The decision to start a family is one of the biggest and most important choices you’ll ever make. It’s usually accompanied by joy, stress, excitement, and an array of questions surrounding your physical and financial house. As new parents, not only will you be faced with a list of items and products to purchase and compare, but you’ll also need to ensure you have a plan in place that addresses your spending, your estate, and your insurance coverage to ensure that your new family is taken care of.
When planning for a baby, below are 3 financial considerations to review to ensure you’re prepared:
Spending & Savings Plan
According to this article, it will cost the average middle-income couple $241,080 to raise a child that was born in 2012 (not including extras like sports or club involvement, private schools, dance classes, etc). That’s a quarter of a million dollars – per child! Of course, it’s not a bill that will hit you at once, but will happen over time. In order to alleviate some of the financial stress or strain that may come along with it, take some time to get the following in order and update your family budget:
- Emergency Funding: Build up your emergency saving to include 3-6 months of living expenses. Err on the side of caution if only one of you will be working and build up 6 months of reserves.
- Groceries: What will your expenses look like with diapers, formula and baby food in the mix? Start pricing these items out and understand if and where you’ll need to make adjustments.
- Transportation: What does your current car situation look like? Do you have safe and adequate room for a car seat? Will you need to put aside money for a second or replacement vehicle? If so, now is the time to set a plan in place to work towards this goal.
- Medical Costs: Read the fine print on your insurance policy and call your customer service line with questions. Will your premiums and co-pays increase? By how much? Talk to your employer about tax-advantaged plans they may have in place to assist you.
- Childcare: This report by the U.S. Census Bureau shows that childcare costs have risen tremendously since we were kids. Take some time to check out the costs of childcare in your city, whether it’s daycare groups, individual care or hiring a nanny. Are you or your spouse planning on making the switch to a stay-at-home parent? Be sure to sketch out what your new financial picture will look like.
- College Funding: Are you hoping to assist your children with college? Consider the ever-increasing costs and set a plan to start saving as early as possible. This chart gives a great overview of the savings vehicles available.
- Wills: Whether you do or don’t have a Will in place, now is the time to either implement one or review it. Having a Will not only ensures that your assets are distributed in line with your wishes, but it allows you to assign an executor to handle any matters associated with your estate and select a guardian for your children.
- Guardianship: When choosing a guardian for your children, ask yourself who your children would feel most comfortable with and whom you feel would most responsibly and effectively control any funds left to them. Consider the values, beliefs, and overall emotional comfort your chosen guardian could provide to your children. Remember to have a discussion with those you choose and to nominate a contingent should your primary be unwilling or unable to serve.
- Trust: A trust document can provide instructions on how you would like any funds left to your children to be managed and spent. In addition, you can appoint a trustee (also a primary and contingent) to manage the funds.
Having the right kind of protection in place is just as important as having a detailed spending and estate plan. Evaluate your existing life, health and disability coverage and ensure that you have the appropriate amount of insurance in place should something happen to you or your spouse.
- Life Insurance: Life insurance is important because it ensures that if your family is faced with the premature death of you or your spouse, the coverage provided by the policy can be used to replace any income lost and ensure they will have enough money to cover their living expenses and sustain their lifestyle. If you don’t have coverage or if you have an existing policy, be sure to consult with your agent on the appropriate amount of coverage for your situation. Items such as income levels, debt load, and existing assets should be taken into consideration.
- Disability Insurance: Disability insurance is an often overlooked, but important piece of coverage. A disability income insurance policy ensures that should you become disabled for a short or extended period of time, you are paid a percentage of your current income on an ongoing basis. These types of policies safeguard you and your family against a complete loss in income.
- Health Insurance: Review your health insurance coverage and ensure you understand the parameters and costs around routine check-ups, prescriptions, premiums, deductibles, and co-pays. If you find your existing policy doesn’t meet your needs, look into other options available through your employer or agent.
Mary Beth Storjohann, CFP® is the Founder of Workable Wealth and is a Financial Planner for Gen Y. She works as a writer, speaker and financial coach and is passionate about working with individuals and couples in their 20s and 30s to help them plan for and navigate through the financial questions and issues that arise during their post-quarter-life transitions. You can also follow Mary Beth on Twitter and Facebook.