The Cost of Bringing Up Baby
If prospective parents ever tallied the cost of having a baby before they conceived, the U.S. population rate would undoubtedly suffer a serious decline. Just consider: According to government estimates, the average middle-income family will spend roughly $10,000 on child-related expenses in their baby's first two years of life ($8,000 for a second child), and some experts suggest that figure may be too low.
After all, you can count on spending at a minimum $25 a week ($1,250 per year) on diapers, formula, and baby food alone. Then toss in such big-ticket items as furniture, equipment, clothes, childcare if you're returning to work, medical expenses, and -- well, you get the idea.
"New parents learn early on that everything costs much more than they anticipated," says Barbara Hetzer, author of How Can I Ever Afford Children? Money Skills for New and Experienced Parents. "And the expenses keep getting bigger as you go along."
For some new parents, these expenses come as a double whammy. If both parents were working before the baby's birth, "when you have a baby, if one or both of you take at least some time off, your income goes down at the same time your costs go up," says Alan Fields, coauthor of the book Baby Bargains.
But having a newborn doesn't have to become a financial crisis. If you get a realistic grip on the expenses you're likely to face, do some advance planning, and learn the art of the baby deal, you should be able to save a bundle on your bundle of joy. Here's how.
Contributing editor Diane Harris has written a book on women and finance.
If you've signed up with an out-of-network doctor or are enrolled in a traditional indemnity plan, prepare for your pocket to be pinched. Yes, you'll likely be reimbursed for the lion's share of your expenses (typically 80 percent of your obstetrician's fees and 100 percent of the cost of your hospital stay). But whereas insurance companies ordinarily pay these bills after you deliver the baby, many obstetricians want their money up front or on a pay-as-you-go basis.
If your practitioner is among them, you may be able to negotiate more wallet-friendly terms by simply asking the doctor to accept the difference between what she charges and what your insurance will reimburse, rather than the full amount. You can then work out a reasonable payment plan with your physician's billing office.
But while you obviously don't want your out-of-pocket costs to be any higher than necessary, don't choose your medical plan on price alone. "During open-enrollment season, many people simply go with the lowest-cost option," says Barry Barnett, a principal with Kwasha Lipton, a benefits consulting firm. "Then they spend the next year cursing the constraints put on them."
If you're opting for managed care, for instance, find out whether you're comfortable with the obstetricians and pediatricians in the network and if the hospital where you want to deliver is part of the plan as well. No matter what kind of insurance you have, you'll also need to find out whether tests such as ultrasound and amniocentesis are covered and how long a hospital stay will be covered. Go with the plan that's most likely to allow you to have the pregnancy and childbirth experience you want, even if it costs a bit more.
Get Your Financial House in Order
"From the moment you learn that you're pregnant, start tying down the financial loose ends of your life," advises San Diego financial planner Peggy Eddy. Vow to pay down credit-card debt as fast as you can. Refinance your mortgage if rates have dropped since you took out your loan.
Try to build a financial cushion that will cover at least six months of your living expenses. One smart way to accomplish that goal: Sign up for an automatic savings or money market program with a bank or a brokerage or mutual-fund company, and arrange to have a set amount deducted from your checking account every month and placed in the savings vehicle of your choice.
Now is also the perfect time to devise a livable budget, or to fine-tune the one you've got. Sit down with paper and pen or a computer spreadsheet and set up two columns: Life Before Baby and Life After Baby. Under the first column, list all of your current expenses, from your mortgage payments to the amount you spend on such incidentals as newspapers and gum. Then, follow the same guidelines for the second column, estimating amounts for new expenses, such as diapers, formula, and childcare, and refiguring old ones (for example, your entertainment expenses may drop since you'll probably go out less). Finally, rework your income figures to reflect how your earnings may be affected by the amount of time you're planning to take off after the baby arrives. With the hard numbers in front of you, you can then see where you need to make adjustments to bring your income and expenses into balance.
