June 2005
| Bringing up baby on a budget The cost of raising a newborn through age 5 is daunting, but you can trim the baby fat from your spending
That's just Year One. By the time a child born in 2004 reaches age 6, parents with an income exceeding $70,200 a year (the median family income for 2003 was $52,680, according to the most recent census data) will have spent $95,840. Those are the most recent numbers from an annual study conducted by the Center for Nutrition Policy and Promotion division of the U.S. Department of Agriculture. The budget-busting doesn't stop there. Parents with a $70,200-plus income will have laid out about $353,000 by their child's 18th birthday. That amount doesn't include the cost of delivering the baby (about $7,000 to $11,000) or college expenses, which are estimated to run about $130,000 for four years at a public university in the year 2021. Fortunately, babies are a pay-as-you-go proposition; you don't have to have all the money up front. Gifts from doting relatives and friends defray some of the start-up costs. And despite what manufacturers tell you, keeping a sharp eye on the baby budget doesn't mean you'll be denying your child what he or she needs. Saving now can help ease the way later when expenses rise more steeply. What follows are costs you are likely to face and suggestions for paring them. THE BABY BOTTOM LINE Parents' biggest expense has always been housing, a category in which the USDA includes furniture, appliances, and utilities. That eats up about one-third of total child-rearing costs. As a result, child-rearing for couples in the Western metropolitan areas, where housing is most expensive, runs about 10 percent higher than the rest of the nation. Northeast urban areas place second, followed by those in the urban South. Overall, both rural and Midwest urban-area residents will shell out the least of all regions. Those who live in rural areas will pay about 7 percent less overall than the average urban-area couple because housing costs are lower. Rural families spend more on transportation and medical care, possibly because of greater distances to be traveled and lack of competition among medical providers. What have swelled are child-care and education costs, from 1 percent of household spending in 1960 to 11 percent today. Dr. Mark Lino, a USDA economist, says the increase reflects a surge in the number of households in which both parents work. A second child does not double your expenses. The new child will cost about 20 percent less than the first because you can take advantage of hand-me-down clothing and nursery furniture. You might be able to have your children share a bedroom, or make a second bedroom from existing space, effectively driving down your per-child housing costs. For obvious reasons, parents of multiples enjoy fewer economies of scale. Single parents (now about 25 percent of all families with children under 6, according to the Census Bureau) have it tougher all around. Those who earn more than $40,000 will spend about 32 percent of their income each year on a child, while two-parent households earning the same income will spend just 23 percent of their earnings on their child. Lower-income single parents will spend less for most of their child's needs and, surprisingly, a lot less on child care, possibly because they tap relatives to baby-sit. As income rises, the percentage of income that parents lavish on children increases just slightly, though the actual dollar amount will soar. A couple with one child, born in 2004, taking in less than $41,700 annually will spend about $177,000 over 17 years, or about 25 percent of annual earnings. A couple with a combined annual income of more than $70,200 will spend about 30 percent of income, a total of $353,000, by the time their child turns 18. BABY TAX BREAKS The federal government has taken some baby steps to ease parents' burden. A tax bill signed into law in May 2003 gave parents a larger tax write-off on minor children. The child tax credit is now $1,000 for each child under age 17, as long as family income is less than $110,000 (or $55,000 for single filers). The personal exemption increased to $3,100 last year and will be $3,200 for 2005. Working parents might also qualify for the child-care tax credit, which allows them to deduct 20 percent to 35 percent a year of up to $3,000 in day-care bills for one child (up to $6,000 for two or more children), depending on income. Another boon from the government is the flexible spending plan, offered by many large employers. It allows you to use pretax dollars to pay for medical and child-care expenses. The maximum annual set-aside for child care is $5,000; corporations set their own limits for medical care. The child-care costs are easy to estimate, but Paul Fronstin, senior research associate at the Employee Benefit Research Institute, suggests that parents refrain from boosting their set-aside for medical expenses when a baby arrives. However, depending on the type of health care parents have, this may not always be true; a small percentage of preferred-provider organizations (PPOs) and indemnity