What to Really Expect When You Have Children

You’re starting a family? Congrats are in order! So is this a rude awakening? Parenthood is expensive. From childcare to college savings, the cost of raising kids – especially in this day and age – is huge. But it’s worth it! Those hugs, those kisses, those smiles… provide sweet satisfaction that you’ll never be able to bank or buy.

Le sigh…Now here are stop tips you can really bank on. 

Then Comes Baby In a... How Much is That Baby Carriage?!

Now that a baby is on your horizon, people are coming out of the woodwork to give you their two cents. It’s all very well intended, but the truth of the matter is you will never be completely prepared for parenthood—kids are funny that way. All you can do is seize today to get your finances in order before your baby’s googoo-ing and gaga-ing turns you into spend-spending mush. You should also bank some extra sleep while you can!

Step 1. Reassess your budget

Your lifestyle will go through more changes than your baby’s diapers, both of which will require a total budget overhaul. Allow for extra daily expenses like daycare, diapers and clothing, plus monthly increases in medical coverage, housing costs (if you move) and college savings accounts.

Step 2. Don’t let those non-essentials fool you!

New babies come with new things – lots of new things, including a crib, stroller, carrier, car seat, clothes and other essentials. And quite a few non-essentials, too. What they don’t tell you when you’re expecting is you really don’t need half the stuff you think you do, not right now…if ever. Outsource larger one-time purchases to family and friends, take what’s handed down to you and heed the advice of fellow parents who probably didn’t need that baby wipe warmer either.

Step 3. Find your tribe

In addition to guarding yourself against non-essential purchases, take advantage of this awesome thing we have called ‘the Internet’. It’s bursting at the webs with discount retailers, coupons, blogs and opportunities to save big on your baby.

Step 4. Evaluate your back to work plan

Depending on your circumstances, one of you might decide to stay home from work to cut down on the cost of childcare. This is a huge decision that might benefit you in the short term but may harm you in the long term. Who knows? We’re not talking about a one-size-fits-all onesie here; it’s a financial issue that requires in-depth consideration from both partners.

Run the numbers to see what option makes the most sense for you financially
Decide what your work means to you emotionally

See what your employer is willing to do for you realistically, including flex-time, work-share, telecommuting, flexible spending accounts (FSA), and parental leave time

Step 5: Up your insurance

Kids are expensive once they get here; getting them here will cost you a pretty penny, too. That’s why good medical coverage for you during pregnancy and delivery and for your baby after he or she gets here is essential. The importance of life insurance takes on new dimensions now, too. If you haven’t already, buy a life insurance plan.

Step 6: Update your estate plan

Since we’re on the topic of your mortality, you and your spouse would be wise to update your wills. No one likes to think about it, but it’s your sacred responsibility to make sure your child is looked after should tragedy strike.

Step 7: Start saving for junior’s education

Tuition costs in this country are staggering. Don’t count on them toppling anytime soon. Now’s a good time to set up a college fund and encourage family members to contribute to it. Here are a few ways to get started. 

Step 8: Look on the tax incentive side

Freaked out yet? Here’s a break for you. Four, to name a few. Raising children is rife with obvious rewards, and not so obvious ones, too, including:  

Extra tax exemptions
The child tax credit
Child and dependent care credit (for qualifying child-care expenses)
The earned income credit (if your annual income is below a certain level)

5 Ways to Raise a Financially Responsible Kid

Kids like money. They like the touch of it, the sound of it…some even like the taste of it. What they love most of all is the stuff it can buy, stuff that doesn’t always make sense, sometimes really weird stuff, but stuff they must have or else. Your job as a parent is teaching them that stuff costs money.

Here are five ways to educate them about the value of money and the things it can buy. Each will give your child a solid foundation for a lifetime of financial responsibility, common sense and money-management success. Seriously, mom and dad: this is the kind of stuff that really doesn’t grow on trees.

Lesson 1: Teach them how to handle an allowance

An allowance is your kid’s first brush with financial independence. Use it to teach them the principles of saving and budgeting for the things they must have (even though you know they may not really need them).

A good rule of thumb to follow is $1 for each year of age, so a five-year old would receive $5 a week.

Lesson 2: Teach them the value of hard work

While certain chores might be a given in your household, let them know that opportunities abound when they take on a little bit more. Teach them the value of those extra efforts with a monetary reward. Honestly, is there a more effective way of getting the weeding done?

Lesson 3: Teach them about “free” money

Saving can be a bit vague for little ones. By taking your child to the bank and opening an account, he or she will learn how savings and money markets actually work. Periodic check-ins with their monthly ledger is a great way to teach them about compounded interest. As in free money…everybody, open up and say “wow!”

Note: Be sure to let them withdraw a little cash now and then to buy toys and other knick-knacks so they’ll continue to stay interested.

Lesson 4: Teach them to go for their goals

You’re probably still wrapping your own head around the concept of turning 65 one day. Can you imagine what goes on in your kid’s head? Try…where his or her next Spiderman action figure is coming from. Let your child set his or her own goals , and guide him or her towards achieving them. That means, helping them learn the difference between short-term goals (bubble-gum) and long-term goals (an iPad of his or her very own!).

