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Starting a Family

Photo of a Couple and Their Newborn Baby

This article is for those whose lifestyle includes raising a family. These days, having children is more of a choice than it was a few generations ago. That being so, there's no reason not to prepare a financial plan for a family lifestyle. The basics are the same as any financial plan: set short, intermediate, and long-range goals, and then work out the numbers. When planning to raise children, you need to know that children are expensive—very expensive. If you are having your own children—the old-fashioned way—there are increased medical costs for prenatal care. Then there's medical care for newborns, which is followed up by regular pediatric visits. If you're adopting, you can skip the prenatal and possibly the neonatal care. Either way, raising children means increased medical care costs or increased health insurance premiums to cover your children. Then consider costs of clothing and diapers. Young children outgrow clothing very rapidly—especially shoes, which aren't cheap. If you are like most parents, you won't want to wash diapers either—so be prepared to spend a lot on disposable diapers. Don't forget housing. A child or two means an extra bedroom—now. Do you need to move to larger quarters before starting a family? If you plan to move later, you still need to factor those costs into your plans.

Another thing to consider: it is very likely that one parent is going to have to stop work for a while, which means decreased family income. If you are financially able to hire a nurse or nanny, you may not have to sacrifice job income, but you will have the additional expense of a caregiver.

Consider whether you want to raise more than one child and the spacing in ages of multiple children.

When planning financially to start a family, make a list of all the increased costs and changes in income that will result from having children and the duration that this will last. Consider too whether you want to raise more than one child and the spacing in ages of multiple children. It may be more economical to have several children close in age to allow the "stay at home" parent to re-enter the work force earlier rather than later. Having children close in age can also help economize on clothing costs if a younger child uses clothes that an older child has outgrown but not worn out. Children close in age may also be a benefit later when the school-aged children apply for financial aid, since aid is partially awarded on the basis of cost of all children in school during the same academic year. This applies to private elementary and secondary schools as well as to institutions of higher education.

You also need to prepare for future childcare costs including toys, sports equipment, education supplies, outings, and higher education. Oh, and probably dental braces. You may as well start saving for these now while the kids are still young so you have time to accumulate sufficient resources. If you are saving for your child's higher education, the IRS offers tax breaks to persons using the Coverdell education savings account or your individual state's sponsored 529 qualified tuition program.

Some good news is that children are a tax break. But, you will still spend a lot more on the kids than you save on taxes. Each child gives you a dependent deduction allowing you to deduct an amount specified by the IRS from your taxable income ($3,400 in 2007 and $3,500 in 2008) subject to IRS income phaseout and dependent definition rules. Direct medical expenses and medical insurance premiums are itemized deductions subject to IRS limitations. You may also qualify for certain tax credits that are a dollar-for-dollar reduction in taxes. These include the child tax credit ($1,000 per child), the dependent care tax credit (up to $3,000 for one child and $6,000 for two or more children), and the earned income tax credit (amount depends on income and number of dependents). In order to get the credits, you must complete the appropriate federal income tax return and calculate the amount using the IRS's complex methods. However, with a good tax software program or professional help, this should not be an insurmountable problem. If you want to complete your own tax returns, you can obtain IRS Publication 17, which has all the details. If you pay childcare costs to someone who provides the services in your own home, such as a nurse, nanny, or au pair, you may be subject to paying household employer taxes including withholding, Social Security, and unemployment taxes (see IRS Publication 926).

Raising a family is an awesome responsibility and should be given careful consideration and financial planning. Children will put a great strain on any relationship because of the emotional and financial demands they make. However, if you are properly prepared emotionally and financially, children can be the greatest joy in your life.