In the years before a child goes to school full time and even when they are enrolled in school, there are many costs associated with childcare that can be overwhelming to manage. If you are a parent, or are planning to become one, budgeting for childcare costs can help you anticipate and prepare for all the related expenses — expected and unexpected.

What to look for when planning for childcare costs

If you have or are planning to have children, chances are that you’re thinking about all the expenses that come along with it and maybe even feeling a little overwhelmed. A huge part of being a parent is dealing with the cost of having and raising children.

There are three basic components to childcare costs:

Total costs of care

This covers everything from day care and education costs to what you spend to take care of your child’s physical and emotional well-being.

Tax preparation and planning

There are many tax benefits available to families with children, so tax planning is an important part of every childcare plan.

Future saving

Planning ahead for the future means looking forward and starting to plan for big expenses, such as education, health or medical costs and big purchases.

If you are aware of these elements, you can start to plan ahead for the big and small expenses that come along with being a parent.

Why plan ahead for childcare costs

Planning ahead for childcare costs is smart because even the simplest plan will help you avoid financial problems. Taking the time to list out all your potential expenses and shopping around for more cost-effective alternatives — on everything from kid-sized furniture to after-school programs — will be a major help. You'll have a good sense of the range of costs, and have plenty of time to prepare for them.

How to plan for childcare costs

Having a family means you have greater financial responsibilities — there are some basic things to include when planning for childcare costs to ensure that your family’s financial picture is secure.

Here are the basic elements of a solid childcare plan:

1. Protect your family against health, medical and other emergencies.

As you start a family and have more people depending on you, you’re no longer focused on just protecting yourself. In order to protect your family against any health, medical or other emergencies, you need to have the right insurance coverage and emergency funds in place.

• Health insurance

You need health insurance for everyone in your family in case of illness or injury. When you have kids, you have to update your health insurance to either add them to your policy or get them their own policies. When you do this, your premiums might change. If your health insurance doesn't cover all healthcare related costs (most policies don't), work up a budget for covering co-payments and deductibles for at least the minimum schedule of typical doctor visits and vaccinations.

When expecting a child, check to make sure mom's health insurance covers maternity. The costs of labor and delivery can cost tens of thousands of dollars if paid out-of-pocket.

• See also: Health insurance

• Life insurance

If anyone in your family relies on your income to survive, you also want to have life insurance. If you don’t have life insurance, you need to get it. If you have life insurance, you may need to increase your coverage. When you update your policy, your premiums may change.

• See also: Life insurance

• Emergency funds

You should always have a buffer of at least $1,000 in your checking account. This will help you deal with unexpected emergencies like home and car repairs or medical costs. It also will help you avoid using credit card debt or over-drawing your checking account, so you don’t get hit with bank penalties and fees. If you’re new to budgeting, you can build up to $1,000 buy setting aside $19 a week. In a year, you’ll have your $1,000 buffer.

Once you have your $1,000 buffer, it's probably a good idea to build up an emergency fund. The right size for your emergency fund depends on your job security and other factors, but for many people is an amount that could cover 3-6 months of living expenses.

• See also: Emergency funds

2. Budget for childcare related expenses in and outside the home.

Childcare means paying for childcare both inside and outside your home. Daycare or school tuition, babysitter or nanny fees, before or after-school care, summer and day camps — and all this adds up. When you are planning to have kids, add these items to your budget and adjust your spending so you can cover these things. If you have no idea how much they cost, see if you can ask parents in your community or call around to compare rates.

Remember you may be covering more than just the actual tuition of a day care center or hourly rate of a babysitter — you may need to cover school materials, field-trip fees, transportation fees and other expenses.

Also know that the cost of everything else in your household budget could go up when you have children — utilities, gas payments, food costs, clothing costs and other non-essential expenses. If you’re adjusting your budget to account for children, you’ll need to add more money in your budget for all these things.

• See also: Budgeting

3. Compare the cost of childcare vs. staying at home.

In general, you have two childcare options: Do it yourself or pay someone else to do it. In many American households, both parents work. If you work and have children, this probably means that you’re looking at spending a significant amount of money on childcare during work hours.

Many couples that have two incomes look at the cost of childcare and assume that they’ll have more money if they keep two incomes coming in. There are many reasons for staying at work beyond finances, but we recommend actually writing down the costs of different working versus non-working alternatives.

