Budgeting for Baby

You may have to spend your money in different ways once your new bundle of joy comes along. But a little planning can help you maintain financial security as your family grows.

Denise Dorman has a two-word explanation for why she didn't do much financial planning before the birth of her son, Jack, and it's not "morning sickness." "Hurricane Ivan," she says.

Denise and her husband, Dave, had half of their home destroyed in September 2004, a month before she was due. "So we just sort of winged it," says Denise. "Budgeting? At that point, we didn't." After a near-miss from Hurricane Dennis the following summer, the couple moved from Florida to hurricane-free Geneva, Ill. But Mrs. Dorman, a public relations consultant, and her husband, an artist, still struggle with post-partum finances. The biggest shock: day-care costs. "It's much more expensive than we thought it would be," Denise explains.

Most couples can't claim a hurricane as an excuse for not planning. Even if parents try, it's tough to come up with an actual figure for what they'll spend on each new baby. In 2006, The U.S. Department of Agriculture reported that raising a child from birth through age 17 costs the typical middle-income, two-child family $197,700.

Diapers and day care are just the beginning. Expectant parents also must budget for life insurance - the foundation of any financial plan. And they should think about saving for their child's college tuition, without compromising retirement savings. Phew. Now, that's a lot to consider.

But take a deep breath. A few smart steps can get your finances in order and let you concentrate on your little one.

A trial run
Long before the due date, take a good look at how your baby will affect everyday living expenses. If you and your mate are unfamiliar with the price of day gowns and diapers, stroll through a baby store or two - and take notes.

Buying disposable diapers instead of cloth may be worth it to you, but expect to spend a total of $1,500 to $2,000 until your child is potty trained, according to Consumer Reports. The cost of formula, if you use it, adds up quickly, too. "Store-brand formula is almost identical to brand-name, but half the cost," says Financial Planner Sean Sebold.

Next, redo your annual budget to include the new line items. That exercise can help you figure out if you need to cut spending in other areas.

If one parent is thinking of leaving the workplace to care for the baby at home, experiment with living on one income to see how feasible it is. "See what it feels likes - the earlier the better," says Financial Planner Dianne Nolin. Sock the second income into savings for child-related expenses.

Baby-clothes bonanza
It's fun to buy new hoodies and onesies, but the Financial Planning Association recommends investigating hand-me-downs, consignment shops and garage sales. Denise Dorman is a regular on eBay, where she finds box loads of gently used and quality children's clothes for a few dollars.

Ask gift-givers for items you really need, suggests Dianne. Otherwise, you're likely to be overwhelmed with newborn outfits that are outgrown in a few weeks.

House notes
Beyond expenses for the crib and any decorating you might want to do in the nursery, think twice before buying a new home for your growing family. You may find yourself baby-rich and house-poor like Lisa and Luis Rivero.

The 32-year-old professionals rented an upscale but affordable apartment in downtown Boston before buying a home in Ipswich, Mass., a few weeks after their first child was born. Unexpected repairs and maintenance robbed them of their savings. "Now we live paycheck to paycheck," Lisa says.

You can save on housing by moving, but not necessarily to heavily populated areas in the Northeast or out West. Child-rearing costs are lowest in the Midwest and South, according to the U.S. Department of Agriculture, largely because of lower housing expenses.

Not moving at all might have been better, at least for a while. Mrs. Rivero wishes they had rented for another year.

Hot wheels
Contrary to popular belief, you don't really need a minivan or sport utility vehicle to parent properly. Lisa regrets trading her paid-for sedan for a luxury SUV just before gas prices soared. "I would return it to the dealer in a heartbeat," she says.

Day-care solutions
Perhaps the most meaningful financial assistance grandparents, other relatives, and friends can give is volunteering to baby-sit. "That's very helpful, particularly when the baby's young," says Park Ridge, Ill. Financial Planner Terry Gaertner. "You have to develop some sort of support system for baby care."

For those without this system, here's a tip from the Financial Planning Association: If your employer offers a flexible spending account, you may be able to use it to pay up to $5,000 in child-care expenses using money exempt from income taxes.

Bye-bye to brand names
Perhaps you can afford that designer diaper bag, but if it's a stretch, one from the discount store might have to do.

Your baby won't know the difference between top-of-the-line baby blankets and less expensive, quality ones that feel just as snuggly.

Look ahead to higher education
If you start planning for college in the delivery room, you won't be jumping the gun, Dianne Nolin says.

The College Board estimated that the average cost of tuition and fees for the 2006-07 school year was $5,836 for a public college, up 6.3 percent from the previous year, and $22,218 for a private college, up 5.9 percent from the previous year. By the time your baby is a freshman, who knows what tuition, room and board, and books will cost?

Financial aid and part-time jobs may help your child pay for college, but if you want to contribute, experts suggest 529 college savings plans and Coverdell educational savings accounts.

For now, college is far from Denise's mind. But the good news is that the financial sacrifice, even the day-care cost, is worth it. "My son is thriving," she says.

The preceding discussion is not tax or legal advice. Consult your tax or legal professional regarding your specific situation.

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