If you are expecting or have recently added a child to your family, you have likely begun making big plans for the future. One of the most important things to consider while preparing for a growing family is how your financial habits, responsibilities and goals might change. Here are five things to consider:
1. Make a decision about childcare. With a new baby comes new expenses, and often the biggest of these for working couples with young children is childcare. In some situations, it may make more financial sense for one parent to stay home than to spend a majority of their income on childcare. To help make this decision, calculate the cost of childcare and weigh that against your household income. If it’s near what one parent makes, you may want to consider alternative options to daily childcare. Remember that this decision shouldn’t be made hastily, and the benefits may be different for each family. Also keep in mind that if a parent leaves the workforce, he or she will lose any employer-sponsored retirement plans and may sacrifice future career advancement opportunities.
2. Understand your insurance coverage and employee benefits. Making sure you have adequate health care coverage is critical during your pregnancy and when your baby arrives. Read your health insurance policy and include your maximum deductible in your budget to avoid unexpected expenses. Understand paid maternity and paternity leave benefits, and anticipate any unpaid time out of the workforce. Carefully evaluate your life insurance and disability coverage—an accident or illness that keeps you from working or causes your premature death could be catastrophic for a growing family. Also consider purchasing a life insurance policy for your child, which can be an effective, systematic way to set money aside for your child’s future.
3. Start saving for college now. If you wish to enroll your child in a private elementary or secondary school, begin factoring the associated expenses into your long-term budget. If you’re able, get started saving for your child’s college education now with time on your side. While it may be tempting to procrastinate on saving for college, setting aside manageable amounts now will help you avoid using funds from your own retirement or savings accounts in the future.
4. Limit your purchases. Having a baby is exciting, especially as you discover the fun products marketed specifically to new parents. In addition to clothing and toys, you will likely need a changing table, crib, car seat, highchair and more. Before you succumb to impulse spending or become overwhelmed, determine what you really need and want and do some comparison shopping. Consult friends or family members who have young children. Babies outgrow the need for these things fairly soon, and it’s possible you could inherit some items on your list that are still in good shape.
5. Re-evaluate your financial goals and legal documents. With all the financial preparation for a baby, it’s easy to forget about your other important long-term goals. Ensure you’re still contributing a percentage of your income to a 401(k), IRA or other retirement account and invest funds systematically. If you haven’t already, establish a will, power of attorney and a guardianship plan.
According to the U.S. Department of Agriculture, a middle-income family will spend approximately $245,000 (not including education) to raise a child born in 2015. But don’t be overwhelmed—planning even before your baby arrives can help you get started on the right track. Consider working with a financial professional who can help you work toward your financial goals for every stage of life—from raising children to retirement.
William “Drew” Watson CFP® is a Financial Advisor and Private Wealth Advisor with Ameriprise Financial Services, Inc. in Owensboro, KY. He specializes in fee-based financial planning and asset management strategies and has been in practice for 20 years. To contact us by phone, please call 270-684-8424, or mail to 111 West 3rd St., Owensboro, KY 42303. You may also visit our website at www.williamawatson.com.