How to Budget for Baby

It is one of the most wonderful times of your life, expecting a new addition to your family. But along with the joy comes the responsibility of providing for all of his or her needs. As the saying goes, "Parents are people who carry pictures in their wallets -- where their money used to be." The cost of welcoming a new arrival can be about $32,000 for the first two years alone. Knowing in advance what expenses a new child adds can make your family's finances easier to manage.

A new baby makes creating a budget (or adjusting your existing one) a top priority, as conservative estimates have the cost of raising a child at $9,500 to $10,700 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.

If you and your spouse plan to keep working after your child arrives (and you both have company-provided benefit plans), one of your first steps 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. With this type of plan, you'll have to determine at the beginning of the year how much to contribute and you will lose any money you don't spend.

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 if and when you go back to work daycare can be costly...averaging over $9000 a year. 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 a savings vehicle with a 4% monthly rate of return would give you over $800 seven months later. That could pay for a year's worth of diapers or baby food/formula!

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 should be your next consideration. You should have 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 and pay benefits if the policyholder dies. (For example, a term policy with $100,000 coverage may cost about $200 in yearly premiums.)

Another important thing to consider is drawing 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.

Best of luck to all of you new parents and parents-to-be. Hope this is helpful.

Make Your Child a Millionaire

Just wanted to pass along some valuable information in which I thought you may be interested. If your child is employed, they can contribute up to $4000 a year to a Roth IRA. The contributions are not tax deductible, but at their tax bracket it won't really matter. Just to put it in perspective, consider the following...

If they would put in $4000 a year between the ages of 16 and 21 and not another dime after that, and the Roth IRA earns 10% per year, the child would have well over $2 million dollars at age 65. $4000 may be alot to contribute at that early age, but even half of that and they would have over a million dollars. The Roth may earn less than 10% some years, but may earn even more in other years. The point is to try and have them save as much as possible to maximize their savings at retirement. And the best part about saving this money in a Roth, is that the money will be 100% tax free at retirement!

A great place to go for some financial calculators is
http://www.firstcommand.com/whereGo/calculatorlist.htm. Just search calculators on the home page.

Happy Investing.