Babies bring joy and excitement. They also bring an extra burden to your finances. According to the U.S. Department of Agriculture, the cost of raising a baby to age 18 can top $230,000, after you factor in generally higher housing costs, health care and other expenses — but before including college costs. This is a daunting number, to be sure! Fortunately, there are some things you can do to alleviate the burden.
Here are some steps that will help bolster your family’s financial stability:
Check your insurance. Life and disability insurance are critical. Life insurance provides financial protection if an income-earner in your family dies. Term insurance can be a cost-effective option. It offers protection for a specific period of time — say, 20 years — at which point many children will be relatively self-sufficient, and the loss of income less harmful. Of course, you’ll also need to ensure that your will names a guardian to look after your children in case of your death while they’re still minors.
Disability insurance provides financial protection if a breadwinner becomes disabled and no longer can earn a living. While some employers offer disability insurance, the policies often don’t provide enough income to cover all expenses. And Social Security disability benefits might not offer the protection you expect. For instance, to obtain the benefits, the breadwinner typically must be unable to work at any job. So consider purchasing your own policy that will pay if you can’t continue in your current job. The distinction might make a difference.
Review dependent care tax breaks. If you pay a caregiver to watch your baby so you can work, you may be able to claim the dependent care credit. Depending on your income, this can total between 20% and 35% of eligible child care expenses, up to $3,000 for one child, or $6,000 for two or more. The caregiver typically can’t be a dependent, your spouse, or a parent of the child.
Another option is a dependent care assistance program, also often called a dependent care Flexible Spending Account (FSA). This is an employer-sponsored program that allows parents to set aside up to $5,000 pretax annually (up to $2,500 if you’re married and file separately) to cover qualified child care expenses. It’s important to note that you can’t use both the credit and the FSA for the same expenses.
Save for education. The sooner you start saving for your baby’s education, the more you can leverage the value of monthly compounding. If you save $200 per month starting at your baby’s birth and earn a 6% return, you’ll have nearly $78,000 in 18 years!
One of the best options, potentially, is a Section 529 education savings plan. It allows you to save for college expenses, as well as K-12 tuition expenses. Contributions aren’t tax-deductible for federal purposes, but many states offer tax benefits. Withdrawals used for qualified education expenses (limited to $10,000 per year for K-12 tuition) aren’t subject to federal income tax, and typically not subject to state income tax.
But it doesn’t make sense to skimp on retirement savings to fund a college account. Your child likely will be able to use loans, work, scholarships or grants to help with college expenses.
Get expert advice
It’s important to reduce financial worries as you welcome a new baby. Get expert advice to help you evaluate these options and manage your finances. That way, your family will start, and build, on a solid economic foundation.
This material is generic in nature. Before relying on the material in any important matter, users should note date of publication and carefully evaluate its accuracy, currency, completeness, and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances.