The Unheard-of Financial Plan Every Would-Be Parent Needs to Hear About

NEW YORK (TheStreet) -- Child care is one of the largest expenses related to raising a child today. Parents needing day care can expect to pay about $4,600 per year in Mississippi to nearly $15,000 per year in Massachusetts.

Most expectant parents, however, don't have a clear idea when it comes to planning for child care. Unlike a 529 plan, where money is set aside for future college costs, a solid child-care plan is largely unheard of.

Although no tax-advantaged plan has yet been designed to encourage saving for future day care or nanny costs, would-be parents should be able to create a good child-care plan on their own in three steps:

Step 1: Decide early what type of care the child will receive.

Joseph Clark, managing partner at the Financial Enhancement Group, believes it's important to answer these questions well in advance: Will the child be put in a day-care center or a family child-care home? Will the child need a nanny?

"Would-be parents should figure out their monthly child-care costs and put that in a savings account or reduce their spending by that amount to see if they can absorb the financial pressure," says Clark.

A recent report from Child Care Aware of America breaks down the costs of full-time child care in every state. It includes average fees for both child-care centers and family child-care homes.

In New York, for example, the average cost for infant care in a day-care center is about $14,000 per year or $1,167 per month. In this case, Clark says, the couple should set aside an amount to cover the first six months of care, or around $7,000.

If would-be parents choose to have their child cared for by a nanny, they should be prepared to shell out an average of $831 per week in New York City, according to data from the 2012 International Nanny Association Salary and Benefits Survey.

Whether it's day care or nanny care, "work up to six months of that need in a cash-type savings vehicle," says Clark. "It will require discipline now but it will eliminate some stressful nights later on."

Step 2: Calculate out-of-work income loss.

After a child is born, most couples have a significant loss of income as one parent stays home to take care of the child for the first three to six months. Expectant parents should take this into consideration and save for it before the child is born.

To figure out how much needs to be saved for the unpaid time away, the most straightforward way would be to figure out the net pay the parent will forego by staying home, says Michael Garry, managing member of Yardley Wealth Management.

Assume that the parent who will stay home with the baby makes about $35,000 per year, or about $1,350 every two weeks. After taxes and deductions, the net pay comes out to about $1,100. If the parent is going to stay home for six months, the family needs to replace $14,300 ($1,100 times 13 bi-weekly paychecks); if the parent wants to stay home for three months, then the couple should save $7,150 ($1,100 times 6.5 bi-weekly paychecks).

The parent who plans to stay home with the newborn should check his or her employer's policies for time off, adds Jessica Maldonado, chief compliance officer for Allos Investment Advisors. Be sure to read into the specifics. How many days are paid? Can FMLA (Family and Medical Leave Act) time be used? What about sick days, personal days and vacation days?

"You should also take into consideration the kind of company you work for and how invaluable your position is," says Maldonado. "If you're the VP at a small company, wearing many hats and with several direct-reports, it might be more important for you to return quickly." Some employers are willing to compromise some flexibility in work hours for having a new parent back to work sooner.

Step 3: Weigh child-care cost vs. potential income production.

Rick Kahler, president of Kahler Financial Group, says it's a good idea to compare the cost of child care with the income of the lowest wage-earning parent. In many cases, he says, the cost of child care negates working outside of the home.

In Wisconsin, for example, the state median income for a two-parent family is $79,589, while average cost for infant care in a day-care center is $10,775 per year, or about $207 per week. In the city of Milwaukee, the gross weekly salary average for full-time, live-out nannies is $500.

Assume that the lower-earning parent makes $2,500 per month in net pay. After work-related expenses (transportation costs, lunch, etc.) of about $350, the amount available for child care and other household expenses is $2,150. If this parent's contribution to the household budget is $1,000 per month, subtract that contribution from the monthly available and $1,150 will be available for child care.

"There are roughly 4.33 weeks in a month, so the child-care costs could not exceed $265 per week or this family would be going backwards," says Maldonado.

For many parents, however, even though there is no financial advantage to working outside the home, it's an emotional and mental necessity. Parents need to weigh their needs with their child's needs and the financial implications of child care.

"It is wise to create a plan for child care," says Maldonado. "But for it to be successful, the plan should include both financial as well as emotional and values-based components."

To get a sense of how much child care costs in your area, check out the following reports from Child Care Aware of America and the 2012 International Nanny Association Salary and Benefits Survey.

-- Written by Marilen Cawad in New York.

>To contact the writer of this article, click here: Marilen Cawad.

>To follow the writer on Twitter, go to http://twitter.com/marilencawad.

>To submit a news tip, send an email to: tips@thestreet.com.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

More from Personal Finance

All 2018 Graduates Must Watch Jim Cramer's Bucknell Commencement Speech

All 2018 Graduates Must Watch Jim Cramer's Bucknell Commencement Speech

The Best Investment Advice? Stay Diversified

The Best Investment Advice? Stay Diversified

Use This Simple Investing Strategy to Stay Ahead in a Rollercoaster Stock Market

Use This Simple Investing Strategy to Stay Ahead in a Rollercoaster Stock Market

5 Most Ridiculous Royal Wedding Memorabilia Items

5 Most Ridiculous Royal Wedding Memorabilia Items

7 Ways Your Financial Adviser Should Help You Survive Rising Interest Rates

7 Ways Your Financial Adviser Should Help You Survive Rising Interest Rates