Reducing Baby Expenses

Sorry for my lack of posts recently. Things have been quite busy at the FIwaF household with our first little one coming along.

A picture of our newborn

I might be biased, but this is the cutest baby I’ve ever seen.

However, now I feel like I’m actually somewhat qualified to have the blog title I do, and I have a good concept for a post now.

Babies are expensive

I feel like I hear this everywhere, but I’m not sure I believe it. I believe that kids are expensive, especially once they become teenagers, but babies don’t really need much. Our goal for this year is, not counting the cost of the birth itself, to spend just a little bit more in our little one’s first year of life than we get in tax breaks from him.

The tax benefits

These come in two flavors: the child tax credit, and savings on federal and state taxes thanks to an additional dependent exemption. There is also a credit for Child and Dependent Care, but since Mrs. FIwaF will be a stay-at-home mom, this doesn’t apply to our situation.

The child tax credit is $1,000 for those below the phaseout range (which we are by a wide margin). We are in the 15% marginal tax bracket for our federal taxes, and the exemption amount in 2014 is $3,950, so the extra exemption gets us $3,950 x 0.15 = $592.50. We live in Ohio, and our state marginal bracket is 3.74%. The dependent exemption amount in Ohio for 2013 was $1,700, and I believe it will be the same for 2014. So that saves us $1,700 x 0.0374 = $63.58 on state taxes.

This gives us just north of $1,656 in tax savings, which equates to an average of $138/month we can spend on our baby without his first year costing us anything.

Direct costs

The three biggest costs associated with babies are diapers, formula, and childcare. Since the Mrs. is staying at home and will be breastfeeding, the latter two are non-issues for us.

As for diapers, cloth diapering is not only far cheaper (after some initial start-up cost), but way better for the environment as well. Something I wasn’t aware of until recently is how much oil is used to make disposables – one cup of crude oil is used to make the plastic in just one disposable diaper, not to mention the waste of tossing so many diapers in the trash. We have spent about $145 on cloth diapers that should last at least the first 6 months. We’ll need to spend another bundle to upsize when he gets bigger, but overall, the cost is far lower than that of disposables. Another benefit is that we’ll be able to use these diapers for future kids too, so it’s a huge win. We haven’t started cloth diapering just yet since he’s not even a week old yet and we got some disposable diapers from baby showers.

If any other new parents or parents-to-be are interested (or even if you have kids but hadn’t given this a thought yet), here’s some information we found helpful. The first Amazon review for this product describes pretty well how much you’ll need to get started and has some other good tips, and this YouTube video provides a helpful how-to.

So we’ve killed the 3 biggest costs for our son right there. Besides food, diapers, and someone to care for him, he doesn’t need too much else. Besides a new car seat (which you should never buy used), everything else can be gotten secondhand. We got a bassinet from my in-laws (the same one my wife slept in as a baby) that they obviously don’t need anymore. Baby clothes can always be gotten from friends or relatives whose children have grown out of them (if you’re reading this, thanks Alex!), or at worst, from a second-hand store. A crib, for when the baby gets bigger, is something you want to be careful buying used, since new safety regulations have come out fairly recently and old cribs frequently don’t meet these codes. The crib, as well as a lot of the additional “nice to have” stuff, we got from friends and relatives at baby showers, and most if not all of these we will be able to keep and use for future children.

All told, I think $138/month is quite a reasonable budget if the mother can stay at home. We’re budgeting $150/month for this first year (just more than our tax credits give us, as I stated above). January we bought the diapers, and we’ve had some start up expenses for small things in February, so we are right on track with these estimates.

Other costs

The above having been said, the baby will actually cost us quite a lot of money in indirect costs. Since my wife will be staying home with the baby, she won’t be working a paying job. However, we believe the benefits of raising your own kids, the health difference of breastfeeding vs. bottle feeding, all combined with the cost savings associated with not paying for child care and formula make this sacrifice very, very worth it.

Additionally, I’ve only discussed the baby’s first year costs. I know as our son grows older that he will cost more and more, especially when it comes to food.

To sum up

Although we hear all the time how expensive it is to have a baby, if you take steps to minimize the big costs, and don’t feel like your baby needs everything brand new, a baby can be quite cheap starting out. I hope some of the ideas above are helpful! Please feel free to let me know in the comments if you have any other ideas or tips for reducing baby expenses.

The Basics

As I mention in the newly updated about page of the blog, my wife and I are hoping to achieve financial independence by the time I am in my early to mid 40s (I am 26 now). Before getting into the specifics of our plans, I would like to discuss our basic values, as finances are concerned. These principles shape all of the decisions we make and how we view our money, so it’s important to make them clear and stick to them!

Keep priorities in order

Money is, in the grand scheme of things, not that high on the list of priorities – there are many things more important than money. My list includes such things as:

  • Maintaining a proper relationship with God
  • Behaving ethically and growing in virtue
  • Being a good husband and father
  • Caring for those in need
  • Enjoying your work

If making money or saving money interferes with anything on that list, I need to remind myself of what is really important. Money is an important tool in our world, well worth paying attention to, but it is still just a tool, and not an end in itself to be valued.

More stuff won’t make you happy

I once read a quote that has really stuck with me.

