My wife and I recently celebrated the birth of our first child, so it felt appropriate and timely to discuss some of the financial planning issues related to growing a family.
As you prepare for life with your new child, it is time to prepare a new financial plan for your family or make any necessary changes to your existing plan. You should consider how your baby will affect your budget and taxes, make sure you have adequate insurance, and protect your child’s future with a well-thought-out estate plan.
BUDGETING FOR THE BABY
The birth of a child is an opportunity for you to create a new budget or review your current budget. It is important to consider the impact that your child will have on your living expenses as well as account for any adjustment to income that might occur if you or your partner decides to transition from working outside the home to working inside the home to care for your baby. You may also need to adjust your retirement savings to ensure that your family can live comfortably, now, and in the future.
EXPENSES THAT TYPICALLY INCREASE WHEN YOU HAVE A BABY
Some of the new expenses you will likely incur when welcoming a new baby to your family may be obvious, but others may not. A few major expenses to think about are summarized below:
- Your grocery bill: Diapers and formula (you may still use some even if you’re breastfeeding) are very expensive. Later, when your baby turns to solid food, you’ll have to also factor in the cost of baby food.
- Your housing costs: If you don’t already live in a house or large apartment, you may find yourself wanting to, or needing to move once your baby gets old enough and takes up a lot of space with toys and equipment.
- Your transportation costs: If you have a small car, you may find it difficult to fit in a car seat, and you may need or want to buy a new car. Or, if you have an old car, you may want to buy something more reliable now that you have to worry about your baby’s safety.
- Your clothing and household expenses: You may find yourself spending less on yourself and more on your child now that your budget has to stretch. You’ll likely spend a lot initially to buy essentials for your child and then spend a bit more each month than you’re used to on items your child needs.
- Medical expenses: You may make frequent visits to health- care providers, which may mean increased costs. Your health insurance premium will likely dramatically increase as well. It is important to review your healthcare options (if you have options) to determine which plan is right for you.
- Cost of childcare: Whether you look for full-time daycare or hire an occasional babysitter, you need to plan for the impact this will have on your budget.
As you prepare for life with your new child, it is time to prepare a new financial plan for your family or make any necessary changes to your existing plan. You should consider how your baby will affect your budget and taxes, make sure you have adequate insurance, and protect your child’s future with a well-thought-out estate plan.
INITIAL EXPENSES
The initial outlay for your baby can be quite high. You’ll have to equip your home with new things like baby furniture, a stroller, a highchair, an infant seat, a car seat, bedding, and clothing, among other items. You could spend well over several thousand dollars equipping your home with just the basics, and many new parents spend a lot more.
However, when you are shopping for the arrival of your baby, try to separate emotion from need. Of course, you want your baby to have the best, but you don’t really need the best in most cases. Your baby won’t look any cuter in an expensive crib, and many parents can tell stories about the top-of-the-line stroller they purchased and then found that it to be too heavy to push easily. A great thing to do is to ask other parents for recommendations, then shop around. Usually, you don’t have to sacrifice quality and safety to save money. If you start shopping far enough ahead, you can find good deals in discount stores, department stores, and superstores. You could also look to purchase certain items secondhand, which has a significant impact on the price; of course, you may want to buy some items brand new, but you don’t need to buy everything brand new. You can look for items online, in thrift stores, consignment shops, and yard sales, although finding clean secondhand items in good condition can be a challenge. Ask friends and relatives, too, if you can borrow baby items that they’re not currently using. If your friends and family are throwing you a shower, ask for items you need. Also talk with other parents when putting together your list for your baby shower, because it is easy to think that you need certain things, when you may actually find you’ll never use some of those items.
SAVING FOR EDUCATION
It’s wise to begin saving for your child’s education as early as possible. There are several ways to do this. You can begin by depositing a certain amount every month into a savings account, a brokerage account, contribute to a college savings account (529 account), or take advantage of a wide variety of other investment vehicles.
SAVING FOR EMERGENCIES
If you don’t have an emergency fund, now is the time to set one up. If your car breaks down, you need to move unexpectedly, or you lose your job, you can dip into your emergency account. An emergency account should normally contain an amount that equals at least three to six months’ worth of living expenses.
INCOME TAX CONSIDERATIONS
At tax time, you may be eligible to claim certain tax credits that can help with the cost of raising a child. Credits include the child and dependent care tax credit (if you have qualifying child-care expenses), the child tax credit, and the earned income credit (having a child raises the amount of income you can have and still claim the credit).
