New parents face financial challenges

More than 4 million babies are born in the United Sates each year, according to MSN Money.

The U.S. Department of Agriculture says a child’s first two years alone, on average, could cost nearly $20,000 after adding up the cost of food, clothing, housing, transportation, health care, child care, toys and entertainment.

Following are some tips to help get you prepared financially for baby’s arrival:

Create a budget

From baby clothes to toys to that extra mouth to feed, your expenses will surely increase, even before baby arrives. Research and comparison-shop for big-ticket items such as cribs, strollers and car seats to get the best products at the best rates. Make sure that any items you borrow or buy used meet current safety standards.

Expect increases in all budget items, even miscellaneous expenses, such as laundry detergent and tissues, and even utility bills, because you will be home more often. The good news is that you will probably be spending less money on entertainment such as movies, restaurants, sporting activities, etc. The Consumer Credit Counseling Service suggests that with the arrival of a newborn, calculate a minimum increase of $200 per month. And that doesn’t include savings, for college or otherwise.

Prepare for reduced income

One of the first things women might want to do is to check with their employer to see if their short-term disability insurance covers pregnancy. A typical policy will pay 60 percent to 70 percent of gross income for approximately six weeks following the birth.

If you don’t have disability insurance, your employer might be required to grant you time off under the Family Medical Leave Act, but they’re not required to pay you. For example, parents who have worked at least one year for a company with 50 or more employees are entitled to up to 12 weeks of unpaid time off and are guaranteed their jobs back at the end of their leave.

Whether you’ll receive salary or disability benefits, schedule out your expected income and expenses and make sure you can make ends meet in those first few stressful and expensive months.

Insurance issues

You need to know the specifics of your medical insurance coverage. Does it cover prenatal care as well as your baby’s doctor visits? What delivery options are covered? Check this out before you get pregnant, in case you decide you want to switch. If you switch after you’re pregnant, be sure that your new insurance plan covers pre-existing conditions. Consider deductibles and co-pays, and find out how much it will cost to add an additional dependent. If spouses have separate health insurance, look at the terms of both policies and determine which plan is best or consider splitting your family’s coverage between the two plans.

Insurance

While no one likes to think about this, you need to plan to take care of your child if something happens to you. Many new parents buy term insurance that insures them for a fixed amount for a given premium and is generally the least expensive option. Don’t forget to insure the stay-at-home parent as well; if something happens to them, the working parent will more than likely need to purchase child care and other services.

As people between the ages of 35 and 65 are more likely to become disabled than to die, according to The March of Dimes’ Web site, it is very important to provide for your family if you are disabled and can’t work. Don’t forget to update your will and beneficiaries on all your investments and insurance policies as well.

Consider child care costs

If you choose to get child care, and you want to be able to deduct your child-care expenses from your taxable income, you’ll have to choose a licensed provider because you have to give the provider’s Social Security number to the IRS when claiming the deduction. Even when your child is old enough to go to school, remember to plan for after-school care, summer camps and other related expenses.

Saving for college

Whether it’s a bank savings account, a Roth individual retirement account, Section 529 Plan, mutual fund or trust fund, start putting away a little each month as soon as the baby is born and stick with it. With help from compounding, this money will grow over time and help fund the largest ticket item in your child’s financial future.

A qualified financial advisor can help determine your specific savings and insurance options and needs when planning to grow your family.

Paula Dougherty, CFP, ChFC, CLU, is a certified financial planner with Ameriprise Financial Services Inc., member NASD.

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