Beyond bottles and diapers.
Becoming a parent can be one of the most exciting, yet confusing, times of a person’s life, since everyone likely has conflicting opinions and advice about what to do. As with any significant life event, we’re here to help you wrap your head around it all. Following are key financial considerations that anyone planning to bring home a bundle of joy should be thinking about (beyond paying for that cute onesie you just found online).
Budgeting for baby.
Adding an adult member to your household may help reduce your monthly costs, but adding an infant will increase them substantially. Start re-working your budget before you bring home the newest member of your family. These expenses in particular are likely to increase:
- Groceries. Diapers and formula are expensive. Later, when your baby turns to solid food, you’ll have to figure in the cost of baby food.
- Housing. If you don’t already live in a house or large apartment, you may find yourself moving once your baby gets old enough to take up a lot of space.
- Transportation. If you have a small car, you may find it difficult to properly install a car seat, and you may need to buy a new car. Or, if you have an older car, you may want to buy something more reliable now that you’re worried about your baby’s safety.
- Clothing and household costs. 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 for items your child needs.
- Medical costs. Your baby will require several visits to the doctor, and you’ll probably pay a co-payment for each of these trips unless your health insurance plan covers 100% of well-baby care. Your health insurance premium will likely increase as well, unless you already had family coverage for you and your spouse.
- Child care. Whether you look for full-time day care or hire an occasional babysitter, you need to plan for the impact this will have on your budget.
Factor these new expenses into your budget, and if a partner works less or stops working altogether to stay at home with the baby, be sure to factor that change in income into your new budget as well.
The list of things you’ll need for a baby may seem overwhelming: A bassinet, changing table, blankets, stroller, high chair, car seat, clothes — and that’s just the beginning of the list. But before you buy every little thing, think about what you need just to start out. You don’t need to have items suited for a one-year-old when your baby is brand new — you can buy those later.
Also, ask other parents for recommendations, then shop around. You may not have to sacrifice quality and safety to save money. You can find good deals in discount stores, consignment shops, yard sales, department stores and superstores. You might also borrow baby items from your friends and family. If your friends are throwing you a shower, ask for items you need, not just things you want.
Start saving for your child’s education as early as possible. You can use a wide variety of investment strategies like depositing a certain amount every month into a savings or money market account. You could also contribute to a 529 plan and encourage friends and family to do the same in future years instead of buying birthday or holiday gifts for your child.
If you haven’t already, set up a fund to help pay for emergencies like an illness that you or your child may develop, car repairs, or unemployment. Your account should contain at least three to six months’ worth of living expenses. Starting and growing an emergency fund may seem daunting at first, but by taking small steps regularly, you can accomplish it and help protect yourself against the unexpected.
Planning your estate.
Estate planning may bring up some unpleasant thoughts, but it’s crucial that you leave instructions clarifying your wishes in the unlikely event you die before your child grows up. Here are the basics.
- If you don’t currently have a will, make one. You’ll want to appoint a guardian for your child, decide how you want your assets distributed, and choose an executor for your estate. Note, however, that a will isn’t an “end-all be-all” document. While it’s helpful to share your wishes, it’s up to the probate court to actually carry them out.
- For this reason, you may also want to set up a trust, particularly a revocable living trust, to protect your child’s interests after your death. A trust also helps the guardian manage assets and helps ensure that funds from your estate will be used to benefit your children according to your wishes.
- Beneficiary designations are also important. In addition to your property, you’ll want to designate who gets any assets remaining in your retirement and investment accounts.
Estate planning can be very complex, so be sure to consult with an estate planning lawyer as you work through these considerations.
Review your insurance coverage to make sure you and your family are adequately protected. Specific policies to consider include:
- Life insurance. Having a child will increase your need for life insurance coverage. Many experts recommend your life insurance equals five times your annual salary.
- Health insurance. The best time to check your maternity coverage is before you’re pregnant. Make sure you understand your deductibles, your co-payments, and whether your policy covers testing, emergency care, and all delivery costs. You’ll also need to know how long you can stay in the hospital for the birth, and whether your choice of doctors is limited. Usually, your baby will be covered from the time of birth, but check anyway to make sure. If both you and your partner are covered by an employer-sponsored policy, or are eligible for it, you may need to decide which policy offers the best (or most cost-effective) family coverage.
- Long-term disability insurance. Before you had a child, you may not have worried about becoming disabled. Now, you’ll need to think about what happens if you suffer an injury or illness and can’t work for a while. Long-term disability insurance won’t replace your total income, but depending on the policy, it can generally replace 50-70% of your earnings.1
At tax time, the tables turn — having a child can actually save you money in this department. When you file, you may be able to claim an exemption for you, your spouse, and your dependents if your adjusted gross income is below a certain “phaseout” amount. You may also qualify for one or more tax credits, including the child and dependent care tax credit, the child tax credit, and the earned income credit.
Soon-to-be parents certainly have a lot on their minds and are likely experiencing a spectrum of emotions, too. Having solid financial building blocks in place, however, can not only help calm these nerves but can also help create a foundation that’s promising and secure for both parents and baby.