Bringing up Baby on a Budget
Concerned about spending a bundle on your bundle of joy? Learn how to estimate future expenses, begin saving, and cut the baby fat from your budget.
Use a Budget
You wouldn’t trade your baby for a million dollars, but do you know that you may spend half that to raise him or her? According to the US Department of Agriculture, it can cost up to a quarter of a million dollars to raise a child born in 2004 through age 17—statistics that don’t even account for growing college expenses. While this number may seem astronomical, there are ways to control and manage the costs that confront you as a new parent—other than just buying stock in diapers.
One of the best ways to get a grip on your expenses is by using a budget. “Have a budget that’s accurate, review it monthly, and eliminate the hundreds of dollars wasted every month,” recommends Mary Staton, CEO of the Staton Institute and coauthor of Worry-Free Family Finances: Three Steps to Building and Maintaining Your Family’s Financial Well-Being. Many people are uncomfortable with the notion of a budget—it almost sounds like a diet. But a budget is the best tool you can use to determine how much you’re currently spending and where you can make cuts to save money.
Begin by creating an accurate budget to see what your pre-baby expenditures are and looking for ways to trim those costs before the baby comes. “The earlier you get used to spending less, the easier the transition will be when junior comes along,” points out Bard Malovany, certified financial planner at Financial Council, Inc. in Annandale, Virginia.
Plan for Your New Expenses
Before the baby arrives, anticipate how much he or she is going to add to your monthly budget. “The best and most simple way to prepare for a new addition to the family is to plan ahead,” says Sheri Provost, coauthor of CashCow Kids: The Guide to Financial Freedom At Any Age. “Identify what additional expenses you will incur with the new baby.”
But how do you know what expenses your new baby will bring to your family? “Talk to your friends to find out what their monthly baby expenses are,” suggests Dave Ramsey, author of The Total Money Makeover: A Proven Plan for Financial Fitness. Price out the actual costs of items such as diapers, formula, and baby food in the stores. Estimate how much you will use per month. Add in costs for clothing and toys, and don’t forget the expense of childcare if both parents will be working outside the home.
Plan for the larger costs as well—such as a child’s furniture,—by saving money in advance to pay for those purchases. While these large items may seem like the ones that will you hit you the hardest, many parents found that not to be the case. “The big costs didn’t surprise me—I’d researched those,” says Michele St. Martin of Willmar, Minnesota. “It was the little ones. Diapers and clothes are expensive.”
Think about Spending Differently
While most expectant mothers daydream of a picture perfect nursery and a baby dressed in the cutest outfits, thinking about these expenses realistically can help keep your costs in check. “It’s really easy for expectant parents to get wrapped up in cradles and bottle warmers, when infancy only lasts a little while. If I could do it over, I would save the money we spent on frills for the later years,” says Hilary Evans of Fort Dodge, Iowa.
William Connington, owner of Connington Wealth Management Group in Pine Brook, New Jersey, points out, “Most parents want to provide more for their children than they were given by theirs.” But this kind of thinking can lead to incredible costs.
“Kids can be very expensive if parents purchase brand new, top-notch everything for them. I think parents can manage the costs by saying no to some of the high-priced toys and purchasing baby furniture, equipment, and clothes secondhand,” suggests Brigitte Thompson of Williston, Vermont.
A frugal approach will continue to work as your child ages as well. “Children’s interests and abilities change so quickly. It doesn’t make sense to buy a lot of things or pay top-dollar for things that they will only use for a short time,” offers Elise Monroe of Trenton, New Jersey.
Consignment and secondhand stores offer great buys on high quality, lightly used items. Careful comparison shopping will allow you to get good prices for items you buy new. If you start to develop a habit of spending wisely, you will not only be able to control costs throughout your child’s life, but also set an excellent example for him or her.
Managing the expense of a child requires more than careful spending. “New families should save systematically. That is, they should pay themselves first by putting 10 percent (at least) each month into a savings program,” suggests Eric Aafedt, president of MarketFN.com. A forced savings plan, where money is deducted directly from your paycheck and placed into a savings account or investment program, is the best way to make sure you are meeting your savings goals. Savings must be a priority and should be like a bill you pay every month.
Creating a healthy savings account can seem impossible if you can’t shave much off your budget, but you can save more than you think. “As a child moves through life stages and their associated costs, don’t pocket the savings on diapers, daycare, formula, etc. Rather accumulate the former weekly diaper money and place it away in a savings plan,” recommends Brice Harrington, director of 529 plans at MFS Investment Management.
Other ways to build savings include putting away money given to children as gifts, asking relatives to contribute to a child’s savings account or college account instead of buying gifts, and saving money you receive as rebates or tax refunds. Even a small savings plan that allows you to save $10 or $20 a week can add up to over $1,000 a year.
Use Debt Wisely
Your family’s total debt-to-income ratio should remain under 20 percent, with 10 percent being optimal. While most people think that all debt is bad, in fact, “there is good debt and bad debt,” says Bob Waters, chief economist for Quickenloans.com. Good debt is debt that gets your family something, like a home or a car. Bad debt is debt that continues to grow unchecked without providing you with anything of substance (an example is credit card debt). New families should use good debt to move ahead and avoid bad debt whenever possible.
Some new families find that their homes need an addition to make room for the baby. “A home equity loan (HELOC) is the best way to finance a home improvement project. With a HELOC, individuals have the flexibility to draw money as they need it, and the interest is only applied to the amount drawn, not the entire credit line,” says Walters. The interest is tax deductible as well, helping to make it a good debt.
There are hidden dangers though. “A home equity loan may be tempting to tap into for unexpected expenses for the new bundle of joy, but be careful. If for some reason you miss some payments, you risk losing your home,” warns Sandra Salter, co-owner of American Express Financial Advisors Branch Office, in Newark, New Jersey.
Think about College Now
When thinking about the costs a child brings, most people immediately think of college as the largest and most difficult expense to meet. “New parents or expectant parents should start thinking about college expenses now. The sooner they do, the more time they have for their money to grow for them,” says Malovny.
There are several methods to help you start saving for college. “The 529 college savings plan allows the most money to be socked away with significant tax benefits, yet the parents still control the money,” says Staton.
Kevin Neal, a certified financial planner with the McDonald-Neal Group in Coral Springs, Florida, recommends using an Educational Savings Account. “The ESA allows for a maximum contribution of $2,000 … The child has until the age of 30 to use these funds for educational needs. And … the funds may be used for the educational expenses of K through 12.”
Planning for the Future
College is not the only big expense new families need to think about and plan for. “As important as college is, there are a few things parents need to do first for the family before they save for college. Save $1,000 fast for small emergencies. Pay off all your debts except for the house, smallest to largest. Save three to six months of expenses for life’s big emergencies. Maximize your retirement investing,” says Ramsey.
While it’s important to plan for college, you shouldn’t neglect other things to pay for it. “Keep in mind though that the kids can get loans for college, but you can’t borrow for retirement,” says Monroe.
While saving for college and for the future are important moves, Michael Sullivan, director of education at Take Charge America, believes that there are important things to spend money on while your child is young. “It is not wise to skimp on preschool education or life enrichment activities such as travel just to save for college. The younger years will have more impact than the years from 18 to 22.”
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