1. Talk It Out

The first thing you really need to do is sit down with your spouse and make sure you’re on the same page about taking care of a baby. While you envision a two income household and childcare, she may envision being a homemaker. While you may want your children to earn scholarships to college, your spouse may want to save money for them. Hopefully you discussed these topics before marriage, but if not, definitely spend the time to do it well in advance of the due date. On a non-financial note, it’s also time to make general plans of how you feel about punishment, babysitting, names, religion, nursery decor, etc.

2. Plan Healthcare

The fact is a baby can cost you a lot before you even see it’s pink cheeks for the first time. Monthly prenatal visits, vitamins, maternity clothing, healthier foods, and the delivery costs add up tremendously. Now would be a good time to make sure you have health insurance, and be aware of your deductible and covered expenses. Depending on your level of insurance, plan on spending anywhere from $1000-9000 on your entire pre-birth experience. Also, be aware that you will need to add your baby to your health insurance almost immediately, which can increase prices significantly per month. If both spouses have access to insurance, you may choose to hold two separate policies to save costs. Also, you should now consider increasing your life insurance benefits; if you or your spouse were to die, how would the remaining spouse be able to care for the child?

3. Budget, Budget, Budget!

It may go without saying, but you seriously need to go ahead and plan what it’s going to cost per month and find where that money is coming from. For us, we just finished off paying my old debt, which means we now have that $400 extra to spend. We were going to put it toward a house, but it looks like that will have to wait now! You may need to find ways to cut other categories down. Maybe less entertainment, or less eating out (especially since you will likely not be going out much anyway). But plan now so you will know what to expect! If you are totally clueless to the expenses of a baby, don’t worry; I was too. As a general rundown, I will give some basic monthly costs for you to consider:

1. Disposable Diapers (200-300/month) – $100
2. Wipes (4 boxes/month) – $15
3. Formula (30 cans/month) – $110
4. Childcare ($125 per week) – $500

Obviously, you may be able to cut costs in these categories, but do your research. You can save money by breastfeeding and cloth diapering, but those have very big drawbacks, especially for working couples. You may also be able to work from home, and save on childcare for awhile (while they don’t demand 100% attention) Also, this does not include the larger purchases such as equipment, nursery items, clothes, bottles, etc. that will be needed. And you may want to work on increasing that emergency fund! Now, you have one other member of the household that may need something unplanned!

4. Get Family & Friends Involved

You may have one untapped resource right nearby, and that is your friends and family. Maybe they will throw you an amazing baby shower that provides all your needs for the next year. Maybe someone is planning to have permanent birth control soon, and is getting rid of all their baby stuff. Maybe they will offer childcare. The point is, now is not the time to be proud. It does take a village to raise a child, and you do not have to do it completely alone. Allow them to help you out, and you will not be sorry! Even in a bad economy, family and friends will come through for you. As an example, my dad is going to build a cradle that will be both useful and become an heirloom of sorts. Our church will throw a shower, and one family member has offered up lots of gadgets, clothes, and equipment (car seats, swing) from her previous babies.

5. Cut Corners

This is where you decide what you really need. Does a baby need a a whole new changing table, or would an existing bed or dresser suffice? Do you need 3 strollers, or would one good one work? Do you need brand-name diapers, or would more generic brands work? Do you really need to outfit a whole new nursery, or would the baby be just as happy with the basics? Let’s face it – babies only use half of this stuff for a few months of their life and then it is worthless. And I’m not here to judge you if a decked-out nursery is what you want to do; it’s all about discovering what you believe is most important, and cutting corners on the rest. But at least explore your options – go to a baby consignment shop, or visit some garage sales in nicer neighborhoods. Research how to select quality, sturdy equipment.

6. Start now!

I use the toilet paper analogy – it is very expensive when you wait to buy until you need it. But if you use sales and coupons and stock up ahead of time, you can spend much less! Diaper coupons are common, but do not run all the time. Start saving coupons now, and you will appreciate it later. Even better than that, start buying them! Go ahead and start stocking up when they are on sale and you have a coupon. Look for free samples of baby products online. If you start deal-hunting now, you can be well stocked up when the time comes, and spend much less per month on the essentials. It’s also ok to start buying clothes on sale; post-Christmas we found several outfits for just a few dollars each! Be clever and wise, and you may get away without much budget increase at all!

Having a baby almost guarantees you will be spending more than you anticipated, but with some advanced planning it does not have to be a bad thing! Some smart budgeting and deal-hunting may make the transition almost effortless. The main point is to start talking about it with your spouse, and the two of you getting creative to find ways to give your baby a great childhood without ruining you financially! The more you plan now, the easier it will be when the time comes.

