Your First Child: 6 Ways to Financially Prepare
If you’ve got a child on the way, congrats! Talk about an exciting life transition! While welcoming a new child to your family is exciting, it also welcomes new set of areas to plan for financially. Keeping your child healthy and thriving is a key job as a parent, so is financially preparing yourself for the expenses that come along with having a baby (today and tomorrow).
It’s important to have a plan that incorporates the expected (childcare, college, budgeting, changes to income or career) as well as the unexpected (insurance, estate, emergency fund).
Here are the top 6 ways to financially prepare for your first baby so you can enjoy your new bundle of joy without taking on extra financial stress.
1. Revisit your Budget
Your spending will change once you have a baby but before it does, get a handle on where you stand now.
Step #1: Confirm what your living expenses are today (start with the last 12 months). Budgeting softwares like www.mint.com can be helpful for automatically tracking your spending.
Step #2: Anticipate how much this child will cost upfront for delivery and each year going forward (childcare, food, medical costs, changes to career or income, will one spouse stay at home, college savings, etc). According to studies, raising a child in the US costs on average $272,000 to raise the child to age 18 (adjust accordingly for your state and area). It pays to be prepared for this so you don’t derail saving for your own future in the process.
Step #3: Be honest with yourself about your spending, cut back on spending as necessary to ensure you can manage these increased expenses once the child is born. If you don’t currently budget, start one, and see where you stand. What categories do you spend the most money in? Are there any categories you can cut back, such as dining out, entertainment, eating lunch out at work, coffee shop stops, or impulse buys? “Spending Awareness” is the greatest financial gift you can give to yourself and your family.
Financial Tip: Always plan conservatively, plan for higher than expected expenses to be safe, this gives flexibility and less margin for error.
2. Create an Emergency Fund
An emergency fund is even more important when you have a baby. You never know what might go wrong and the last thing you want is financial pressure adding to what’s already going on. Whether you or your spouse lose a job, someone falls ill, or the baby has an emergency, having cash set aside to handle these emergencies will provide some peace of mind knowing you’re financially prepared.
The key is to have 3 to 6 months of expenses set aside at a minimum depending on your situation and risk tolerance. For example, if your essential monthly living expenses (after taxes) are $4,000/month, you should have $12,000 - $24,000 set aside. Put the money in a high-yield savings account that you don’t touch unless it’s truly for an emergency.
3. Plan your Careers
If both you and your spouse work now, what will happen when the baby is born? Will you go down to one income or will you both work and pay for daycare? Does your company offer maternity and/or paternity leave?
There’s no right or wrong answer to the situation, but you should consider what you might do ahead of time. If you’ll cut down to one income, you’ll need to trim your budget considerably and have plenty of time to save money to make up for the lack of a second income.
If you both plan to work, look at daycare costs in the area. Even if grandma and grandpa will watch the baby at first, always have a backup plan financially in the event they can no longer watch the baby. The cost of childcare in the U.S. ranges from $5,436 to $24,243/year but could be much higher in certain areas of the country as well.
4. Choose the Right Health Insurance
Health insurance is a key component to nail down before having kids, but it’s even more important after you have kids. As a couple without kids, you might have gotten away with a high deductible and high co-pay insurance because you didn’t use it much.
Once you have kids, your medical expenses could increase exponentially meaning you might want to have better health insurance, even if it might cost more. When you choose health insurance before having your first child consider:
· The deductible
· The preventative care included
· The amount of the co-pays & premiums
· The doctors and hospitals considered ‘in network’
5. Think about your Estate Plan
An estate plan may not seem like a high priority when doing financial planning for young families in their 20’s, 30’s, or 40’s, especially if you don’t have assets, right? I would rethink that. The unexpected happens all the time and you want to make sure your family isn’t left with an “estate planning nightmare” should you pass unexpectedly. These situations can and do happen all the time, you should be prepared for them.
As for the child, one priority is choosing a guardian for your child should you both pass. At the very least, a will is necessary to name a guardian, appoint an executor, and direct how to split up your assets so that your child is provided for in the future.
You may also want to consider a healthcare proxy to let someone else make your healthcare decisions if you are incapable; a financial durable power of attorney to handle your financial affairs if you become mentally incapacitated, and a HIPAA release so those named can receive medical information about you.
6. Buy Life Insurance
If you don’t have life insurance, let having a child be the important prompt to review everything and make sure you’re adequately covered. Think of the expenses your spouse would incur if you were to pass away and vice versa. At the very least, you’d want to replace your income and leave enough money for your spouse to raise and care for your child, payoff debts, etc.
Even if one of you will not work, both should consider life insurance as there are many expenses the working spouse would incur if the non-working spouse were to pass away, including childcare.
Your employer may offer group life insurance, but it’s often not enough coverage. At the very least, consider a term life insurance policy which is usually affordable and can provide the financial coverage your spouse and child need.
Final Thoughts
Preparing for your first child can seem overwhelming. You must learn how to provide for someone completely dependent on you medically, financially, and emotionally. While the medical and emotional components come more naturally, the financial part requires plenty of planning. It’s so important to know what to prepare for ahead of having your first child (the areas listed above are just a starting point).
If financially preparing for your first child is important to you, consider speaking with a financial planner to help guide you through this process.
Schedule a free 30 minute introductory call with me here
Together we can explore “you” in a way that’s deeper than dollars and cents, and start a conversation to get you and your partner on the same page financially. I’m here to help you create a life vision for you personally and your family, then make the money moves necessary to bring that vision to life. You can live for an epic life today, while still being on track for tomorrow.
Jonathan Grannick, CFP®
Wonder Wealth LLC
San Diego Financial Advisor | Fee-only Fiduciary
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