Smartest Money Moves at Any Age

From first job to retirement, we tell you how to manage a dozen events that can change your life.

From Kiplinger's Personal Finance magazine, July 2005

What to do when baby makes three

For most couples, having a first child is a financial shock. For Mark and Krista Schumacher, Justin's birth packed a double whammy: They slashed their income by 25% when Krista quit her job to stay home.

But the Schumachers, who live in Pickerington, Ohio, had taken pains to cushion the blow. Throughout their five-year marriage, they had banked Mark's pay raises as a physician's assistant, building up significant retirement savings and a healthy emergency fund. They don't have credit-card debt and are paying off their car loans. "We believe in the pay-yourself-first philosophy, and my wife's frugality is contagious," says Mark, 32.

When Krista, 29, quit her job as an interior designer, the couple saved money on gas, clothing and dry cleaning. And with Krista staying home, they don't have to worry about child care. But that wasn't enough to offset the loss of Krista's salary. So the Schumachers trimmed costs by dropping land-line long-distance service and shopping for a better deal on auto and homeowners insurance. Total savings: about $1,000 a year.

Mark and Krista have also turned into homebodies. "I play with Justin more than I play golf," says Mark. They eat out less often and don't pay for services they can do themselves, such as mowing the lawn and cleaning the house.

They also decided to refinance their home loan with a 30-year, fixed-rate mortgage, reducing their house payments by about $3,000 a year -- enough to cover a boost in Mark's disability and life insurance when Justin was born. Their son's birth also prompted the couple to draw up wills and name a guardian for Justin.

Expanding their family from two to three translates into major tax savings. Not only does Justin qualify for his own personal exemption this year -- the $3,200 deduction reduces the family's tax bill by $800 -- but the Schumachers also qualify for the child tax credit, which shaves another $1,000 off their federal taxes. Mark continues to contribute the maximum $14,000 per year to his employer's 401(k) plan, which reduces his taxable income by that amount and builds their joint retirement savings -- already worth about $140,000. His company matches his contribution dollar for dollar.

Now Mark and Krista can focus on starting a 529 state-sponsored college-savings plan for Justin's education. And they recently purchased an investment property in Florida, which they hope to rent out and then sell in a few years. -- Mary Beth Franklin

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