Merging your money when you got married was probably tricky enough, but making the financial formula work when a baby is added to the mix is a lot more complicated. Feel overwhelmed by the prospect? Here's a handy guide you can use as a checklist while you manage your money.
Saving While Expecting
The earlier you start saving for daycare, college tuition, and retirement, the more money you'll have in the bank when you need it -- so begin now. Not sure how? Write down your long-term financial goals, and assign a dollar amount (we'll tell you how) and a due date to each. Then follow our checklist to stay on target as your savings grow along with your new baby.Review your health insurance coverage. Many employer-sponsored group health policies automatically cover children as dependents, but double-check your plan to make sure it offers this benefit, and don't forget to fill out the necessary paperwork. You should also find out if your prenatal visits, your birthing facility, planned type of delivery, well-baby care, and immunizations are covered.
$ TIP: If you don't have health insurance, your hospital may offer a special short-term-care package. Ask your doctor or the hospital's patient relations department for more information.Get the details on your maternity leave. If you're planning to go back to work, be sure to go over your rights and benefits with a company representative and nail down your maternity leave plans with your boss.Manage your debt. If your credit-card balances have gotten out of hand, now's the time to start reining them in. Here's how: Write down what you owe on each card, and then find out each account's annual percentage rate (APR). Pay off the card with the highest APR first by paying as much as you can on each bill, then move on to the card with the next highest APR.Create a special savings account. You might need extra money for a few medical expenses that aren't covered by your insurance (like an extra day in the hospital), as well as for birth announcements, diapers, clothes, and other essential baby items. Try to sock around $250 in an interest-bearing account (like a money-market fund) that can be easily tapped on short notice so you'll have some cash on hand when you need it most.
$ TIP: To find the best yields on CDs and money-market funds (and lots of other neat financial stuff), log on to bankrate.com or call 561-627-7330.Reshuffle your budget. Adding baby-related items to your expenses column means you'll have to cut out some of your regular expenditures so that you still come out ahead. Sit down with your partner and decide together how you're going to make things work.
Welcoming the Newest Member of Your FamilyGet a Social Security number for your newborn. If you didn't receive a form at the hospital, call 800-772-1213 to get one or download it from www.ssa.gov/online. You'll need the number to open a bank account for your baby for any gifts of cash he receives from family and friends, and it will also allow you to claim a dependency exemption for your child on your tax return.Review your tax withholding. The more allowances you and/or your spouse claim on the W-4 form (it's filled out when you start a job), the greater your take-home pay. Whoever is working should ask the payroll manager for instructions on how to add an extra allowance for your baby.Write or update your will. Should you and your spouse die without one, the court will step in and distribute your property according to the laws of your state -- practically assuring that a large portion of your assets will go to the government rather than to your child. Consult a lawyer as to how you can set up a will so that your child will retain as many of your assets as possible.
Just as important, through a will you can name a legal guardian (and an alternate) to take care of your baby. Otherwise, the court may appoint one you would not have chosen. Discuss this with the guardians beforehand to make certain they are willing to accept this responsibility.Set up a temporary trust. As part of your will, this type of trust will tell someone you've selected how to manage your assets on your child's behalf until your child reaches an age that you specify, typically 21, 25, or 30.
$ TIP: To find a lawyer, ask friends or family members for recommendations. You can also check the lawyer locator section of the American Bar Association website, abanet.org, where you'll find the phone number of your state or local association's referral service. Or contact the American College of Trust and Estate Counsel at actec.org (click on "Find an ACTEC Fellow") or 310-398-1888 for a list of estate lawyers in your area.Rethink your life insurance. You want enough life insurance to cover your baby through college in the unlikely event that something happens to you. You or your partner may already have coverage (usually twice your salary) through an employer; if not, ask if you can purchase it through the company's plan. You'll get a group rate that's usually lower than what you'd find on the open market.
If the company's policy won't allow this, you might want to buy term insurance, which ends after a specified period of time (usually 10 or 20 years) and is therefore considerably less expensive than permanent (sometimes called cash value) insurance, for which you'll pay premiums indefinitely.
