxed on the amount you receive less the premiums you have paid.

Talk to an insurance agent for more specific information about life insurance plans and which one is right for you.

Maternity and Paternity Leave
Most companies don't provide paid maternity leave - and don't have to. The Family and Medical Leave Act, which only applies if a company has more than 50 employees, ensures mothers should be able to return to their old job or an equivalent job up to 12 weeks after they begin their leave. The actual policy varies from company to company, especially if the company has fewer than 50 employees.

If you are a father, ask your employer about paternity leave. The Family and Medical Leave Act does not cover this time, but many employers are offering the same or similar benefits to their male employees.

Plan monetarily for maternity and paternity leave, as it is unpaid. You may be able to save up sick time and vacation time to continue receiving income for several weeks. But most likely, you will lose some income during this time. Even though it's costing you money to stay home from work, don't rush back into your hectic world too soon. Pregnancy and birth are very strenuous (sometimes on fathers, too!) and the rest will be very good for both your body and mind.

Taxes Believe it or not, there is a financial advantage to having a child. You not only gained a loved one, you also gained a dependency exemption you can deduct on your tax return.

Apply for a social security number for your child within a year after his or her birth. That will make the baby "official" in the eyes of the IRS and that's the first step in getting your deduction.

Who is a dependent?
There are five requirements that a person must meet to be your dependent.

1. This person must be a relative or at least have lived in your home as a family member all year.
2. If the person is married, he or she can't file a joint return. This probably isn't a consideration for a newborn.
3. This person must be a United States citizen, resident alien or a resident of Canada or Mexico.
4. This person must have a gross income of less than $3,000, unless the person is under the age of 19 or a full time student under the age of 24.
5. You must have provided more than 50% of the person's total support for the tax year for which you are taking the deduction.

Tax credits
Tax credits differ from deductions in that they don't just lower your taxable income, they actually directly lower the tax you owe. So a $1 tax credit will lower the tax you owe by $1.

If you pay for someone to take care of your child, for example day care or a nanny, you may receive a tax credit equal to 20% to 30% (depending on your income) of qualified childcare expense, up to $2,400 for one child or $4,800 for two or more children.

Be sure to keep all payment records, including receipts, for all childcare expenses. You will need them to substantiate your expenses. Nursery school, private kindergarten, after school programs and day care are all qualifying expenses.

Flexible spending accounts
Some companies offer their employees flexible spending accounts as a benefit. These accounts allow employees to have from $2,000 to $5,000 a year deducted from their paychecks pre-tax. This money can be spent on healthcare and childcare for the family.

All of these tax issues have complexities that are not covered here. To find out exactly how you can benefit the most from federal tax laws, as well as the state and local tax laws that apply to you, ask a professional accountant for advice.