Commonsense lessons on life and debt that new parents can bank on
Having a baby knocks much of your life out of whack, including your bank balance. Few new moms and dads are spared the financial stress, regardless of income level. To help you regain control of your piggy bank, we treated three families to a money makeover from Erica Sandberg, author of the new book Expecting Money: The Essential Financial Plan for New and Growing Families (Kaplan Publishing). We’d bet good money that you’ve got some of the very same challenges.
Wanting it All…Right Now
Lisa and Brian Neer
Their Jobs: She’s a teacher, he’s a land surveyor
Annual Income: $62,388
We all have our financial dreams, and this busy two-income couple is no exception. For starters, they’d love to have a baby sibling for 19-month-old Mitchell and buy a bigger, newer house that needs less work. Lots of couples pull this off, So what’s the big deal? you may be thinking. Lisa, 32, would also like to trim her work hours now and quit altogether when the next baby arrives. Ouch.
The Positives The Neers do have some savings from their pre-parenthood days tucked away for emergencies, as well as a 401(k) retirement account through 41-year-old Brian’s employer. Since that money is deducted pretax from his paycheck, saving is fairly painless, and the income they have to pay taxes on is also reduced. Also, Lisa is making excellent use of her employer’s flexible spending account, which enables them to put aside money before taxes to pay for medical expenses and childcare. And she’ll be completing her certificate in school psychology next month, which will increase her earning potential.
The Challenges The couple is roughly $700 shy of meeting their monthly expenses. They’ve been drawing money from a home-equity credit line to cover some costs.
Prioritize expenses The Neers need to think seriously about what they love and need and what they can do without. For instance, two hefty car payments plus related costs (gas, insurance) are consuming more than $1,600 a month. They should consider replacing one of those vehicles with a less expensive, fuel-efficient model. Gifts for friends and relatives are a big expense, too – an average of $160 a month – that can be trimmed down.
Schedule Cash Chats Because Brian and Lisa sometimes view their spending needs differently, they should set aside at least 30 minutes per week for budget updates.
Explore Options Losing one income and buying a bigger home at the same time isn’t feasible for most families. For now, Lisa should stick with her job, save for that new house, and explore ways she can later work at home (perhaps tutoring or starting a home childcare business).
Stop Using the Home as an ATM Immediately Turning to a home-equity line of credit when money runs short can put their home in danger of foreclosure. If the Neers follow the other tips and get their budget back in the black, they shouldn’t need to borrow against their home.
Keep the Savings Going And up the amount as their income grows. Soon enough, the Neers will be pulling into the driveway of that dream home.
Living off credit cards
Keiko Kasai and Mike Hazekamp
Their Jobs: They both work in film production
Annual Income: $27,600
For this young couple, the baby carriage came unexpectedly – before the marriage. Just as Keiko, 25, was about to graduate from college, she found herself pregnant with daughter Serena, now 14 months. The new responsibility combined with financial troubles has become overwhelming: Keiko and Mike, also 25, worry about caring for the baby, derailed career plans, and saving for future needs such as retirement and Serena’s education.
The PositivesThis family has time on its side, plus Keiko’s father has offered to make the down payment on a home when they can handle mortgage payments.
The Challenges Keiko and Mike are spending about $700 more a month than they’re earning. Where’s it coming from? Credit cards – Mike’s balance has swollen to about $8,000. And while the couple is saving on childcare by working opposite shifts and caring for Serena themselves, they’re both exhausted and their relationship is suffering.
Rethink their priorities Stop worrying about future expenses – getting a handle on their monthly bills takes precedence. Keiko and Mike feel they’re spending as little as possible, but they could cut down on eating out – fast food is a frequent fallback – and take lunch to work, so they reduce their hefty $600-a-month food bill.
Consider Childcare Both Keiko and Mike are paid by the hour, so increasing their income is as easy as clocking more time. If they can line up some affordable childcare (perhaps sharing a sitter with neighbors or finding a small family daycare), Serena will get to socialize with other children, and there won’t be as much stress on the couple’s relationship. With childcare they should also be able to earn more – an additional $1,000 a month in income will make a big difference in their lifestyle.
Demolish that Debt They’ve got to suspend charging and, with their additional income, get those credit cards paid off. If Keiko and Mike make regular monthly payments of $350, they’ll be debt-free in under two years.
Tread Carefully into Home Ownership Keiko’s father’s offer to help them buy a home is a huge plus, but the couple is considering an interest-only mortgage, with initially lower payments. The trouble with these mortgages, however, is that the payments balloon dramatically in three to five years. Keiko and Mike will need to begin putting money aside for that increase so they aren’t caught shorthanded – like so many other families in the current mortgage crisis. Still, the strategy recommended by most money experts is to just wait to buy a home until they can afford a traditional fixed-rate mortgage. Then, as their income grows, they can start to save for the longer-term goals such as retirement and college for Serena.
Spending within a budget
Alissa and Thomas Cotter
Their Jobs:He’s a software engineer, she’s a fitness instructor who works infrequently
Annual Income: $42,600
Things weren’t always this way: Pre-parenthood, Alissa, 32, and Thomas, 35, were saving regularly, and they already owned a home. But as their family expanded to include Adam, 3, and Ella, 13 months, they bought a larger house and Alissa worked less. Thomas has a successful career, but it’s become a strain to cover the sizable mortgage, two vehicle payments, and all the costs of family life.
The Positives: Alissa and Thomas seldom fight over money, which is great. Clashing over financial matters is common among couples – and can be relationship poison. Alissa has adopted the role of budget director, tracking spending and cutting costs by locating the best deals. She’s also pursuing personal-trainer certification, which will enable her to earn more yet work flexible hours.
The Challenger: Ultimately, there just isn’t enough cash to meet their monthly bills, let alone unexpected costs.
Pay off some bills The couple is almost done paying for a washer, dryer, and motorcycle (hey, you’ve gotta have some fun), which will give them $300 more a month.
Attack debt Once those bills are eliminated, they’ll be in the black and have a little extra to put toward paying off their $2,900 credit card balance.
Earn more It will cost just $300 for Alissa to obtain her personal-trainer certificate, which will be quickly recouped when she secures a steady clientele.
Save more With Alissa working a few Saturdays and evenings a month, the couple will be able to save close to the recommended 10 percent of their income. They’ve begun retirement savings; now they also need to build an emergency fund equal to six months of living expenses. After that, they can start putting money aside for college.