plans do not have well-baby care. Still, costs for a healthy baby are low, and any money you fail to spend will have to be forfeited at the end of the year. FISCAL UNDERPINNINGS More important than all the equipment parents buy are the financial underpinnings the family needs to buttress baby's security: health insurance, life insurance for each parent, and savings for the child's education. You may already have such items in place, but you may have to adjust them for an expanded family. Rethink your health plan. When you have the opportunity, you may want to switch to a health-maintenance organization or a preferred-provider organization that covers all well-baby care. You should add a new child to the plan within 31 days of birth or risk losing coverage until the next open enrollment period. Make sure you have enough life insurance. Estimate your family's expenses should either parent suddenly die, then subtract the assets you have. The gap is the amount of life insurance you need. Renewable term-life policies offer the best values for young families. Start saving for college. Set up a custodial account and invest all cash gifts you receive for it in a low-cost stock-index fund that mirrors the market's performance. Let relatives and friends know you'd prefer a donation to the fund rather than U.S. Savings Bonds, which generate lower returns. Or you can establish a so-called 529 plan, which allows funds you contribute to earn interest tax-free. Just make sure that you buy directly and avoid using brokers who will pile on extra fees and commissions. BABY BUDGETING Splurging on children is one of parenthood's chief joys. Nonetheless, you can keep baby's costs in hand without affecting the child's welfare in any way. Finding a home with more elbowroom in a top school district is the first impulse of many new parents. But moving right away may not be the best strategy. An infant won't need a school or a lot of space for a few years. Similarly, you need not go overboard on a big car to accommodate the baby. You can also try some of these commonsense methods to help reduce expenses: Register your child. Even before the baby arrives, list what you will need at stores or their online baby-gift registries. Doing so will help steer relatives and friends away from what you don't want or already have and toward what you really need. Don't go whole hog on baby furniture. Buy a sturdy new crib (less than $200), but pass up the expensive matching chest, changing table, and armoire (which can run hundreds or thousands of dollars more). Unfinished open shelves (less than $100) and a three-drawer chest (less than $200) will do the job. However, a chest will not have the safety straps that a changing table would and as a child grows into a toddler, open shelves are difficult to childproof. Consider furniture that can serve more than one purpose, for example, a high chair that converts to a toddler chair and table. Be careful of hand-me-downs. You may save money when friends and family pass along used clothing, nursery furniture, and toys to you and your baby, but be careful. Consider not accepting a used crib as they are not expensive and especially, if the manufacturer information is not available. Also, get the instruction booklet for a used car seat and make sure it wasn't involved in a crash. Before accepting any gifts, check the U.S. Consumer Product Safety Commission Web site, at www.cpsc.gov , or www.recalls.gov for possible recalls on the hand-me-downs. The CPSC sets mandatory regulations for cribs, seats, pacifiers, rattles, and toys, and general regulations for products with small parts that a baby could ingest, sharp edges and sharp points that can cut, and lead in paint. Join a warehouse club and buy in bulk. Colossal-store discounters such as BJ's, Costco, and Sam's Club sell diapers, formula, and baby wipes the way you'll use them: in vast quantities. You'll change up to 8,000 diapers per child, so per diaper savings can really add up. Warehouses also mark down diapers by as much as 35 percent and formula by about 20 percent. Save a bundle on clothes. Resist baby-store recommendations to buy too much. Choose a beginner wardrobe of a dozen T-shirts and one-piece outfits. Buy baby clothing at least six months larger than the infant's age to give items longer life; you can roll up the sleeves and legs until they fit--except for nighties, which must be tight-fitting. Scout out online freebies. There are a bunch of Web sites (for example, www.storknet.com/cubbies/freebies/babies.htm and www.coolfreebielinks.com ) that offer baby goods to parents. But be prepared for the onslaught of junk e-mail and contest come-ons you'll receive as a quid pro quo. Diaper manufacturers' and formula makers' Web sites usually post free offers and coupons, and Pricezilla.com, at www.pricezilla.com/coupons/bargains/category/baby.html , lists a multitude of deals. Consider doubling up for child care. If you have a friend or relative with a matching schedule and with whom you can share a child-care provider, you might save half of the $10,000 to $20,000 that full-time nannies charge per year. |