“People were created to be loved. Things were created to be used. The reason why the world is in chaos is because things are being loved and people are being used.”

I don’t know who originally said this, but it is a powerful quote indeed. As a society, we need to turn off the radio and the TV and stop listening to advertisements that convince us that we need more things. You may think you’re smarter than the ads you are bombarded with on a daily basis, but if they didn’t work, companies wouldn’t pay so much for them.

I’m sure I’ll think of more things as soon as I hit “Publish,” but that’s what the edit button is for.

Have you given thought to your priorities and guiding principles when it comes to money? What are they?

Deciding on a Mortgage – 30 Year or 15 Year?

Hello! This is my first post on a blog I created a couple of weeks ago, and it was prompted by a friend posting a question on Facebook. This question demanded far too long an answer than a Facebook post could deliver: “Should we get a 30 year mortgage or a 15 year mortgage?” I’m a math and engineering type (spreadsheets soothe me), so I hope I don’t scare too many people away with numbers and calculations!

It depends

It’s a common question for a new homebuyer to ask: 15 year or 30 year mortgage?

The answer is, of course, it depends. You probably know the basics – a 30 year mortgage has a lower monthly payment, but you pay more on interest over the life of the loan. What you might not know is just how much more interest. Let’s look at a $160,000 house bought with 20% down for an example. A 30-year loan might have a 4.39% interest rate and a 15-year loan might have a 3.39% interest rate (these rates are today’s rates from the bank where I have my mortgage). Closing costs are irrelevant for the sake of this discussion, since we are only looking at 15-year vs. 30-year and not considering whether it’s worth paying points. If people are interested, I can get into that in another post.

Here’s some data about the options:

30 year loan 15 year loan
Monthly Payment $640.22 $908.15
Interest Paid over Full Loan $102,478.51 $35,467.17
Interest Paid First 5 years $26,899.54 $18,807.64

For a 30 year loan, your monthly payment will be $640.11. You will pay $102, 478.51 in interest over the life of the loan. Of that, you will pay $26,899.54 in interest in the loan’s first 5 years.

For a 15 year loan, your monthly payment will be $908.15. You will pay $35.467.17 in interest over the life of the loan. Of that, you will pay $18,807.64 in interest in the loan’s first 5 years.

A home buyer who picks a 30-year loan pays almost triple the interest that the 15-year borrower pays. I don’t know about you, but I don’t want to pay $65,000 extra in interest if I can help it.

The monthly payment

“But I can’t make that kind of monthly payment,” some are surely saying. “What if you lose your job?” others may ask. And to be sure, these are legitimate concerns. If there’s one thing that 2008 taught us, it’s that buying a house and taking out a mortgage is nothing to be done lightly.

If you are not saving at the very least 20% of your income (we shoot for 50%), DO NOT BUY A HOUSE. If you do not have at least a couple of months worth of costs in the bank that you can draw on in case of an emergency, DO NOT BUY A HOUSE. If you have never tracked your spending and cannot give an accurate picture where your money is going, I would recommend getting that in order before buying a house.

Also, keep in mind all of the costs associated with a house. You don’t just have that mortgage payment. You also have property taxes, homeowner’s insurance, repair/maintenance costs (estimates put this between 1-3% of your home’s price, per year), and mortgage insurance if you can’t put 20% down. That’s not even counting more complicated costs like the opportunity cost of money tied up in home equity or transaction costs for buying and, later, selling the house. Jim Collins, one of my favorite financial bloggers, has a great post talking about these costs.

Spreadsheets!

To get a good idea of the total costs of owning a house, and a comparison of various loans, I’ve created a Google Drive spreadsheet that you can look at. If you have a Gmail account, you can go to File > Make a copy… to create your own copy that you can edit to fit your individual needs. If you don’t have a Gmail account, create one! It’s free! Only tan fields should be edited, and I will warn you that delving into the second sheet and making changes there could throw off all the calculations, but you can see the amortization schedules there. In a future version, I hope to add some more calculations to account for the effect of inflation.

The two most important lines are highlighted in yellow at the bottom of the first sheet: your true cost of homeownership, and your cash outflow. For a better explanation of the differences between these, read the article I linked above.

Looking at the spreadsheet, considering the first 7 years of the loan, we see the following:

30 year loan 15 year loan
Monthly Payment $640.22 $908.15
Average interest paid per month $439.35 $292.28

As long as you can afford the extra $267.93 per month while still stashing 20% of your paycheck away in an IRA, 401k, and/or high-yield bank account, picking a 15 year loan over a 30 year loan saves $147.07 per month in interest. For the extra  $267.93 per month you put towards your mortgage, that’s a guaranteed 54.9% return on investment! Sounds like a clear winner to me.

Because this is dragging on so long, I’m going to have to leave the discussion of paying a 30-year loan on a 15-year schedule and Adjustable Rate Mortgages for tomorrow. Spoiler alert: in defiance of conventional wisdom, I don’t like the former, and I do like the latter, provided you will either move out within 5-7 years or you will aggressively pay down the principal of the loan. Since we’ll probably be moving out in 5-7 years, the 5/1 ARM saves us interest and gives us a lower monthly mortgage payment. But I’ll talk more about that later.