Your newborn may seem small now, but when it comes to having a baby, the cost associated with raising a child can really add up. According to a recent survey from NerdWallet.com, sixty percent of respondents believe the cost of raising a baby in the first year is less than $10,000. The actual estimation ranges from $21,248 for a family earning $40,000, to $51,985 for a family whose income is $200,000. If that jaw-dropping discrepancy is enough to make you rethink your spending habits, you’re not alone.
But rather than sweat every purchase that you’ll make until your child graduates from college, consider these expert tips from financial experts that can help you maintain a sensible budget and start saving now for your child’s future education.
Managing New Baby Expenses
Sure, it can be tempting to want to snatch up that high-end stroller or upgrade to an SUV after you have kids, but it’s not a necessity, especially for budget-conscious families. Liz Weston, a certified financial planner with NerdWallet.com, suggests figuring out which types of compromises make the most sense for your family. “Housing and transportation are two big costs that can make or break your budget, so it pays to keep a lid on them,” she notes. “You don’t need to upgrade your reliable sedan to a minivan just because you have one kid or even two kids.”
Accumulating tons of baby products can also be another big drain on your savings. Instead of opting for all new products, consider inheriting hand-me-down strollers, cribs and clothing from family and friends, as long as these items meet current safety standards. “You can save thousands of dollars in set-up costs this way,” notes Weston.
Tax Breaks and Other Savings
One perk of having a new baby is the ability to take advantage of a tax credit—up to $1,000 as long as your adjusted gross income is below certain limits. According to Weston, the credit starts to phase out at $110,000 for married couples and $75,000 for singles.
Parents can also utilize tax-saving benefits through their employers, many of which offer flexible savings accounts that enable people to put aside up to $5,000 in pre-tax money to pay for child care. “You may be able to take advantage of both the tax credit and an FSA, but you can’t use the same expenses for both,” she says, adding that most families typically choose one over another, depending on their income level.
Saving up for College
College may seem like a long way off, but it doesn’t hurt to begin thinking about setting aside even a small amount of your monthly income. “Funding a future education is a dream for many families,” says David Gerard, a tax advisor in Levittown, NY. “Most new parents don’t realize this cost because they are still so used to the vacations they used to take and the dinners they used to go out for.”
However, if you are determined to put aside some savings, try to come up with a dedicated plan. “If you put $8,000 a year away for 18 years, earning 4 percent per year, you will have just over $200,000 for education,” offers Gerard. “If you have two kids, that would equal $16,000 per year.”
Another viable option is to open a 529 College Savings Plan, which Gerard lauds for its ability to offer an immediate benefit on parents’ state tax return. “[These plans] are usually age-based, which means that as the child gets older, the money shifts from high-risk (high return) to low-risk investments,” he adds.
Weston also recognizes the advantages of a 529 Plan. “The money grows tax-deferred and is tax-free when used for qualified college expenses at any university—not just the ones in the state that provide the plan,” she says. Ask family and friends to contribute to your child’s 529 plan in lieu of birthday gifts or other special occasions. To learn more about these types of plans, visit https://www.sec.gov/reportspubs/investor-publications/investorpubsintro529htm.html.