Expecting? Or expecting to expect anytime soon?
It’s a good thing it takes almost ten months to build a baby, since there’s a lot to do to get ready. No sooner do prospective parents see that telltale pink plus sign, then the endless round of doctors’ appointments, prenatal classes, and interviews with child care providers gets underway.
By the time the baby’s due date comes into view, most soon-to-be parents believe they are more than ready for his or her arrival. Physically, emotionally, it’s time.
But what about being financially prepared? Judging from the new parents I’ve counseled one, two, even five years after the child’s birth, the only ducks in a row are the ones they put on the walls of the nursery. They certainly aren’t the financial ones.
The reality is that many young couples have never done much financial planning before they have kids, and have little idea of what exactly is at stake. So here are the important financial steps for expectant parents to put on their countdown-to-baby lists, and to check off as diligently as they do their ob-gyn visits.
1. Push your sights beyond your due date, and get an idea of the annual costs of raising your child. The U.S. Department of Agriculture has a great calculator. Enter the number of your children, where you live in the U.S., and your income, you will get an estimate of the incremental costs of parenthood in various categories, such as housing, clothing, transportation. Next, create a budget reflecting these costs. If the bottom line is negative, keep reworking the budget until you can make ends meet. Look at it this way: as a new parent, you probably won’t have time for travel or gym memberships. Sleep, which fortunately costs nothing, may well become your first choice for an evening “out.”
2. Determine what insurance coverages you will need.
- Start with health care coverage, and make sure your child is covered on your policy from his or her date of birth. Rethink your deductibles: babies practically come installed with ear infections and tummy upsets, so it may be advantageous to lower your deductible, and pay a higher premium.
- You’ll need life insurance to provide for the child if you or your spouse dies. You’ll want enough insurance to cover the loss of parental income, extra childcare expenses, and the costs of higher education, if you intend to pay for your child’s college. Don’t forget a wedding, too, if that is one of your dreams for your child. For most new parents, term insurance is the way to go: you can get a lot more coverage for your premium dollar than you’ll get with a whole life policy.
Disability insurance is important, too, to cover the loss of income in the event of an illness or accident that prevents you from working. Hopefully, you already have this insurance: it does not take a baby to need this coverage – it’s important even if you are just providing for yourself. But sometimes a new baby is exactly the kick we need to get things done that should have been done before. After all, you’re the parent now.
3. Get estate planning documents in place or up-to-date. Even if you have very little in the way of assets, and expect to have even less after taking Step #1 above, you need a will to name a guardian for your child should you and your spouse/partner not be there. Furthermore, if you have done Step #2 and obtained life insurance, there may, in fact, be assets for the support of this child. In this case, you may want to set up trusts, either separately or as part of the will, to hold these assets at least until the child is of legal age.
4. Review and revise all beneficiary designations to include your new child. In many cases, you will want this child to be a contingent beneficiary on life insurance or retirement accounts, after naming your spouse or the child’s guardian as primary beneficiary. But here’s where Step #3 comes into play: because a child cannot legally own assets until he or she reaches either 18 or 21, depending on your state, you will not want to simply name your child as either primary or contingent beneficiary, but instead name the trust you created as part of your estate plan.
5. In addition to or instead of a trust account for your child, set up a custodial account. This type of account can also be used to hold assets for the benefit of your child, as well as be named as a beneficiary of a life insurance policy or retirement plan. There are some tax advantages to this type of account, where earnings up to a certain amount are taxed at the child’s rate, rather than yours. It is also a great idea to have this account ready for any money gifts from grandparents and others. A 529 plan for college costs can also be set up, with you as the owner and your child as the beneficiary. In this case, just be sure that the 529 plan you select can accept third-party contributions from those doting relatives and friends. Just tell them you already have all the onesies and sleepers you’ll need, and give them the account numbers instead.
Yes, as this list makes clear, there is a lot of work to do to get ready for baby. There’s a reason it’s called labor. But it doesn’t necessarily have to be painful or exhausting. Talk to CFP® professional who can help you through the planning process, and deliver the best possible financial future for your new child.