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Financially Preparing for a Baby

Hang on to your hats, prospective moms and dads: The U.S. Department of Agriculture speculates that a middle-income family will spend more than $165,000 (in today's dollars) raising one child to the age of 18. That's not counting fertility treatments if needed, adoption costs, private schools, after-school lessons, or college, which can add $100,000-300,000 to the bill. In 1960, parents spent an average of only $146,000 (in today's dollars) raising a child.

Even before your child arrives, the USDA estimates that you'll spend $6,800-10,600 (depending on where you live and the type of birth you have -- cesareans are more expensive) for prenatal care, labor, and delivery. Add another $8,000-10,000 for first-year expenses like baby furniture, clothes, diapers, doctor's visits, and day care, and you'll have shelled out nearly $20,000 by baby's first birthday.

The rewards of parenthood are priceless! Follow these tips to make the price tag more manageable, as well.

1. Maximize your health insurance benefits. Sometimes an HMO or PPO (preferred provider option) plan will cover more of your total costs than a traditional 80-20 health plan. If you are able to get comparable care under one of these plans -- i.e., if you are comfortable with the physicians and hospitals they cover -- it may be a good idea to switch over.

2. Sign up for disability. If your employer doesn't offer disability insurance, you can get it independently. Before choosing a plan, read the fine print to be sure that pregnancy and its potential complications are covered.

3. Consider term life insurance. A financial planner can help you figure out how much life insurance you'll need; make sure both spouses are covered. If money is an issue, choose 20- or 30-year term life insurance -- it will cover the time period when you need it most, for substantially less than universal or variable coverage.

4. Take it easy on the baby buys. Those tiny little outfits, strollers, and top-of-the-line baby furniture can easily run into the thousands of dollars. While you should never economize on safety items (like car seats and intercoms), there's no reason to spend big bucks on an outfit your child will outgrow in two weeks. Best reality check: Take a friend who's an experienced mom -- preferably with two or more children -- on your buying spree. When she's done laughing herself half to death, she'll tell you to skip the embroidered diaper-holder and save the money for college.

The government gives you a small credit for taking on the hefty responsibilities of parenthood: You'll get an additional exemption and new child tax credit worth approximately $1,300 per year for a middle-income family. Parents who use day care get an additional $480 in savings, but an employer-sponsored flexible spending account can save you a lot more. Check with your human resources department to find out if this is an option.

Finally, if you and your partner both plan to keep working, start researching your child-care options now. After you've run the numbers, you may even find that it makes financial sense for one parent to stay home.