For some families, it might make financial sense for one or both parents to make a major career shift in order to pay for childcare. You may change your job so you can work from home or adjust your work hours to work part time. While you may take a cut in salary, the money you save in childcare might make up for the income loss. Or, one parent may decide to stop working entirely because it just isn't worth it financially. We recommend working with a financial professional to compare options and pick the one that makes the most financial sense.

• See also: Financial professionals

4. Make sure you’re paying taxes correctly and taking available tax credits.

If you have specific questions about children and filing taxes, we recommend working with a tax professional, since it can get complicated. However, if you do your taxes, here are some kid-related federal tax rules to know about:

• Exemptions

A child counts as an additional exemption on your federal income tax return. That means you're able to deduct an additional $3,700 (in 2011) from your income before computing your taxes, for each kid you have. That saves taxes for most people.

• Child tax credit

This tax credit might allow you to reduce your federal income tax payment by up to $1,000 per child. The tax credit will depend on your income, but even a small reduction can help.

• Child and dependent care tax credit

If you and your spouse are working or looking for work and you pay for day care, the child and dependent care tax credit might give you a tax break. You can claim a credit for up to $3,000 in childcare expenses for one child or up to $6,000 for two or more children. The amount that you get back will be based on your income. In order for you to take the credit, the care provider has to have an official federal tax identification number. Money paid in cash to a neighborhood babysitter only counts if you report the babysitter's full information on the form where you claim this credit.

• Nanny tax

A nanny tax is an employment tax that you are required to pay on behalf of someone that does work in your home, such as a house cleaner or babysitter. In 2011, this tax can apply if you pay someone covered by the rule more than $1,700 during the year or $1,000 during a calendar quarter.

• See also: Taxes

5. Understand your employer’s childcare benefits.

Some employers offer a benefit called the Dependent Care Flexible Spending Account (FSA), which allows you to put a portion of your pre-tax income aside to pay for day care programs, including summer camps, for children under age 13. Residential summer camps do not qualify for this benefit. FSAs are a "use it or lose it" benefit — you lose any money you don’t spend at the end of each year.

The IRS limits the amount you can set aside to $5,000 annually, or half that if you are married and file separate tax returns. Your employer might limit your FSA even further. Some employers reimburse you for certain childcare costs, as well, so when you are looking for a new job and evaluating job offers, make sure you research these benefits.

• See also: Flexible spending accounts

6. Plan ahead for education and other big expenses.

It’s never too early to start planning ahead for your children’s college costs. With costs rising every year, there are many saving options to help parents who want to plan ahead for education savings. Our recommendation is to look into a Section 529 Education Savings Plan, which is a special investment account that is tax-free as long as the money is used for higher-education expenses. For those who might want to pay for education costs before college, also look into Coverdell Education Savings Accounts (ESAs), which have similar tax benefits.

You can start to plan ahead for other big purchases as well. Maybe you know you’ll be buying your child a car when they are able to drive or you want to build an addition on your house. If any of these are goals you are considering, include them in your budget and plan ahead.

7. Expect the unexpected.

Life comes at you fast and you’re not always prepared. If you have enough savings, you’re not keeping high credit card balances and don’t have a lot of debt and you’re being mindful of spending, you should be able to set aside money for unpredictable events. As your children age, update your plan for childcare costs every few months and adjust your budget to reflect any changes. Looking to the future will help you anticipate any expenses that you can start planning ahead for.

8. Look for community resources for education, fun and childcare sharing.

Libraries, community centers, churches, museums, non-profit organizations — many times these organizations offer cheap and free alternatives for fun, recreation and childcare. This can help you spend quality time with your children while keeping your costs down. If you can find ways to trim extra expenses from your budget, then you may have more to spend on savings and planning ahead.

Words to know

Unsure about something you read? Many of the financial terms you came across in this article are defined in our financial glossary. A-Z Glossary

Links we like

Here are a couple online features you might find useful:

• IRS Child and Dependent Care Credit: www.irs.gov/taxtopics/tc602.html
• IRS Child Tax Credit: www.irs.gov/publications/p972/index.html
• IRS Household employer’s tax guide: www.irs.gov/publications/p926/index.html
• National Association of Child Care Resource and Referral Agencies (NACCRRA): www.naccrra.org
• Parents Magazine: www.parents.com
• Saving for College: www.savingforcollege.com