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Attack of the Tiny Wallet Eaters

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It’s that time—your biological alarm clock is ringing, urging you to be fruitful and multiply. But what’s that other loud bell going off? It probably sounds like a cash register flashing the amount of $650,000. That, according to BabyCenter—an SF-based online resource for new and expectant parents—is what it’s going to cost you to keep your child housed, fed, clothed, transported, educated and healthy for the next eighteen years. With such a daunting investment on the horizon, we asked Brandon Miller, a local certified financial planner with Ameriprise Financial, for advice on how to bring up baby without breaking the bank.

Don’t leave yourself in the poor house. The first move many of Miller’s clients want to make is to tap into their unsuspecting nest eggs. Many believe that instead of continuing to contribute to their retirement plans, they should divert that money into starting a college fund. This is actually an unwise financial strategy. “I tell people to continue contributing to their retirement funds. [Diverting the money is] a great gesture, but down the road, there is a better chance of someone picking up the tab for your child’s education. Whereas no one’s going to be giving you money to quit working,” says Miller. That’s for sure. And when you do begin a separate college account, be sure to …

Make your college (and preschool) fund tax-deferred. You know all about 401Ks, but do you know about 529s? Those are savings plans that allow your money to accrue, tax-deferred, toward a post-secondary education, and Miller recommends them. Typically, the intention is to use the savings for prepaid tuition and books at an in-state, public university. But even if your kid doesn’t go on to become a Cal Bear, the money can be put toward an out-of-state and/or private institution. Another option is a Coverdell Education Savings Account (CESA), which allows you to save in many of the same ways as the 529, except the funds can be used for private schooling in grades as young as pre-K.

Put a price on your head. It’s time to talk life insurance. Decide how much coverage you need and for how long. If you can afford it, Miller suggests getting permanent life insurance (which stays in force and pays a death benefit regardless of when you die) rather than term insurance (which only pays a death benefit for a fixed amount of time). Here’s why: A permanent life insurance policy accumulates a cash value, much like a savings account, which grows (tax-deferred) over the years and which you can borrow against or convert into a retirement account. Permanent insurance costs more, but the premium remains fixed for life. “Without knowing you personally, I’d recommend insuring yourself for a crude amount of a million dollars,” says Miller. “That should pay off the mortgage and car and maybe even leave a little to hire a nanny.” If investment is not your bag, however, then opt for term life insurance, which is much less costly than a permanent policy—especially at first—and which allows you to buy a policy with a larger face value. Miller recommends a twenty-to-thirty-year policy to cover your child’s most vulnerable years.

Budget in the miscellaneous. The day-to-day needs of little ones fall into many categories, most of which are sure to drain the purse. Miller recommends making a list of the things that the baby will change—you might want a different car, for instance—and using some of your current budget allowances (yep, you guessed it, for entertainment and travel) to cover your new baby-related expenditures. “Build up a cash reserve,” says Miller. “Diapers are freaking expensive.” Stay calm, though. You can keep it simple. One of the best lists we’ve seen of the basic supplies you need for an infant is at apartment therapy the 9-month-cure. The site’s pared-down list includes just the necessities: stroller, bouncy seat, crib, baby bath, car seat, and diapers.

Well, those items, and $650,000.
By Kasey Clark

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