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A Nine-Month Plan for Getting Your Family's Finances in Order

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Nick Dewar

If you're an expectant parent, you have probably learned enough medical terminology to pass for a fledgling ob-gyn, grasping complexities like alfa-fetoprotein levels and epidural anesthesiology. But studies indicate that you should be paying as much attention to the jargon of financial well-being -- arcane phrases like "Section 529 tax-advantaged college savings," for example, and "spousal IRAs."

According to recent figures from the U.S. Department of Agriculture (USDA) in Washington, DC, a baby born now will cost a middle-class family $170,460 to raise through age 17. The figure climbs to $249,180 -- about $15,000 a year -- if a family's annual income is above $65,800. And that doesn't even include college expenses, now averaging $26,070 a year at private schools and $11,976 at public ones. Covering the costs will inevitably be a stretch, since a recent Consumer Finance Survey by the Federal Reserve indicates that nearly two-thirds of households with young children are saving no money at all.

Those zero-digit savings begin to collide with the expanding cost of childrearing when a baby is about 6 months old, says Ruth Hayden, a St. Paul, MN-based financial consultant and author of For Richer, Not Poorer: The Money Book for Couples. "Just when the baby is getting so cute and personable, a couple starts to fight over money issues," she says.

To head off trouble, she and a team of other money experts (with 26 children and 18 grandchildren between them) helped Child assemble a nine-month plan for nurturing your nest egg as your pregnancy progresses. The payoff? Research shows that, given the same income, people who commit to a financial plan save twice as much money as those who just wing it.

The warm, fuzzy upside: The more financial decisions you work out ahead of time, the more fun you'll have with your new baby.

First Month

Cut down credit card debt. The first trimester is the time for cleaning up your financial act, says Jean Chatzky, financial editor for the Today show. A good place to start is with credit cards. Balances in the thousands of dollars cost hundreds in annual interest -- money you'll need for new expenses. They also hamper your growing family's ability to get loans for big-ticket buys like a home or the inevitable minivan.

Consider transferring your balance to a credit card with a lower interest rate. Visit www.bankrate.com to compare rates and fees; once you've switched, charge as little as possible until you've paid off your debt.

Stash receipts. Next, you'll need to create a new budget. To start, keep track of every penny you spend. The easiest way is to reserve a compartment in your wallet for receipts for all cash purchases, says Tamara King, an executive vice president at Women's Financial Network at Siebert, a financial services firm in New York City. Don't tally them yet; you'll need a few months' worth to develop a clear picture of the petty cash effect on your finances.

When the time comes to crunch the numbers (the third month), those receipts -- along with credit card records and a scrupulously kept checkbook log -- will document your spending patterns.

Second Month

Install finance software. If you're not already hooked on a computer program like Quicken or Microsoft Money, install one now. These personal-finance workhorses, which cost as little as $30, provide forms for creating a budget and chart-making tools for tracking your cash flow. It's too early to enter numbers, but you can get acquainted with the program's functions.

Of particular benefit to busy parents is the software's capacity to organize financial records in one place. You'll come to appreciate this convenience at tax time, loan-application time, and any other time you need to put your fingers on details like account numbers and balances. The program's online bill-paying function can also save you valuable time and effort during those sleep-deprived early postpartum months, says Dee Lee, a Harvard, MA-based certified financial planner.

Update your beneficiaries. Double-check for and delete any out-of-date beneficiaries on your company-sponsored life insurance and 401(k) plan, particularly if you were single when you started your job. "Whenever there's a major lifestyle change, you need to look at those beneficiary statements," Lee says. Your parents, siblings, or even an old boyfriend may still be listed.

Third Month

Check up on your credit. Even if you pay your bills on time every month, errors can slip into your credit report. Save time and aggravation by correcting mistakes now, when your life is relatively sane. A clean record is particularly important for expectant parents since they may soon be in the market for a bigger home or car, says King.

You can order your credit report from Equifax (800-685-1111; www.equifax.com), Experian (888-972-5722; www.experian.com), or Transunion (800-888-4213; www.transunion.com). By law, they may charge no more than $9 for a standard report. Be forewarned that applying for a free credit check from less reputable providers can be an invitation to identity theft. In addition, limit yourself to only one a year. Any more than that can hurt your rating.

Crunch the numbers. Now it's time to get down to the last step of budget-making. Your checkbook log, credit card statements, and the receipts in your wallet will give you the numbers you need to get started. Type them into your software program's budget worksheets, along with your household earnings. Print out the results -- this is the "before" shot for your budget makeover.

