Adding a child and dropping an income: a time for planning

Your suspicions are confirmed: You're going to become parents for the first time. It's a heady prospect for many, but one that is often followed by concern over family finances - especially if both parents-to-be have well-paying careers and the wife decides to change hers from budget analyst to full-time mother.

In such cases, it's important to remember that ''financial decisions are not primary. Having a child is the primary decision, from which there is financial fallout,'' says Thomas Foley, vice-president for financial planning at IDS/American Express in Minneapolis.

''One nice thing about becoming parents,'' he adds, ''is that you have some time to plan.''

''It's a time to take a look at your total (financial) situation,'' agrees George Barbee, excecutive director of the Consumer Financial Institute in Newton , Mass. ''People often are afraid that they'll be confronted with what they can't do. In reality, planning gives you greater control and well-being.''

That's a theory that my wife and I were unknowingly about to test when we learned last spring that she was pregnant with our first child.

Early on she decided that she preferred full-time motherhood to returning to her job as a budget analyst - if we were able to keep going after a 53 percent drop in income. While she worked, she enjoyed both a modest salary and some additional income from outside work. My journalist's salary is supplemented by some modest outside income that is too unreliable to include in our budget. We rent our home, the car is paid for, and after four months, we're finding that, so far, there is life after a 53 percent income drop.

The first step, says Mr. Barbee, is to sit down and evaluate financial goals for the next one or two years, reset spending priorities, and ''recognize the need for trade-offs.''

This, he says, is important even if a mother-to-be initially plans to go back to work after the baby is born: ''I've seen a number of cases where the wife plans to go back to work. But after three months, the baby gets cute and looks like a real person, and the mother decides to stay home. In other cases, women have tried to go back to work but find that the job is not as exciting.''

Once goals are set, Barbee says, ''you have to understand where the money is going so you know what faucets to turn off or tighten.''

This involves some sort of recordkeeping. But you needn't keep track of every penny. For us, the bookkeeping system involves a checkbook and a notebook. The notebook keeps track of each paycheck and of fixed expenses, including savings and a general category that includes food and incidentals. After accruing a prorated amount to each fixed expense, those accruals are added together. The result is subtracted from that period's income, and the balance is entered into the checkbook for discretionary spending.

The obvious benefit of setting up some form of bookkeeping system is that it helps show where the money is going. Without some sort of recordkeeping, we might know that we're saving money when we change our spending pattern in one area, but we wouldn't know how much and in all likelihood would not be able to direct the savings into other areas.

We've found a not-so-obvious advantage: While accruals build toward annual expenses such as insurance, or a sporadic but large expense such as fuel oil, the money stays in our NOW account earning interest, albeit modest. In other types of accounts it could at least help keep the balance high enough to avoid check charges.

In some cases, accrual bookkeeping can help build an unexpected nest egg. For example, last spring our furnace gave out and our landlady replaced it with a new, more fuel-efficient model. The combination of weather, a fall in fuel oil prices, and a more fuel-efficient unit has left our current fuel ''account'' some $500 ahead of where it was this time last year. That money can go into savings (or to some other agreed-upon priority) or serve as the base from which we can begin to accrue money (at a slower rate) against next year's estimated oil expenses. Either way, that means cash that won't be going up the furnace.

Before our son's birth, we were able to use the accrual process to work down charge-account balances, pay for delivery and nursing costs, squirrel away money for baby furniture, and prepare for income taxes.

Once income and expenses are tracked, ''then you have to determine your priority areas,'' Barbee says. ''Ask yourself, 'Where can we agree the budget can be cut back?' ''

For us, some immediately apparent cuts included:

* Transportation. Driving to work costs close to $102 a month when tolls, parking fees, and gasoline and maintenance are included. When both of us worked, that was close enough to the $96 a month it would have cost in rapid-transit passes to make driving worthwhile. But with just one commuter, the $48 pass saves $54 a month, and in exchange for 11 months' worth of passes, our auto insurance company offers a modest discount on its premiums. And the time spent on the road can now be put to more productive use.

* Phone service. After looking at our phone use and phone bills, we found we could save money by buying our phones and reducing the type of service we use. This will cut our local phone costs by about 50 percent.

In the change from a two-income to one-income family, another area to explore is taxes.

''Tax planning is less influential with one income (than with two), but it can still be a source of discretionary income,'' notes Mr. Foley of IDS/American Express. He suggests taking all the deductions allowable on the W-4 form on file with employers. Two days after our baby was born, I marched into work and changed my W-4 and related state income tax forms, yielding an additional $140 a month in take-home pay.

Both Foley and Barbee stress the importance of savings.

''Savings is a discipline and a process as much as it is an amount,'' Barbee says. ''Don't lose the process.''

He suggests mixing short-term saving goals, such as a dinner out or a weekend away from home, with longer-term goals. These might include what Foley calls four cornerstones. He lists them in the order of priority: (1) a sum set aside for emergency expenses; (2) coverage for risks (which includes insurance) so that family financial goals can be met even in the face of mishaps; (3) fixed assets, such as savings and certificates of deposit; (4) and equity, such as stocks and bonds or real estate.