Congratulations on your new arrival! Your new baby is entering a world filled with opportunities and wonder, but also with complex money issues and expenses that can be overwhelming. Read on for information about the financial challenges and opportunities presented when you have a baby.
Time for a reality check: If your new baby doesn’t eat much or cause any major damage to your house or car in his teen years, the US Department of Agriculture (USDA) says you will spend approximately $140,000 to $280,000 on him by the time he turns 17. And then there is college. (You can find your state’s current college finance rates at BankRate.com. These statistics are kept up-to-date and culled annually from the USDA’s yearly report.)
In many ways, then, your child is the most important investment you’ll ever make. The degree to which you embrace the fiscal realities of nurturing a new life into adulthood is the degree to which you will survive the process emotionally and financially intact. Whether or not you let your kid host a party or drive your car is, of course, up to you.
Your joyous arrival is bringing more than just sleepless nights and doting grandparents. Your new baby enters a world filled with complex money issues and expenses that can be overwhelming. Here’s what every new parent should know about the money challenges and opportunities presented by a new arrival.
Get Started Early
Given all the financial realities, it makes sense to think about money as soon as you make the decision to have a child. Many people set up a baby fund as soon as they know they are expecting (or are trying to become pregnant) so that they can slowly sock money away for the extra costs that will be associated with your new child’s early life.
Set up a money market account and begin depositing money every month. Think short and medium term—the expenses you will have to deal with before a child gets into school full time are varied and relentless. Working moms, be sure to check on your maternity leave benefits long before you actually have the baby—most plans will pay you 60 to 70 percent of your pay while you are gone. You’ll need to budget for that reality.
By far one of the most challenging expenses for a new parent will be childcare. For two-income families, childcare is an emotional as well as financial issue; most parents would rather not have their child away from a parent for large chunks of time, and at thousands of dollars each year, it’s not an issue to be taken lightly.
Begin searching for a local childcare provider before your child is born, so that you can find someone with whom you have a rapport and who falls in your price range. (Of course, if you’re going to be relying on family members, there will be costs associated with that as well.) Remember, if you plan to deduct your childcare expenses from your taxes, you will need to find a licensed provider. (You must provide their tax ID number on your taxes.) Your accountant can help you decide if the deduction is beneficial for you, if your circumstances are unusual.
Tax Benefits and Credits
Speaking of taxes, if you are adopting a child, there are some unusual benefits for your family. If you have adoption related expenses or income, you may be eligible for a number of tax benefits or credits. By all means, keep copious records, and check with your accountant. You may substantially reduce your tax bill and be able to sock that money away for more delightful things—like braces.
Social Security Numbers
More tax talk: You will need to get a Social Security number for your new child. Why? It’s the only way that a child older than one year can be claimed as a tax deduction. Additionally, he or she will need a Social Security number for a savings or brokerage account, to get medical coverage, for some government or school services, or to buy a savings bond.
If you give birth in a hospital or birth center, you should be given the option to apply for a Social Security card when you fill out the birth certificate information. The card will be mailed to your address in about 12 weeks. If you are giving birth at home, ask about a Social Security card when you fill out the birth certificate at the Department of Vital Statistics for your area. If, for whatever reason, you decide to apply later, simply contact your local Social Security Office. You’ll need to provide evidence of your child’s age and citizenship, your identity, and the parents’ Social Security numbers. Remember, there is no charge for this service, although recent scams would have you believe otherwise.
Once you have your child’s Social Security number established, you can begin a savings program for your baby. Unlike your baby fund, a long-term investing program can help defray the costs of college, which were not included in your child’s aforementioned $200,000 price tag. Remember, you’ve got time on your side; small amounts, invested regularly, can grow to large sums over the course of 18 years. According to Bankrate.com, if college costs increase only five percent per year, today’s parent will be facing a $175,000 bill for a child who’s born in 2008 and plans to enter college in 18 years.
Consider an Education IRA, which allows you to sock money away, tax-free, as long as you use the money for your child’s education. Although the contributions are limited to $500 annually, you can choose your own investments. (Five hundred dollars a year for 18 years at 10 percent is $16,670. That’s a good portion of annual public college tuition, or most of your child’s books and a lot of macaroni and cheese.) You can open an Education IRA at any brokerage and most mutual fund families.
Alternatively, investigate the new state-sponsored education savings plans known as 529 Plans. Although they vary from state to state, they usually offer unique tax benefits and higher contribution ceilings.
These plans are professionally managed, which means that you do not have a choice as to how the money is invested. You’ll have to do your homework. Of course, there are always traditional investment accounts in your or your child’s name, and the ever-popular savings bond. All have unique advantages and disadvantages, but there is no greater advantage than starting now.