Personal Finance Strategies: Bringing Home Baby
Date: January 4, 2017
Planning a family is nothing if not exciting: the announcement, the get-togethers and those oh-so-adorable baby shoes. While it’s easy to get swept up in all the festivities, budgeting should be a top priority too. Planning for common expenses, saving for the future and minimizing your tax liability will help ensure your financial health and put your child on track for a bright future.
What’s in a Baby Budget?
According to the U.S. Department of Agriculture’s 2013 Expenditures on Children by Families report, a child costs $245,340 to raise to age 18. And the first two years cost an average of $12,940 each. Here’s how that breaks down for the average two-parent, middle-class family:
- Housing: $340 a month for additional shelter and utilities costs, plus furniture and appliances.
- Food: $120 a month for groceries, food purchased at convenience stores and dining out.
- Transportation: $144 per month for car payments and purchases, gasoline, airfare and public transit.
- Clothing: $66 per month for diapers and dry cleaning.
- Health Care: $75 per month for co-pays, health insurance premiums, medical services and prescription drugs not covered by insurance. According to the National Partnership for Women & Families, one-time costs of childbirth vary from an average of $2,277 for a vaginal birth at a birth center to $23,923 for Caesarean surgery with complications.
- Child Care: $258 per month for babysitters, day care and related expenses. Full-time day care can cost significantly more, however. In New York state, for example, full-time day care costs an average of $14,144 per year, according to the Parents and the High Cost of Child Care: 2015 Report published by Child Care Aware of America.
- Other Expenses: $76 each month for hygiene essentials like shampoo and soap, as well as books, toys and entertainment.
Adjusting Your Budget
Start your baby budget by looking at your current take-home pay and spending habits. “You have to have a cash flow,” says Abby Eisenkraft, EA, a New York-based financial and tax advisor. “You have to allocate funds first to the necessities, like your mortgage, utilities, cell phone. Then see what’s left.” Eisenkraft recommends cutting your entertainment budget first and holding off on any large expenditures not related to the baby.
As for how much to save, think big: “No one ever said, ‘I saved too much money,’” says Eisenkraft. Adjust your emergency fund savings to account for a child — Eisenkraft recommends at least a year’s worth of expenses, which means adding an average of $12,940 to your emergency savings.
Tracking every purchase and using personal finance software like Quicken Starter Edition can help. If you’ve never tracked your spending before — or just haven’t done so lately — you might discover hundreds or even thousands of “extra” dollars you can easily divert to the new baby. Financial software also helps you meet new financial obligations without sacrificing your retirement savings.
Maximize Your Tax Savings
Some good news — a new baby can significantly lighten your tax load. While you’ll need to check the tax laws in your state, most states allow parents to deduct a personal exemption for dependents, which can save you thousands of dollars, advises Eisenkraft. You may also be eligible for tax breaks on IRS 529 college savings plan contributions, pre-tax insurance and child care costs. Use personal finance software to track these expenses, so you can get the deductions you deserve come tax time.