Additional Expenses

Budget

It’s hard to believe that someone so small could need so much, but kids are expensive. The USDA reports that the average cost of raising a child from birth to the age of 22 is $450,000. Fortunately, you don’t have to spend that amount all at once, but it does add up. Estimates of how much the first two years will cost range from $10,000 to almost $30,000.

Go back and revise your budget. Keep in mind that you will get a tax break for each child in the form of an additional exception and a child tax credit. The IRS Web site can tell you more about how your taxes will change. You’ll also have a lot more expenses. 

Finances get especially touchy if one parent is going to leave a paying job to stay home with the baby. If that’s your plan, start living on one salary before the baby is born. It’s good practice, and it will allow you to sock away some extra money. This is a great way to begin a college savings plan. We know this is easier said than done. But if you’re going to do it, it’s better to start early. Check out some of our general money-saving tips.

When you’re shopping for the baby, it’s easy to spend too much. Way too much. That cute little outfit will no doubt look wonderful on your infant – both times he wears it before he outgrows it. That’s why second-hand baby clothes are such a good deal: they’ve hardly been worn. Check out garage sales and resale shops. Take all the hand-me-downs you can get. Then pass your baby’s clothes on to another kid. It’s baby clothes karma – and it works!

You can also get furniture and other baby supplies second-hand, but be careful. There are some things that it’s better to buy new. Chief among these are car seats. There’s just no way to know if they have been in an accident or damaged. Used cribs are okay if they are relatively new and you check them carefully for stability. Also measure the distance between the crib bars to make sure they meet current safety standards.

For information on recalls and other safety issues, visit the Consumer Product Safety Commission Web site.

Childcare

Good childcare can be both hard to find and expensive. Fortunately, Uncle Sam is willing to help out at least a little on the expense. There are two ways that you can save on taxes if you are paying for childcare: you can get a tax credit or use a dependent care reimbursement account (DCRA). To qualify for either, the childcare expenses you pay must be necessary for you to work outside the home or for actively seek employment. Visit the IRS  for more details on eligibility requirements.

The federal tax credit is limited to $2,400 per year for one child or $4,800 for two or more children. With the DCRA, you can spend up to $5,000 per year in pre-tax dollars. Complete our worksheets to see whether the tax credit or DCRA would save you more money.

Worksheets

Worksheet A: Federal Tax Credit

Table 1

Worksheet B: DCRA Tax Savings

Table 2

For information on what to look for when choosing a childcare provider, and a list of questions to ask, check out the I Am Your Child site.

Money for College

It’s never too soon to start saving for college, and no amount is too small to save. Save regularly and creatively, and you will have a good start on financing your child’s education.

There are a number of options for investing the money you save:

• Before your child gets to high school, you can ride out any dips in the market, so stocks might be a good investment.
• Once your carpool duties change from driving to junior high dances to riding shotgun so junior can practice on his learner’s permit, you will need to be more careful of loss and move to more conservative options.
• Check out an Education IRA. You can put away $500 per year per child. The growth is tax-free and withdrawals are tax-free as long as the money is used for college expenses.
• Even savings bonds can be a simple, relatively painless way to save for college expenses, especially if you encourage friends and relatives to give them to your children instead of other, less practical gifts. (Hint: Grandparents are especially fond of buying savings bonds.)

Use our education planner to calculate how much you will need to save each year in order to meet your college savings goals. You can also use it to see how much the money you are saving each year will have turned into by the time your little cupcake heads off to school.

Ask at your credit union about the best ways to invest the money that you are saving. Because they’re both non-profit organizations and financial institutions, credit unions are a great place to get unbiased, expert advice on how to choose the best options for you and your family. Not a credit union member? Look for a credit union near you.