Budging the Budget When Baby Makes Three
With the help of a financial planner, a couple fine-tunes their budget before their first baby is born.
Diane and Nick DiArchangel of Rutherford, N.J., are in for some big changes. They bought a three-bedroom house less than a year ago, and now they're planning their first addition -- a new baby, due this month.
Even before the baby arrives, Nick, 33, an assignment editor for a local television station, and Diane, 29, an administrative assistant for a book publisher, are facing some daunting expenses. Out of their monthly take-home pay of about $5,500, which includes Nick's overtime, they write a $1,800 check for the mortgage on their 47-year-old colonial (including real estate taxes and insurance), and spend significantly for renovations and repairs. Nevertheless, they're doing a good job of living within their means.
To see if they've overlooked any ways to make the most of their money, however, the DiArchangels recently analyzed their spending with the help of Family Money. First, they estimated their monthly expenses. Next, over the course of a month, they carefully tracked their outlays by writing down what they spent. Then they compared the two sets of figures to see where expectation and reality diverged.
Nick and Diane's actual monthly spending exceeded their estimate by $367. Some of their extras were one-time-only expenses, such as $120 for Lamaze classes. But other expenditures were ongoing and impulsive. The couple ate up $318 dining out -- $118 more than they had estimated. In fact, their total food costs -- groceries, restaurants and meals on the run -- were much higher than Diane and Nick had estimated.
Another surprise: how much they spent on home improvements. A dedicated do-it-yourselfer, Nick remodeled the kitchen for less than $1,000. But in this particular month, the DiArchangels had set aside $200 for repairs and new projects, and they blew that budget by $95.
Where Their Money Goes
Diane and Nick had several conversations about their spending habits with financial planner Steven Sanders, president and CEO of MDL Capital Management in Philadelphia.
Sanders generally commends the couple for the way they're handling their budget. He notes approvingly that they have no credit card debt. When they use their credit cards -- which is rare -- they always pay the monthly bill in full. They also own their three cars outright. And they've financed their home improvements out of their monthly budget instead of borrowing.
But Sanders identified one major purchase that the couple has neglected to make: life insurance. Neither Nick nor Diane has any coverage, and Sanders suggests that they buy individual term policies worth the equivalent of three to five years' salary. He warns, however, that it may be hard for Nick to find a reasonably priced policy because of his hobby: flying light aircraft. This pastime puts him in a high-risk group, which could as much as double the cost of his annual premium.
The obvious place to free up cash for life insurance, as well as for baby expenses, is in the couple's recreational expenses, particularly their spending on restaurant meals. Nick and Diane defend their recent dinners out as splurges. While they can, they're deliberately taking advantage of their pre-baby freedom. But soon, they will be able to redirect that money to another line in the budget -- the baby's dining-in costs, for instance. If they spend $100 a month less eating out in restaurants, Sanders says, that would more than cover the cost of infant formula, for instance, which runs approximately $700 to $900 a year.
To stay on track with their home improvements, Sanders suggests they plan on doing only a couple of projects a year. Also, if Nick flies less frequently, Sanders says, he can reallocate some of the flying money -- which can run as much as $100 a day for a plane rental -- to pay for the life insurance policies.
Finally, after taking a look at their car costs, Nick and Diane decided to drop collision insurance, because such policies don't pay enough on vehicles as old as theirs to make the coverage worth the cost. Dropping collision, a move Sanders applauds, will save the DiArchangels $83 a month, or nearly $1,000 per year.