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Can You Afford to Have Kids?

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Planning Financially for a New Baby

If you considered only the financial implications of having children, you might end up childless. There's no two ways about it: having a child is very expensive. Financial experts say a home is the biggest investment most people will ever make, but they're forgetting about the cost of raising children, which far exceeds the average home price in the US.

Fortunately, most people don't base this important decision on financial issues alone, but as with any other decision that will impact your financial situation, it's smart to go into it with your eyes wide open and to be prepared. The changes that accompany adding a new little member to your family can be stressful, but you can reduce the stress greatly by minimizing the financial factor.

First, have you considered how you'll manage on the reduced income caused by time off for the pregnancy and birth? Check with your employer to see if you're covered by short-term disability insurance, which covers pregnancy. A typical policy will pay 60% to 70% of your gross income for approximately six weeks following the birth of your child (there may be a waiting period of a week).

Even if you don't have disability insurance, your employer may be required to grant you time off under the Family Medical Leave Act (FMLA), but they're not required to pay you during that time. Whether you'll receive salary or disability benefits or not, schedule out your expected income and expenses and make sure you can make ends meet.

While you're checking on disability insurance, make sure you know what to expect from your medical insurance coverage. Pregnancy must be treated as any other medical condition, meaning it can't be excluded, but the general provisions of your policy will determine how much money you'll end up paying out of your own pocket. Consider deductibles, co-pays (the typical 20% you pay after the insurance company pays their 80% in a non-HMO type plan), etc. Also, find out how much it will cost to add an additional dependent to your group medical insurance policy. If both you and your spouse have health insurance available through your employer, look at the terms and costs of both policies and decide whether it makes more sense financially to have you all covered on one plan or to split coverage between the two plans.

If your employer offers a flexible spending account, it would be wise to put some money into it to cover unreimbursed medical costs. For an explanation of Flexible Spending Accounts, see Maximize Your Employment Benefits.

Probably the biggest expense you'll incur once the baby is born (excluding a college education) is for child care, which is especially expensive for infants. Even when your child is old enough to go to school, you'll have after-school care, summer camps, and other related expenses. Check out day-care providers well in advance of the birth of your child in order to find one that you feel comfortable with and that you can afford. If 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 report his or her social security number to the IRS when claiming the deduction.

As soon as you start thinking about having a baby, start a baby fund. Put a set amount into the account each pay period to cover unexpected expenses (there definitely WILL be some and I guarantee they will be far more than you ever dreamed of).

Bargain hunt for baby equipment and supplies. It's important to buy the best car seat, stroller, etc., to ensure your child's safety, but your baby will quickly outgrow many of the other items you'll buy, and paying full price is often a waste of money. Talk to friends, check stores that sell used goods, visit yard sales, etc. Your baby will never know the difference.

To help you get a grip on the changes in your finances with the addition of a child, you'll need a budget. Find the painless way to budget at Budgeting 101. If you're not convinced a budget is necessary, check out MsMoney.com's Cost of Raising a Child Calculator (see link to the right). Once you've evaluated the costs and have come up with a plan to cover them, you can sit back and enjoy the new addition to your family.

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