Tape a picture of that must have item to a goal chart, bank statement, or jar so they can make that connection between setting a goal and saving for it.

Lesson 5: Teach them to be a smart consumer

Children are bombarded with messaging – both subtle and loud – to consume, consume, consume. They need your help to sort through the noise. You can teach them the difference between being smart consumers and impulsive ones by setting aside one day a month to take their allowances out for a spend. You can also say no.

Madonna nailed it: we’re living in a material world. But your kids don’t have to be material boys and girls. Not if you start teaching them the value of money, the value of the things they purchase with that money, and the value of setting and reaching goals now.

Preparing for the Eventuality That Is: College

You think tuition is stratospheric now? Imagine how expensive it will be by the time your kids come of age. Do yourself – and your offspring – a favor by putting some thought and savings into their higher education costs…starting now.

Here are some options to consider:

529 Plan
There are two types of 529s: college savings plans and prepaid tuition plans. Both share the same federal tax advantages, and yet they are not the same. With a college savings plan, you can use the funds at any college that’s accredited by the U.S. Department of Education. A prepaid tuition plan can only be used for undergraduate tuition at public colleges in your state. But that’s not all. Let’s take a closer look at the pros and cons of each.

Both types of 529s offer Federal and state tax-deferred growth
If the money is withdrawn to pay for college, earnings are not subject to federal income tax
States can add their own tax advantages to 529 plans; a few of them even provide matching scholarships or matching contributions
529s are open to anyone, regardless of income level and you don't need to be a parent to set one up
With a college savings 529, there is no age or time limit on when the withdrawal must be made

With a college savings plan, you can choose from a variety of investment portfolios, but you can't direct the underlying investments
With a prepaid tuition plan, you don't pick anything…that’s only in the hands of the plan’s money manager
College savings plans don't guarantee your investment return, plus you can lose some or all of the money you’ve contributed
Prepaid tuition plans guarantee your investment return, at the very least; it’s just that the benefits paid out might change due to projected actuarial deficits
Using money in your 529 plan for something other than college will cost you: a 10 percent federal penalty, plus state penalties
You'll also pay income taxes on the earnings if the plan’s funds are not used for college…you might even forfeit your earnings entirely
Prepaid plans have a ‘use by’ date: your kid must be college-bound by the time he or she reaches age 30
Both types of 529 plans may charge annual maintenance fees, administrative fees and investment fees

Coverdell Education Savings Account
Tax-wise, the Coverdell ESA is treated like a 529…with a few key exceptions.

A Coverdell ESA allows for greater investment flexibility
Education-related withdrawals are exempt from state income tax, depending on the tax laws in your particular state
Education-related withdrawals are not limited to college and can be used for uniforms, books, school-supplies and more, even at the elementary school level

While 529s do not usually limit contributions, Coverdell ESAs do ($500 per child is the maximum annual contribution limit)
Coverdell ESAs must be used by the time the beneficiary turns 30, or turned over to another family member to avoid taxes and penalties
The income level of a donor determines whether or not he or she can make contributions
There may be fees associated with opening and maintaining this kind of account

U.S. Savings Bonds
Easy to purchase, backed by the full faith and credit of the federal government, it’s no wonder they’re so attractive. Like 529s, there are two types: Patriot bonds and Series I bonds, which are popular college savings vehicles.

Any interest earned is exempt from state and local tax
Federal income tax can also be exempt, provided your modified adjusted gross income (MAGI) falls under a certain level
Fee-free, unless you purchase the bond through a broker

Bond proceeds must be used to pay for qualified education expenses to avoid penalties
Return potential is lower than 529s because stocks generally perform better over time, though past performance does not guarantee future results

Mutual Funds
Investing in mutual funds was once the popular way of saving for college. That was before 529s and their tax-sheltered growth and tax-free withdrawals came on the scene. Still, there are pros…and cons.

If assets are withdrawn for non-educational expenses, mutual funds do not impose restrictions or penalties
Mutual funds allow for greater flexibility and control over investment decisions

The tax factor can cut into mutual fund returns: you'll pay income tax every year on income earned by your fund, even if it’s reinvested
When you sell shares, you open yourself up to Capital Gains tax

Custodial Accounts and Trusts
With custodial accounts and trusts, assets are held in your child's name. You or another custodian manages the account until your child reaches 18 or 21. After that he or she has complete control over the funds.

While funds can be used for education, withdrawals are not subject to penalties if used for non-educational expenses
There are no funding restrictions
Total flexibility and control over investment choices
In the case of custodial accounts, they are generally fee-free

Subject to so-called “kiddie tax” rules, meaning your kids will be taxed at your rate
Trusts are costly and complicated to set up
There is some hope (as in credits) down the line

When you pay for certain higher education costs, you can claim two types of tax credits: the Hope credit (now called the American Opportunity credit) and the Lifetime Learning credit.

Each depends on the amount of qualified tuition and related expenses you pay, as well as your MAGI (remember: modified adjusted gross income).
There are a lot of expenses to plan for when it comes to college. Inevitability you’ll get that call of: “um, can you guys send money for textbooks?” Good thing you prepared them for the real world.