If you're seriously considering leaving work entirely, it's a good idea to give a single income a trial run, and attempt to live on just one salary for a few months while you're still pregnant, Barbara Hetzer advises. You'll likely have to make some serious adjustments to your lifestyle -- brown-bagging it at lunch, eating fewer dinners out, and making do with a limited maternity wardrobe. Although you may not succeed entirely in relying on a single salary, the exercise can show you just how much of a second salary is necessary.
Buff Up Your Benefits
If your employer allows you to buy life insurance through your benefits plan, sign up for as much as is practical as soon as you can (most experts recommend a total of five to eight times each wage-earner's annual salary). Many working couples may not have needed such protection in their preparent days, but the birth of a child changes the equation completely. After all, if one or both of you die unexpectedly, your child will still need food and clothes and, in time, bicycles, braces, and college tuition. A term-life policy purchased through a group plan is one of the most convenient ways to see that he gets what he needs and deserves. "You're probably talking about just a few extra dollars a month in exchange for as much as $200,000 to $500,000 in additional coverage," says Barnett.
While you're in your benefits office, make sure you check out your company's family-leave policy. If you work for a company with 15 or more employees and your company offers paid sick leave, by law your boss must treat pregnancy and childbirth like any other short-term disability. In practice, that usually means you're entitled to six to eight weeks of paid time off. In addition, most employers these days follow the guidelines of the Family and Medical Leave Act, which requires that companies with 50 or more employees grant up to 12 weeks of unpaid time off. (Some states have mandated more generous policies; check with your own state labor department for details.)
Don't be alarmed if your company's official leave policy falls short of what you're looking for. Go ahead and try to strike a better deal. Network with co-workers who are parents to see what kinds of arrangements they've been able to work out; think through what you really want (more time off? to work part-time? to telecommute one or more days a week?); develop a plan to make it work; and then meet with your boss to talk it over. "Never assume that what's in the handbook is all you can get," says Barnett. "Everything's negotiable."
Target Your Spending
According to Fields, new parents typically shell out nearly $6,000 to buy the crib, stroller, car seat, clothes, and other accoutrements of baby life. But the average family ought to be able to get the job done for at least $2,000 less. "First-time parents tend to go for the Cadillac version of just about every baby product on the market," he says.
Fields suggests going top-of-the-line (or as close to it as you can afford) on only those products that will take a great deal of wear and tear (like a stroller) or that will protect your baby from harm (such as a car seat). Then, compromise on items that look good but serve no real purpose (a frilly pillow, say) or outlive their usefulness almost as soon as you've taken the tags off (newborn-size clothes, for instance). And take an experienced parent with you on your shopping trips to help you separate what's necessary from what's nonsensical.
You can also save money by buying some of the items you'll need at garage sales or consignment shops, and by borrowing from friends. When going secondhand, however, stick with clothes and equipment that are used for only a short time, like a baby swing, though you'll still need to make sure it's safe. And by all means be honest with friends and relatives who ask what you need. Why end up with a sterling silver rattle and a drawer full of delicate designer clothes your baby will wear once, when you could have your nursery half-equipped instead?
Do Your Paperwork
After your baby's birth certificate, the most important document you'll need is Form SS-5 from the Social Security Administration. Most hospitals give out cards you can send in to request the form. This form allows you to apply for a Social Security number for your newborn. That in turn lets you claim a tax deduction worth $2,700 in 1998. For the first time this year, parents who jointly earn $110,000 or less ($75,000 for single heads of household) will also qualify for a new maximum $400 tax credit (rising to $500 next year) for children under age 17. Unlike a deduction, a credit is deducted directly from the taxes you owe, rather than your taxable income.
To ensure that your baby's health-care costs will be covered by your insurer, you'll need to officially enroll her in your medical plan within 30 days of the birth. And while you're filling out forms, take time to review the beneficiary designations on your retirement plans and life-insurance policies, advises Chicago financial planner Hope Feinglass. "Chances are you've named your spouse as your rightful heir, and you'll probably want to keep it that way," she says. "But if you've named parents, siblings, or best friends as your secondary beneficiaries, you might want to replace them with your newest family member."