ESTATE PLANNING ISSUES
Estate planning is a subject which we find many people avoid. It is certainly difficult to think that you may not be around to raise your child, however, it’s crucial to leave behind instructions that clarify your wishes in the unlikely event that you die before your child grows up. If you don’t currently have a will, now is the time for you to draw one up. If you do have a will, you should make sure to review it. You’ll want to nominate a guardian for your child and decide how you want your assets distributed. You may also consider setting up a trust to protect your child’s interests after your death. Additionally, you should also review your beneficiary designations.
You may also want to write a letter to your child that will be your testament (i.e., a message from you that your child can read at a future date). It can be about anything — your philosophy on life, your family history, or some advice that you’d like to give your child. You can attach a copy to your will or put it in with your important records for safekeeping.
NOMINATING A GUARDIAN
Choosing a guardian for your child is very important. If you die without naming a guardian for your child, it will be up to the court to do it for you, and the person whom the judge names may not be the person you would have chosen to look out for your child. When choosing a guardian, look for someone who will look out for the best interests of your child, preferably someone who has the time and energy to meet the demands of raising a child. Make sure that you ask a potential guardian whether he or she would like to serve as your child’s guardian. Often someone you think is the perfect choice really doesn’t want the responsibility. For this reason, you should also nominate a contingent guardian.
Before your child is born, it is important to review your insurance coverage to make sure that you and your family are adequately protected.
Periodically rethink your choice of guardian. As your children grow older, you can ask them whom they would like to live with in the event you die. Although this can be a scary subject for children, it’s important to raise the issue with them. In addition, once your children are old enough, tell them who their guardian will be in the event you die.
SETTING UP A TRUST
Setting up a trust can be a good way of passing your assets along to your child. A trust document lists how you want any money left to your children spent, and it can ensure that your child’s money is protected. A trust can help the guardian manage assets and make sure that estate funds are used to benefit your children according to your wishes.
INSURANCE ISSUES
Before your child is born, it is important to review your insurance coverage to make sure that you and your family are adequately protected. If you or your partner are going to quit your job(s), you may cut off your life, disability, or health insurance benefits from that job, and you may need to buy more coverage.
HEALTH INSURANCE
You should make sure to review your health coverage. Make sure that you understand your deductibles, your co-payments (if any), and whether your policy covers testing, emergency care, and all the costs of delivery (including anesthesia, if necessary). Find out about claims-handling procedures, how long you will be able to stay in the hospital once you’ve been admitted for delivery, and whether your choice of doctors is limited. Usually, your baby will be covered from the time of birth but check your insurance policy anyway to make sure. If both you and your partner are covered by or eligible for coverage under an employer-sponsored policy, you may need to decide which policy offers the best (or most cost-effective) family coverage.
LIFE INSURANCE
You should also make sure to review your life insurance coverage. If you or your partner were to pass away it is important to make sure that you have adequate life insurance to replace the lost income your family is dependent upon. Life insurance may also still be necessary if you are not working; if the stay-at-home parent were to pass away, the working parent would likely need to come up with funds to cover day care expenses, which could be provided for via life insurance. It is not easy to think about death, but it is an important part of planning to make sure your family is protected.
DISABILITY INSURANCE
Before you had a child, you may not have worried about becoming disabled. Now that you’re planning to have a child, you may be thinking about what would happen if you suffered an injury or illness and couldn’t work for days, months, or even years. If you and your partner are working and one of you became disabled, would you be able to rely on one of you for income?
To protect your family in case your income is cut off due to disability, consider purchasing long term disability insurance if you don’t already have it. You may have a group disability policy through your employer, or you may want to purchase an individual disability insurance policy. A disability policy won’t replace your total income, but it will likely replace 60 to 70 percent of your earnings.
There is certainly a lot to think about as you grow your family, and it is understandable if you find yourself feeling overwhelmed. Realize that not everything needs to be, or can be, completed overnight; some things will take time, but it is important to begin the process of thinking about those changes, and start making the adjustments to your plan as necessary. Make sure to utilize your resources and support systems; your family, friends, and your BWFA team.
TYLER KLUGE
CFP®, CPWA®, CDFA®, CEPS
Financial Planner
trkluge@bwfa.com