UPDATE: Evan from My Journey to Millions has featured this post in the 241st Carnival of Personal Finance. Be sure to check it out; there are several great articles in the carnival this week!

Put simply, Dave Ramsey’s plan fails on several grounds. First, you should plan on saving upwards of $450 per month for it to work remotely. Second, you’ll be buying some incredibly unreliable cars at the beginning, causing potential need for major repairs, ruining any chance of this working. Third, you won’t be in a new car for 6-7 years or more at the rate of upgrading. Fourth, you have to pay taxes/tag/title every year! Fifth, it doesn’t change the fact you’re putting away $450 a month for the next decade or more. For someone who has a lot of good monetary advice, it surprised me how wrong he is on this point.

This inspired me to figure out my own scenario. As a nuclear engineer, I was/am all too familiar with the concept of decay, and the types of models they present. I’m not so hot on calculating the cost benefit scenarios of owning a house (yet), but knew I could come up with something that takes advantage of the depreciative value of a new car.

First, I had some conditions. I do not want to ever spend more than $300 per month on a vehicle, unless my financial situation has a major shift in the next decade. Second, I don’t want to buy used again. Third, I want to trade in the car at that sweet spot of few repairs and maximum trade in value, or the plateau in the depreciation curve. I calculated about 7-8 years on most cars for that to happen, given more than average driving (150k miles in 7-8 years). Fourth, I don’t demand an incredibly nice car each time, but I do want to progressively get nicer cars. Fifth, I don’t mind using credit to buy, as long as the monthly payments are ok.

I came up with this:

As you can see, I’m taking each car long-term. If you have to have the flashy newest car all the time, this isn’t going to work for you. But until I can afford my Bentley, I don’t mind driving a sub-$20k car for the next decade. I prefer to get a small economical car and then upgrade the heck out of it. It makes it feel more luxurious, rather than getting the standard package on a nicer model. I also use consumer reports regularly, so my trade-in values are maximized and I don’t get a lemon. The trade-in values I used in the chart may be a bit off, but the plan still works; just slower.

My current car is a 2005 Impala I bought in Jan 06, with 30k miles at the time. I expect it to last me seven years total before repairs start mounting (compare this to a $4k junker that Dave wants you to buy). At that time, I will have about $8,000 to put towards a new car. This means I can now finance a cheaper amount on a much nicer car, which means I can then drop to a 3-4 year note, rather than 5. This means, in turn, I can upgrade sooner, I can maximize the trade-in value, and will have more years of savings the next time I upgrade. Eventually, I will be able to get a $25k car on a 1-year note, still paying just $250 per month. If you follow it to its natural conclusion, I will one day be able to purchase a $30k+ car with cash.

I purposefully do not calculate in the interest gained during the savings periods. That extra money can be used for the taxes/tag/title. I also do not include the tax benefits in claiming depreciation on the new cars, which also saves you a little bit. If you look at the chart, you can see how even bumping it up to $300 per month would either get me a much better car, or allow me to upgrade more quickly each time. I simply pay $250 or so for the next few decades, and I’ll eventually be in a BMW. Or a nice mini-van, depending on my family situation then.

The issue here is whether or not you feel comfortable using credit wisely. Currently my car note is only 4.8% interest, which would make it stupid to pay cash ahead of time, considering I can earn more than that over five years in one of many available savings accounts. When you factor inflation into the equation, it makes the scenario even better to use credit for a car purchase rather than paying cash up-front. In fact, if you get a good rate like I did, it almost makes more sense to finance the whole car for 5 years every time, and keep your money in savings to use for the monthly payments. I have not run the calculations on that, but I imagine you would be able to add $1-2k to each new car given the extra returns, and a lot of dealers will give you a better deal if they know you’re financing for 4-5 years. Also, if you’re willing to stick with a cheaper car all the time, you can decrease your monthly payment gradually, making your car less of a monthly burden.

The best thing is if problems happen, such as an engine replacement or something major (worst case scenario), it doesn’t ruin your whole plan. You use your current savings, and the next upgrade, you simply buy less of a car or even finance slightly longer. Also, the major thing in all this is that you don’t have to start some plan right away! You simply start where you are (likely making payments on a car), make a commitment to save about two years after repayment before buying again, and let the cascade begin. The point here is that if you don’t have to have the newest thing all the time, and are confident with using credit to your advantage, you can come out better in the long run, without making major sacrifices in the beginning.