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Money Moves for Your Growing Family

Now that your baby has arrived, you probably have a to-do list about the size of the Yellow Pages. Chances are, getting all of your finances in order is sandwiched between getting to the price club for diapers and thanking Aunt Myrtle for the lovely baby sweater. "Since Lilly was born a month ago, dozens of relatives have sent checks for her college fund," says Anne Barnes of Washington, D.C. "But those checks are going right into our regular checking account because we haven't had a second to figure out what to do with them. We keep talking about everything we plan to do -- write a will, hire a financial planner -- but the truth is, if we do find a free moment, we're going to use it to find a nanny before I go back to work."

For new parents, it may seem as if there's never a good time for making critical financial decisions. But the truth is, the steps are much easier than you think, and taking small ones now can help you get a tight grip on your finances for later, when the really big bills (like college tuition!) come rolling in. Here, four steps to a better financial future for you and baby.

Now that you have a baby, you're eligible for tax credits that you may not be aware of, says Fred Grant, a senior tax analyst with the computer software company TurboTax. The amount of your child tax credit depends on your filing status, your adjusted gross income, and the number of eligible children in your family.

For example, if you're married and filing jointly and your adjusted gross income is $110,000 or less, you're entitled to a tax credit of $1,000 per child. Tax credits are valuable because they reduce your tax bill dollar for dollar. If you have one qualifying child and your household income is more than $110,000 but less than $129,000, you get a portion of the full $1,000 tax credit; if you make more than $129,000 and have just one child, you're out of luck -- the tax credit phases out entirely. However, if you have more than one child, the income limits are higher. If you're single and have only one qualifying child, your adjusted gross income can be as much as $75,000 and you'll get the full credit.

If both you and your spouse work (or you're a working single parent), you can also claim tax breaks associated with childcare for kids younger than age 13. You have two options.

The first is putting money aside in a flexible spending account set up by your employer. Here's how it works. Over the course of a year, you're allowed to have up to $5,000 withheld from your paychecks on a pretax basis. So if you get paid every other week and you want to put the maximum into your account, you'd have $190 deducted from every check, before taxes. If you're in a tax bracket where 28 percent of your income is taxed, you save about $1,400 on federal taxes alone. As the money accumulates, you submit your childcare bills and are then reimbursed by the company's plan administrator. To submit a claim, you must provide the caregiver's Social Security number or tax ID number, so the daycare center or babysitter has to be on the books.

If your company doesn't offer flexible spending accounts, you can claim up to $3,000 in childcare expenses on your tax return if you have one qualifying child, and up to $6,000 if you have more than one child. Again, you have to provide your caregiver's Social Security number or tax ID number.

Life insurance protects your family if a primary wage earner dies. You may have coverage through work, but it may not be enough. How much do you need? In general, experts recommend anywhere from five to 12 times your annual salary, depending on how many children you have, their age, and your goals (if you want to fully fund their college education, or be a stay-at-home mom, for example). You pay a monthly or yearly premium, depending on your age, health, and other factors, for as long as you hold the policy.

"When you're young and healthy, term life insurance is relatively cheap," says Steve Lerner, director of financial services for Oswald Trippe and Company in Weston, Florida. The only decision should be which kind of plan to buy. There are two general types: term and whole life (also known as universal). Term life insurance is usually sold in 10-, 20-, or 30-year increments. If you die during that time, your family gets the amount of money you're covered for; otherwise you won't get back any of the money you paid in premiums.

With whole life or universal insurance, a portion of your premium is invested and builds up a cash value. "Your premiums will be considerably higher, but you can withdraw from your account whenever you want -- on a favorable tax basis," says Lerner. However, it may take up to 10 years for the policy to build any significant cash value, and the premiums may be too high for you to afford the amount of insurance coverage you need.

Insurance companies are rated by the same watchdogs that monitor government bonds -- Standard & Poor's and Moody's. To see how your insurer stacks up, visit www.standardandpoors.com or www.moodys.com.

In addition to making sure you have adequate life insurance, you also need disability insurance, which will pay you monthly benefits when you're unable to work for an extended period of time because of an injury or illness. Indeed, you're more likely to become disabled than you are to die. If you're employed, you may have coverage as part of your benefits package -- with the option to buy more. "You should buy as much disability insurance as you can," Lerner says.

If you can't get disability insurance through work, most experts recommend purchasing a policy that pays at least 60 percent of your salary.

"When our son, Jaime, was born, we sat down and talked to the relatives we hoped would become his guardians if we were no longer around," says Chrissy Biagiotti of Boca Raton, Florida. "But we never put it in writing and then a year later, my husband and I were about to vacation in Costa Rica -- alone. The night before we left, we started freaking out about the consequences of something bad happening, and we stayed up until the crack of dawn writing a will and then rushed it to a lawyer the next day. In your head, you have so many plans for your kid. But no one will ever know what they are unless they're on paper."

Without a will you automatically leave these important decisions to the courts, says Bill Simon, a trust and estates lawyer at the firm Garvey Schubert Barer in Washington, D.C.

In addition to naming a guardian to care for your children, your will should also designate someone to control the assets you've left behind. You can choose one person to care for your children and another person to watch over the money that will go to your children (or the same person can do both). A trust and estates attorney can help you put everything in writing, to make it legal.

By the year 2021, four years at a public university may cost $128,000 or more; the tab for four years at a private university could be as high as $304,000. The prospect of paying for this may be so overwhelming that you can't even think about it.

But don't let denial keep you from starting to save; the earlier you start, the more time there is for your money to grow, says Kevin Neumark, executive vice president of the Concord Equity Group in Miami.

Don't rule out stocks, even with the recent slump in returns. The Standard & Poor's 500 Index, a widely recognized measure of stock market performance, has grown 471 percent over the past 18 years -- a timeframe that includes the recent downturn, says Neumark.

"What's more, if you pick solid investments, you could be buying in at a bargain," says Lerner.

You may want to consider a 529 savings plan, a state-sponsored mutual fund that allows you to invest in the financial markets for the exclusive purpose of saving for college. You only need $25 to open an account in most states. Your money grows tax-free, and you may also not owe taxes when you withdraw it. Every state sponsors such plans; you're not limited to your state's plan, but there may be tax advantages to choosing it. For more information, log on to savingforcollege.com.

Another option is opening a Coverdell Educational Savings account. Coverdells offer a wide range of investment options, including mutual funds, stocks, and bonds. In addition to college tuition, they can also be used to save for elementary and secondary school expenses.

Brett Graff, a mother of one daughter, is a writer based in Miami.