$ TIP: To find out how much coverage you require, as well as information about comparative rates, contact IntelliQuote Insurance Services at www.intelliquote.com (click on "How Much Insurance Do I Need?"). Another good source: "What You Should Know About Buying Life Insurance," a free brochure from the National Insurance Consumer Helpline, 800-942-4242.Add disability insurance. If you or your spouse have an accident that forces you to take a leave of absence from your job, you usually won't get paid during the time you're out unless you have some form of disability insurance. Each working spouse should have enough to replace 60 to 70 percent of his or her current income. Look for a policy that is guaranteed renewable and noncancelable until you reach age 65.Review your homeowner's insurance. Check to see if it covers people who work for you, such as a babysitter or other household help.Open a custodial account. By law, minors generally cannot own stocks, bonds, or mutual fund shares. They must be held in a special custodial account under the Uniform Gifts to Minors Act (UGMA), or Uniform Transfers to Minors Act, depending upon the state. The assets in this account are controlled by an adult, such as yourself, for the benefit of the child until he reaches age 18 or 21, depending on the laws of the state. You can open a UGMA with a brokerage firm, mutual fund company, or bank.
What's great about these accounts is that they are taxed at favorable rates: The first $750 of any unearned income (from bank CDs, savings accounts, stocks, bonds, or mutual funds) is tax free, and the second $750 is taxed at 10 percent, the lowest bracket for federal income tax. After that, if your child is under 14, any additional unearned income is taxed at your rate. Then, when your child turns 14, he or she pays the tax based on his or her tax rate, which is most likely lower than yours.
The bad news: If the money's in your child's name, once Junior comes of age he can use it for any purpose he wishes -- to pay for college, a new car, or worldwide travel. Talk to a bank representative about your options.Rent a safe deposit box. You should store any important family documents, including your marriage certificate, birth certificates, insurance policies, deeds to property, copies of wills, stock and bond certificates, and Social Security cards, at the bank for safekeeping. Make an inventory of the contents, and keep the list and the keys to the box at home.
$ TIP: Make sure that the bank allows both you and your spouse to have access to the box.
Preparing for CollegeAll parents have big plans for their child's future, and they usually include college. The projected bill for a college degree, however, is overwhelming -- by the time this generation enters college, the cost of tuition, room, and board for four years at an in-state public school is expected to hit about $75,000. To obtain that amount by freshman year -- if you're in the 28 percent tax bracket -- you'll need to save around $200 a month in a low-risk fund or bond with an annual return of at least 8 percent.
Sound daunting? Don't be discouraged by those numbers: This example assumes that you'll be paying 100 percent of your child's college costs, which isn't always the case. You can certainly apply for a scholarship, tuition assistance, or low-cost student loans. Or your child may attend a community college, participate in a work/study program, live at home and commute to classes, or work vacations and summers to help foot the bill. So if you can put away 30 to 50 percent of the expected college costs, you'll probably be in good shape.Caution: If you're aiming to use financial aid for college tuition, minimize the amount of assets held in your child's name. Most financial aid formulas require you to contribute about 6 percent of your assets per year for tuition, but your child will be required to fork over a whopping 35 percent of his or her assets.Consider a state college savings plan. Almost all states now offer these excellent plans, officially known as 529 College Investment Plans. They invest in special mutual funds containing stocks, bonds, money market funds, or a mixture of all three. Individual states administer the plans, but the investment management part is usually outsourced to an investment firm or a mutual fund company. You deposit monthly amounts or a lump sum, and the money can be used at any college, not just those in your state. And even though contributions are not tax deductible in most states, the perk here is that your earnings are tax-deferred until the money is withdrawn to cover college costs. What makes this a really sweet deal is that when you make the withdrawal, it will be taxed at your child's rate, which most likely will be lower than yours.
$ TIP: You are not limited to joining your state's plan, but it might be wise. In over 20 state plans, part or all of your contributions are deductible from your state income tax. (New York's plan has a state tax deduction of up to $5,000 for single taxpayers and up to $10,000 for a married couple filing jointly.) For details on all state 529 plans, try www.savingforcollege.com.Look into prepaid tuition plans. Another option available in a growing number of states are programs that let you lock in today's tuition cost for a public college or university within the state issuing the plan. Make sure to find out how to transfer money to an out-of-state school in the event that your child travels far from home.
$ TIP: To find out more about 529 and prepaid tuition plans, log on to www.collegesavings.org.Open a Coverdale Education Savings Account for each child. You (or your family and friends) can put away up to a total of $2,000 a year per child under age 18 in this type of account. The money grows tax-free, and withdrawals are tax-free as long as they're used to cover elementary, secondary, or college expenses (including tuition, books, fees, and supplies) for the child who is named as the beneficiary. And if he or she doesn't use it, the money can be transferred to a sibling.