The "after" picture will need to be a lot leaner. Your goal is not to just break even but to save money regularly, says Stephen Brobeck, executive director of the Consumer Federation of America (CFA), an advocacy and education organization in Washington, DC. At present, Americans save a meager 2.4% of their income. Experts say 10% is a good goal for young families.

When creating your new budget, keep in mind your upcoming childrearing costs. According to the USDA's calculations, households with an annual income above $65,800 can expect to spend about $1,120 a month to provide an infant with basics like food, clothing, shelter, transportation, and childcare. If you take an extended leave from work -- or switch to part-time hours -- you'll face the financial double-whammy of covering these new expenses on an income that is suddenly smaller.

Couples who can't seem to save their way to the 10% mark may want to book an appointment with a certified financial planner, a pro trained to help clients set monetary goals. The Financial Planning Association explains certification and fees on its Web site, www.fpanet.org. The CFA offers free consultations along with other budget guidance through its America Saves program (www.americasaves.org).

Fourth Month

Make a friend in HR. Get a full briefing about maternity or paternity benefits from human resources. Federal law requires you to give at least 30 days notice when requesting time off under the Family and Medical Leave Act, which entitles any new parent who works for a company with at least 50 employees to take up to 12 weeks of unpaid, seniority-protected leave. Your employer must pay the usual portion of your healthcare benefits for the duration. In addition to any paid leave you might have, federal law also entitles birth mothers to short-term disability pay (typically six to eight weeks) if their company ordinarily pays disability benefits in other situations.

Practice austerity. Last month you set a new budget; now you may be tempted to put it on hold and enjoy the good life until the baby comes. That would be a mistake.

"In the second trimester, you need to make sure you're putting something away," says Chatzky. Start by earmarking funds to offset the loss of income you expect from any unpaid maternity leave. "Figure out what the gap will be and then try to make up for it beforehand," she says. If you also plan to furnish a nursery from scratch -- or purchase pricey baby gear -- set aside additional savings toward that goal. Put the amount you'll soon spend on the baby into short-term CDs or money-market accounts. You should have a tidy sum by your due date -- if you begin today.

Fifth Month

Soul-search and cost-justify. When the baby arrives, will you return to work or stay home? You don't need to lock in a decision right this minute, but you should schedule a heart-to-heart with your spouse soon. When making your decision, keep in mind the following expenses. Full-time, out- of-home childcare averages $4,000 to $6,000 a year, $12,000 to $15,000 in major cities. Nanny care can be even higher. Commuting and incidentals like coffee also take a chunk out of a paycheck.

On the other hand, you may feel strongly about maintaining long-term perks like your company 401(k) plan. "By staying on the job, you don't compromise pensions, benefits, or your career track," says Faith Wohl, president of the Child Care Action Campaign (CCAC) in New York City. Finally, there are the psychological factors: Do you both enjoy your work and feel it's important to continue? Or is it better for your family to have one parent at home?

Do the daycare shuffle. If you plan to return to work, your second trimester is a great time to evaluate childcare options -- before your energy wanes and mobility becomes complicated. Child Care Aware (800-424-2246; www.childcareaware.org) offers a free service that will link you with a local resource and referral agency. These nonprofit agencies keep close tabs on the types of childcare available in their region, including center-based and family care, and fees charged by local providers.

To get the most bang for your buck, check nannies' references or confirm that daycare administrators have degrees in early childhood education, staffers receive child development training, and caregivers don't come and go with the seasons.

Sixth Month

Buy life insurance. Most expectant parents should insure themselves for at least six to eight times the amount of their gross annual salary to cover the anticipated dependent, says James H. Hunt, a life insurance actuary for the CFA. Cash-value policies like whole life, variable life, and universal life are quite complicated and often a bad deal -- especially when you can earn interest through other means, such as tax-deferred and tax-free investments like retirement accounts and college savings plans. Hunt advises parents to stick to term life, preferably 20 years or less. A 30-year-old woman in good health can buy $750,000 worth of coverage for about $300 a year.

You can investigate insurance rates at www.term4sale.com. A Buyer's Guide to Insurance, which Hunt co-wrote, offers straightforward advice. The booklet costs $5 from the CFA (202-387-6121).

