The financial impact of having a baby

We all know that having a child can seriously affect your finances. Once your new addition arrives, you probably won't have money to splash out on luxuries such as clothes or vacations.

Whatever money you have will be spent on necessities for your baby – diapers, clothes, formula, college fund. Some estimates suggest it costs more to raise a child than buy a house! It's not necessarily a road to bankruptcy though – just follow these simple guidelines…

Tackle your taxes

You’ll be able to claim your baby as a dependent on your tax return, and you’ll be eligible for the Child Tax Credit if you earn more than $11,750 but less than $110,000 (for single parents it’s $75,000. Your baby needs a social security number in order for you to claim this – you can apply for a number for your baby on the forms given you by the hospital or at your local social security office.

You may also qualify for the Childcare Credit, which enables you to claim back up 20-35 percent of childcare expenses if you pay someone to take care of your child while you work or study. Your caregiver will have to provide you with a social security number or taxpayer ID (if you also have an older child, preschools, afterschool care and summer camps qualify too). Bear in mind that if you’re a high earner, a flexible spending account may be a better option than the childcare tax credit – this allows employees to set aside up to $5,000 tax-free for childcare expenses.

Did you adopt your baby? If so, be sure to claim the Adoption Credit, which means you can subtract certain expenses related to the adoption precedure, such as court costs, attorney fees and travel expenses up to $11,390.

Add your baby to your health insurance

Check what expenses your insurer covers – if you’re insured through work, as your Human Resources department for the information.

Look for childcare well in advance

If you're returning to work start investigating childcare options well in advance, as this can be very expensive. Why not talk to your friends, as they might be able to give you some helpful advice; they might even suggest a nanny share, where a nanny looks after both your babies and you split the cost.

Kit your baby out secondhand

You don't have to buy the most expensive stroller and nursery furniture out there. Consignment stores, thrift shops, online auctions, yard sales and the classifieds can throw up great bargains when it comes to big-ticket items and pre-loved baby clothes. Safety should be your priority so check secondhand baby gear carefully for wear and tear and only buy items that come complete with the instructions. Don’t buy your baby’s car seat secondhand unless you can be absolutely sure it hasn’t been involved in an accident or dropped, as it’s possible the seat could have sustained hidden damage that compromises its effectiveness.

Get insured

Now you have a dependent you need to arrange life and disability insurance so you can rest assured your child would be cared for if you died or became disabled before they were old enough to provide for themselves financially. You’ll need to factor in day-to-day living expenses, debts and expenses such as college when settling on an amount – as a rule, five to six times your annual income is what you should be thinking about insuring for. Speak to an insurance adviser about what types of insurance might best suit your lifestyle and pocket.

Make a will

It’s the best way to ensure that you would have some say in what happened to your assets and your child if the unthinkable ever happened. You can designate a guardian to care for your child and manage her inheritance until she reaches adulthood.

In some states, if there is no will a surviving spouse only gets around a third to a half of the estate – the rest is controlled on behalf of your child by a state-appointed administrator. This involves fees and complicated legal proceedings any time your partner needs to access the money. If your child were to be orphaned and you hadn’t appointed a guardian, your local social services department will appoint someone to raise your child.

You can choose to write your own will and there are books and software to help you do so, but it is best to consult a lawyer, who can better explain all your options when it comes to guardians, executors and trust funds. Costs can range high depending on how complex your affairs are but you can save some money by agreeing most of the arrangements in advance before consulting a lawyer.

Start saving

Start saving while you're pregnant – even if you put just a bit of money aside each month, this will add up (you could use it to stow away the money you’d have spent on alcohol and cigarettes!). See it as long term and put it into an account where it can’t be accessed for a number of years. It could help you save for your teen’s first car!

You can also opt to open an investment account in your child’s name, as tax laws ensure that any investment income he earns up to $850 is tax-free, with the next $850 being taxed at the lowest rate (10 percent). Do bear in mind though that if his annual investment income exceeds a certain amount he’ll need to fill out a tax return and any investment income over and above that point will be taxed at your higher rate. Investing in stocks and bonds for your child is also a handy way of saving on taxes, as he won’t have to pay tax on them until they’re redeemed or they mature.

A couple of things to bear in mind though: investments in your child’s name could potentially restrict his access to college scholarships and financial aid… and he can also cash them in once he’s 18 and do whatever he likes with the proceeds!

Set up a college fund

College costs can be high and will only go higher so start a college fund for your baby as soon as he’s born if not sooner. There are two types of college savings plans:

Prepaid tuition plans allow you to save for college while locking in present tuition costs, but can only be used at colleges in the state where the account is held (it may also be a requirement that you remain a resident of that state). Some plans do allow you to use the fund for out-of-state tuition but it likely won’t go so far, since most colleges charge out-of-state students higher tuition costs. However one big advantage they have is that they aren’t counted towards your child’s financial aid eligibility since they’re classed as your financial asset and not your child’s.

529 college savings plans These are investment accounts that grow your savings tax-free as long as any withdrawals are used to fund higher education. Plus, your contributions count as a gift so you can contribute up to $12,000 annually without being charged tax on that amount. The money can be used at any college in the country. Each state has a 529 plan and investment options within the plans tend to differ, which can put parents off, but you do usually have the option of holding a riskier portfolio when your child is a baby and gradually moving towards a more conservative one as he approaches college age, to safeguard what you’ve earned. As with a prepaid tuition plan, a 529 is your asset, not your child’s, so it won’t affect his ability to apply for financial aid. Bear in mind though that if you dip into a 529 for anything other than school, you’ll be taxed on it. Saving For College (www.savingforcollege.com) has lots of information on college savings plans.

Go coupon crazy

Clip them; download them; if your baby simply must have that top-of-the-range stroller you found on the JC Penney website, don’t click on checkout until you’ve Googled a coupon or discount code. Better yet, register on a website such as The Coupon Mom (www.couonmom.com) where you can print coupons and online coupon codes, or The Grocery Game (www.thegrocerygame.com) which tracks down the lowest prices on a huge range of food items and matches them to manufacturers’ coupons you can clip or download from the site to ensure even greater savings.

Set up swap meets

Children’s toys and books can be expensive so why not set up bi-weekly swap meets with local moms so you can regularly swap toys and books to get a new batch? You could even set up a group to do just that in our groups area.

The information in this feature is intended for educational purposes only. If you have any concerns about your health, the health of your child or the health of someone you know, please consult with a doctor or other healthcare professional