This is a great deal: If you contribute $2,000 in your baby's first year of life and in each of the 17 following years, and if the account earns 8 percent annually, it will be worth about $75,000 when your child turns 18. For more information, check out the College Savings Plans Network, 877-277-6496 or collegesavings.org.Buy EE Savings Bonds. These ultra-safe government bonds offer a low-risk way to save money for college. They are sold at local banks and through payroll deduction plans without a fee, can be purchased for as little as $25, and the interest earned is exempt from state and local income taxes. The rate through October is 4.07 percent. Check out the government's EasySaver Plan, through which you can arrange for automatic transfers of money from your checking or savings account to purchase bonds. For details, go to www.savingsbonds.com.
$ TIP: If you buy these bonds in your name and redeem them in the year you use the money for tuition (and your adjusted gross income is below a certain amount at that time), the interest will escape federal income taxes as well.
Heading for HomeOwning a home, like raising a family, is part of the American dream, albeit an expensive part. Here are some ways to finance what will most likely be the largest purchase you'll ever make.Find out how much house you can afford. Before you call a real estate agent, crunch some numbers so you won't waste time looking at houses that are beyond your means. For a mortgage calculator and other home-buying help, check out Fannie Mae's website at www.homepath.com.Get preapproved for a mortgage. This involves submitting a loan application and acquiring a bank's commitment that you can borrow up to a set amount before you've signed a contract to buy a home. Preapproval won't save you money, but it gives you an edge over other bidders when you finally find the house you want. Log on to www.bankrate.com to compare mortgage rates.Get in touch with Fannie Mae. The "Flexible 97" program is designed for home buyers with limited savings but very good credit histories. It allows you to buy a house with as little as a 3 percent down payment. In addition, that 3 percent can come from a family member, your 401(k) plan, or an employer program. Another plus: Members of your family or the seller can contribute up to 3 percent of the closing costs. For more information, call Fannie Mae at 800-732-6643 or check out www.homepath.com.
Aiming for Retirement
When you're worried about baby expenses, retirement seems a long way off. But you can use that time to your advantage by stashing plenty of cash (a little at a time) so you can retire in comfort one day.Find out how much money you will need. Get a copy of the helpful "Ballpark Estimate" from the American Savings Education Council at www.asec.org. (click on Savings Tools) or from the U.S. Department of Labor Brochure Hotline by calling 800-998-7542. It'll aid you in calculating a base figure.
You can also look in the mail for an annual statement from the Social Security Administration telling you how much money is in your account and estimating the benefits you'll receive when you retire. To request a statement, click on www.ssa.gov.Contribute to an Individual Retirement Account (IRA). Starting this year, you can deposit up to $3,000 annually in either a traditional or Roth IRA, provided you meet the income requirement. Your money will grow tax-deferred and is accessible when you retire.
If you're not working, your spouse may contribute $3,000 into a separate spousal IRA in addition to the $3,000 he's putting in his own account. (Note: If you've contributed to a Coverdale Education Savings Account, that money does not count against the maximum you can invest in your other IRAs.)Fund your 401(k) plan. These employer-sponsored plans let you set aside pretax dollars in a tax-deferred company investment plan [MDASH] usually up to 15 percent of your salary or $11,000 a year, whichever is less. Many employers also match a portion of your contribution, basically giving you free money that's yours after a specified amount of time.Use a Simplified Employee Pension Plan (SEP). If you're self-employed, you can usually stash up to 13 percent of your annual income or $25,500 (whichever is less) in this tax-deferred savings account. It will also help you save on your Social Security payments (anyone who's self-employed must pick up their full bill) because it reduces your pretax income.
Easing the Tax BiteTake advantage of these special ways to lower your tax bill:Flexible Spending Accounts Find out if your or your spouse's company offers this benefit. To participate, you estimate any medical expenses you may have throughout the year that won't be covered by your family's health insurance plan (like prescription drug purchases or doctor's visit copayments). Then, your employer deducts that amount (up to a set maximum) from your pretax salary over the course of the year and deposits it into a special account from which you'll be reimbursed for qualified medical expenses -- with your own untaxed money. Be careful when estimating your needs, however: Any money left in the account at the end of the year goes to your employer, not you.The Childcare Tax Credit If you use childcare for your baby, you may be able to claim a tax credit. To be eligible, you and your spouse must work at least part-time, unless either of you is a full-time student or you're disabled, and your child must be under age 13 or physically or mentally disabled. Log on to www.irs.gov for more information.
Nancy Dunnan is a New York-based financial advisor and author of How to Invest $50 to $5,000.