Write a will. Though you may be loathe to decide who would raise your child and manage her finances should both parents die, it's easier to write a will and choose a guardian before the baby is born, says Dennis Belcher, chairman of the Chicago-based American Bar Association's section on real property, probate, and trusts. "A couple is less emotional before the children are born," he says. (Expect to pay between $500 and $1,000 for a will not complicated by tax-planning issues.)

Seventh Month

Do the Upromise prelims. Enough doom and gloom! The popular college savings program Upromise, with 3 million members and counting, lets you jump-start an education fund by shopping for basics like groceries and gas and by eating out at restaurants. Best of all, you don't need to list a beneficiary to open an account, so expectant parents can start saving for their future scholar before they've even settled on a baby name. If you're pushy enough to enlist family, a multiplier effect kicks in. "I have $3,800 in my account because my 94-year-old grandmother joined Upromise and did one thing," says Jim Doyle, the program's spokesman. "She sold her home through a participating real estate agency."

To sign up for the free service, visit www.upromise.com and register your credit cards. After that, a portion of what you charge to the cards (up to 5% at certain retailers, 10% at some restaurants) automatically goes to your child's account.

Learn these numbers: 5-2-9. If your new budget leaves any room for college savings, tax-advantaged 529 investment plans are too attractive to overlook since they allow you to accumulate as much as $305,000 per child and not pay taxes on the earnings (some tax advantages will expire unless Congress renews them in 2010). The options can be overwhelming -- all 50 states offer a plan and you can currently pick and choose from about 67 investment strategies -- but you'll have more time to go over them now than later, says Joseph F. Hurley, chief executive officer of www.savingforcollege.com and author of The Best Way to Save for College.

You can even open up an account now; most plans will give you up to six months to add a Social Security number when the baby is born. If you'd like family and friends to shower you with college funds instead of booties and rattles, Women's Financial Network at Siebert operates a 529 registry; for details, visit the New Parent page of the S.T.E.P.S. area at www.wfn.com.

Eighth Month

Factor in friends' benevolence. Right now, some of your mom's friends are almost certainly crocheting yellow blankets in honor of your baby's arrival. Your pals are also busy organizing showers behind your back. People tend to be unbelievably generous when a child is born, so you may want to see what you receive before you buy any but the most basic baby goods.

You should also take a moment to open a safe-deposit box at your bank. Some people will undoubtedly send savings bonds to celebrate your baby's birth. You'll want to keep them -- and the birth certificate -- in a safe place. (By the way, Common Series EE bonds and inflation-protected Series I bonds are great because you can cash them in tax-free to pay for education expenses. But this provision works only if the bonds are in your name -- not your baby's.) Before you stash the goods in the vault, make a note of your bonds' vital statistics (series, denomination, issue date, and serial number). You can then track the earnings online using the Savings Bond Wizard at www.publicdebt.treas.gov.

Keep your eye on retirement too. With nursery walls to paint and breathing exercises to practice, your third trimester is not the obvious time to be saving for retirement. But the sad fact is that a majority of baby boomer women have less than $10,000 in retirement savings -- in part because many stop adding to their 401(k) plans when they scale back their careers to raise children, says Hayden. She advises women (or men) who plan to stop working, even for only a few months, to vow to continue budgeting money toward their retirement.

Moms (or dads) who stay out a year or more can pay into a special retirement plan known as a spousal IRA. The IRS allows a nonworking spouse to set aside up to $3,000 a year and to deduct the amount from the family's taxable income -- even if the spouse funds a 401(k) plan at work.

Ninth Month & Beyond

Cover your baby. Most health insurance companies allow new parents 30 days after delivery to add their newborn to their policy. Check with your carrier or human resources. In any case, it makes sense to get the enrollment form and start filling it out now, leaving blanks for the baby's name and birth date. Assign your spouse the task of adding those details and getting the paperwork to HR as soon as you and your baby come home from the hospital.

Invest in couple time. By some cosmic coincidence, the price of a movie ticket is roughly equal to the going rate for an hour of babysitting. That means a trip for two to a two-hour movie will cost double the money -- a full 100% markup -- after your child is born. If you're smart, you'll lock in quality time at prenatal rates, a tactic that also makes sense emotionally. Once a baby joins the household, your bonds as a couple will stretch in new and different directions; it helps to reinforce them now.

Aside from that, if you've followed our planner, the final month of your pregnancy is time for putting your feet up, both fiscally and literally. Relax, pour a cup of tea, and pat yourself on the back for preparing your family's finances for your new arrival.

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Copyright © 2003. Reprinted with permission from the March 2003 issue of Child magazine.