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Money Makeovers

Family (Financial) Planning 101

Should you both work?According to financial planner Kevin McKinley, C.F.P., unless the parent in question makes more than $25,000 a year or so, the family is probably better off if he or she stays home and performs the childcare that you would otherwise pay for. "On a purely financial basis, the less money a parent makes, the better sense it makes to stay home," says McKinley. "But parents also need to consider the emotional satisfaction they get from working."

How much life insurance do we need? One rule of thumb: A newborn baby needs to inherit roughly 300 times the family's monthly expenses if something happens to his parents, McKinley notes.

Start saving for college. If tuitions continue to rise at the current rate of 5 percent a year, by the year 2019, a four-year public school will cost roughly $95,000 and a private university will run about $240,000. If you can't save, plan to borrow. A child with a college degree may earn $1 million more over her lifetime than a child without one.

Get a durable power of attorney. It allows your spouse to make financial decisions on your behalf in the event you become incapacitated. Without one, your family would have to go to court and have someone appointed as your guardian -- a time-consuming and expensive proposition. It's easy to change your mind later: Simply tear up the document.

Take advantage of flexible spending accounts. Working parents whose employers offer flexible-spending accounts for daycare or medical costs have a huge tax advantage. For example, the law allows you to set aside up to $5,000 pre-tax dollars to pay for qualified care. So if your child's daycare costs $5,000 a year and you're in the 28 percent tax bracket, your actual cost will be just $3,600.

Put aside money for a stay-at-home parent. A non-working spouse can make a tax-deductible contribution of up to $3,000 dollars a year to an individual retirement account (see www.irs.gov).

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