The arrival of a child in your life is a joyous event. The proper planning, however, goes beyond baby naming, doctor’s visits, and gender-reveal parties. Children add an element of uncertainty to your finances, and a deeper need for you to be responsible and plan for the future. These seven steps will help you prepare for all that lies ahead.
Step #1 – Create a budget. If you haven’t already discussed and started planning for your financial goals, use the news of your child’s impending arrival to begin the conversation. A family budget is an excellent baseline, with both parties coming clean about spending and savings habits. Diapers, extra food and child care costs, along with additional medical expenses, all need to be included. These may be higher than you expect: the annual average cost of child care in many states comes close to a year of college tuition. Adding a child to the mix means unexpected costs, which should be reflected in your budget.
Step # 2 – Establish an emergency fund. Establishing a liquid source of cash should be a priority, because each new family member increases the likelihood for unexpected medical and other expenses. Consider using a high yielding savings account for safety and accessibility. In today’s market, high-yield accounts are those offering more than 1 percent interest. Fund the account until you have three to six months of household expenses, as a starting point. On an ongoing basis, evaluate the amount set aside and replenish as needed. This one step alone can help parents feel prepared and avoid a downward spiral of debt when unexpected expenses occur.
Step #3 – Investigate tax strategies. There are some financial positives to starting a family! You may be eligible for the IRS child tax credit, the earned-income tax credit, and/or the child and dependent care credit. There are also tax exemptions for dependents. All of these depend on the specific financial circumstances of the parents, and should be explored with a qualified tax advisor.
Step #4 - Establish longer term goals for the family. These may include retirement, college savings, or a vacation property. It’s important to balance the needs of different generations. For instance, don’t generously fund a college plan but fail to save for your own retirement. Start by funding the minimum in your company-sponsored retirement plan to get any available match, but strive to reach the maximum amount permitted. Gradually increasing contributions every quarter can be an effective way to save more without feeling a big pinch all at once. If you do not have a workplace retirement plan, establish a Roth or Traditional IRA. Once your retirement savings are on track, add to college savings vehicles, like 529 plans.
Step #5 – Protect against death and disability. Your new responsibilities include contemplating worst case scenarios. Evaluate any group life and disability coverage provided by your employer, and consider supplementing with individual policies. Consider future expenses such as college, mortgage and retirement for the survivor, as well as current cash flow, when you consider how much insurance to purchase. If one of you is a stay-at-home parent, consider the economic value of the child care and homemaking being provided. Stay-at-home parents may need life insurance, as well.
Step #6 – Execute estate planning documents. Find an attorney who specializes in estate planning to help you execute wills, financial powers of attorney, and healthcare documents. The choice of guardian for your child in the event both of you die is one of the most difficult decisions. It is also critical to name someone to act as trustee and/or investment advisor to handle your child’s assets if both of you die prematurely. Often these two roles, guardian and trustee, are best filled by different people to properly match skill sets and avoid potential conflicts of interest.
Step #7 – Don’t forget the details! Adding your baby to your health insurance, obtaining a birth certificate and a Social Security number, and planning for child care options should all be handled in a timely way. The more you do before your baby’s arrival, the better. Afterwards, your time will no longer be your own.
You need to prioritize your financial goals and coordinate many tasks to lay the foundation for your family’s finances as you bring a baby into the world. A CERTIFIED FINANCIAL PLANNER™ professional can help bring all of these steps together for a family.