Foolproof Finance

by Denise Topolnicki

Foolproof Finance

Track your cash
It’s undeniable: Kids cost money. Your bundle of joy will need clothing, a crib, a stroller, car seat, toys, and around 3,000 diapers in the first year alone — and that’s all just for starters. To pay for all of this new stuff, the U.S. government estimates you’ll spend $7,300 to $15,190 a year on your baby, depending on your income. That means you have to rethink the way you spend your money. And that means you have to find out how you spend it in the first place. Here are two ways to do it:

Are you detail-oriented?
Then you can budget to the penny: Gather a year’s worth of bank statements, credit card bills, and receipts for payments you made on your mortgage, student loans, and insurance premiums. Add up what you spend on other necessities like groceries, utilities, and clothing, as well as discretionary expenses like meals out, vacations, movies, coffee, and gifts. Use a computer program like Quicken or Microsoft Money, or buy a cheap spreadsheet log, so you can keep everything organized in one place.

Or are you laid-back?
For most new parents, keeping track of every penny isn’t realistic. Instead, estimate a rough monthly total of your major expenses (rent, mortgage, student loans, car payments, insurance, and utilities). Then decide what you’ll pay cash for (parking or lunch, for instance), and withdraw a set amount from the ATM to cover it for 30 days. Pay for everything else with a credit or debit card so you’ll have a record of your expenditures — and a good sense of where your money is going in any given month.

Once you’ve set a budget…

Cut expenses
Now you can see where you need to scale back. Try these strategies:
? Visit for low-cost, healthy meal plan ideas from the USDA.
? Shop around for the best quotes for car insurance, health insurance, and term life.
? Get rid of your premium cable this year. With a baby, you won’t have as much time to watch TV anyway.
? Make small substitutions: generic shampoo for name brand, lemon water for soda, a DIY manicure for a pro one.

Get out of debt
Don’t worry about the good debt you carry, like your tax-deductible mortgage or student loans, but do try to eliminate bad debt like credit card balances — before you do anything else. Aim to pay off your highest-rate debt first; use the credit-card debt calculator at to create a payment plan. If you’re too deep in debt to get out without help, turn to an agency that offers confidential budgeting, credit counseling, and debt repayment plans. A good place to start: the National Foundation for Credit Counseling.

Should you go back to work?
Expect to pay $3,000 to $9,000 a year on childcare, depending on where you live. A personal nanny may run you $20,000 or more. Ease the strain by paying with tax-free dollars if your employer offers a dependent care flexible-spending account (FSA). But there’s more than childcare to consider: Take all the financial pros (insurance, retirement plans, health care, bonuses) and cons (commuting costs, wardrobe, dry cleaning) into account.

Or stay at home?
Yes, you’ll have to cut spending, but you won’t have as many expenses as two-career families do, for such items as childcare, trainfare or gas, or a dress-for-success wardrobe. You will have a few additional costs, however, like a bigger grocery tab and higher home heating and cooling bills. Use the “Should my spouse work, too?” calculator to see if your childcare savings will offset your lost paycheck.

Thinking for the future

Create a cash cushion
Disasters happen: Cars break down and roofs leak. Now that you’ve most likely bought many of the big-ticket baby items (crib, stroller, car seat), you can focus on replenishing your savings to cover any emergencies that may crop up. Financial advisers recommend keeping six months’ living expenses in a place where your money isn’t at risk, like a money-market account. Don’t fret if you can’t scrape up that much. Aim for $5,000, and keep one credit card to use only in major emergencies.

Save for retirement
Put away for your future before you save for your child’s college education: He can borrow for college, but you can’t borrow to finance your retirement. If you and your spouse aren’t contributing to a tax-deferred retirement savings plan — a 401(k) or 403(b) plan — at work, start today. Aim to save enough to get your employer’s match, but contributing even 1 percent of your pay is a start. If you’re self-employed, talk to an accountant about Individual Retirement Accounts and Keogh plans.

Save for college
Can’t afford to put away $1,000 a month for Harvard? Few families can, so don’t beat yourself up. Instead, save just half, a third, or even a fifth of the cost of college. You’ll be in better shape than if you pray for financial aid, come up short, and have to borrow. (Play around with college-planning calculators.) Put the money you save in a 529 plan: They’re available to everyone, with no limits on income or annual contributions, and the earnings are tax-free if you use them for higher education.