Having a baby is an exciting, life-changing event. Financially speaking, it’s also a large undertaking.
According to a report by the U.S. Department of Agriculture, it will cost middle-income families $241,080 to raise a child to age 17.1 That includes expenses like your home, food, clothing, transportation and other essential items. However, private education and college tuition – which could mean taking care of your child past age 17 – are not included in this number.
Here are some ways you can make sure that the cost of bringing up baby won’t rock the boat – or the cradle – too hard.
529 college savings plans: savings vehicles, sponsored by states and colleges, which offer tax advantages to people using the vehicles to invest funds for higher education.
If possible, sit down with your spouse or partner to create a budget before you decide to start a family. Find out how much childcare, diapers, furniture, formula and other baby essentials will cost. Add them to your current expenses and calculate your combined income. Look at how your budget will work once the baby’s born. Make sure you review your budget regularly and keep it up-to-date.
If you’re thinking about staying home with your baby, look at how that would change your family’s income and expenses. Compare the numbers to the average cost of childcare in your area. As you look at the numbers, don’t forget about things you can take out of your budget by not going to work, like eating out for lunch, commuting costs and dry cleaning.
It’s important to have savings built up for emergencies. A general rule of thumb is to have enough cash set aside to cover at least six months’ worth of living expenses.
That way, if anything unexpected happens, like you decide to extend your maternity leave or there are extra medical bills to pay, you’ll still have enough for a while to meet your monthly expenses and can continue saving for long-term goals.
You can borrow for big-ticket items like college, but you can’t borrow for retirement. Take a set amount of money out of each paycheck and invest it in a retirement savings account, like an Individual Retirement Account (IRA) or your employer-sponsored 401(k). Once invested, your money has the potential to generate earnings, making more money. The earlier you start, the more time you give your money to grow. Keep in mind that it is also possible to lose money when investing.
You may think you need you need to start saving for college as soon as your baby is born—but it might be unrealistic to start saving while you’re still paying for daycare. Many people simply can’t start saving for college until their child is in kindergarten or later. However, if you’re ready to build college savings, learn how a 529 College Savings plan can help.
Health and life insurance can help insulate your family from skyrocketing costs while you continue to meet your financial obligations and save for long-term goals. If you don’t have health insurance through your employer, look into health insurance companies at your state insurance department. You may also want to consider life insurance in the event of your or your spouse’s death. While not pleasant to think about, life insurance provides a generally federal income tax-free lump sum2 to your survivors in the event of your death. It’s recommended that you and your spouse or partner each own at least 10 times your annual salaries in protection. But as with any personal financial activities, the appropriate amount of insurance for you depends on your needs and personal circumstances.
Talk to your employee benefits department to make sure you have a clear understanding of the type of life insurance that may be offered through your employer. Then, if necessary, consult with two or three insurance companies to help you decide what kind and how much insurance coverage you’ll need. Then compare them to see which will work best for you.
Once your baby is born, you can claim him or her as a dependent on your taxes. You’ll receive a child tax credit and may be able to reduce your federal income tax by up to $1,000 for each qualifying child under the age of 17. Just make sure you get your baby a Social Security number.
Find out if your employer offers a flexible spending account. This can allow you to set aside up to $2,500 per person (up to $5,000 if you both qualify) in pretax income to pay for qualified childcare and healthcare expenses. Depending on your tax bracket, using these accounts can help reduce your taxes. Just one word of caution: You will lose any money that you don't use for childcare or healthcare expenses by the end of each year. Make sure you’ll use all of the money before you deposit it.
For every dollar you spend on childcare (up to $3,000 for a single child or up to $6,000 for two or more children) you can reduce your taxes by a certain amount. The amount of the credit ranges from 20% to 35% of what you pay for childcare, depending on your gross income (your income before taxes and withholdings). Families with gross income of $43,000 or more get a 20% credit, while families earning $15,000 or less get the full 35% credit. However, the IRS doesn’t allow you to use the flexible spending account and the childcare credit at the same time. You’ll have to do the math to see which method saves you more money. Talk to your tax advisor to see what makes the most sense for you.
1 “Parents Projected to Spend $241,080 to Raise a Child Born in 2012,” USDA Office of Communications, August 14, 2013
2 See IRC Section 101(a).
While it is not our purpose or intent to provide specific investment advice or financial planning services, the above information may be helpful in understanding financial issues relating to having and raising children. We urge you to seek advice based on your own particular circumstances from a financial advisor.
TIAA-CREF and its affiliates do not provide tax or legal advice. The tax information contained herein is not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor.
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