Financial Planning for New Parents
Choosing a nursery theme. Poring over baby name lists. Signing up for birthing classes. Becoming a parent is full of new experiences and joyful preparation. Amid these exciting changes, you may also be thinking about how you’ll care for your growing family financially. In this piece, we’ll explore what financial planning for new parents looks like and the steps you can take to prepare as you await your new addition.
Start planning early
It’s much easier to plan over the course of nine months (or more if you want to get a head start) than to try to prepare right before the new baby comes. Not to mention, if you are pregnant, chances are that you’ll have more energy for things like financial planning earlier in the pregnancy than in the home stretch! And if you start to feel overwhelmed, try to focus primarily on the first year of your baby’s life, which will help hone your attention to the most immediate needs.
Create a “New Baby Budget”
Review your current budget and update it to include the added expenses you’ll have once your baby is born. Consider both material items like formula, bottles, a car seat, and more, as well as other services you’ll need such as childcare or a pediatrician. This goes for one-time expenses (like hospital bills) and ongoing costs (like diapers).
Start saving cash
Between added household and medical expenses, and potentially lost income, you’ll need extra cash on hand in the months and years to come. Decide how much cash to save ahead of time, on a monthly basis, to ensure you can cover the following:
- Emergency fund: Review your budget and ensure that you have 3-6 months of your core needs in cash. Remember this will need to be updated to incorporate your “new baby budget” (see above).
- Medical expenses: Now is a great time to review your health insurance coverage and know how much you’ll need to pay for your deductible. The cost of pregnancy and birthing can vary depending on the medical needs of both the mother and the baby. If you have any complications requiring additional care, you might reach the out-of-pocket maximums for your plan. Also, don’t forget to add your new baby to your plan as soon as he or she is born. Check with your company in advance to confirm the window of time you have after delivery to add a new dependent.
- Parental leave: Understand your employer’s parental leave policies, particularly regarding paid vs. unpaid leave. If your income will be reduced for a period of time, be sure to save enough cash ahead of time to cover your expenses until you go back to work. Also, if you decide that one parent will leave his or her employment to become a full-time stay-at-home parent, take that into account when considering your new budget.
Get life insurance
If someone else depends on your income (aka, your new child), you probably need life insurance. Consider that if your income was suddenly gone, would the people who depend on you be able to maintain their lifestyle and continue to save? In the case of minor children, the answer is most likely “no.” If that’s the case, a life insurance policy is one of the best gifts you can give to your dependents.
The same goes for a stay-at-home parent. If you were gone, your working spouse would have to pay for childcare, home upkeep, meal preparation, etc. to cover all the tasks you were doing. This means that stay-at-home parents likely need life insurance as well.
Typically, the best, most cost-effective type of insurance will be term life insurance. Term coverage provides a stated death benefit (that is, the amount paid to the beneficiary upon the death of the insured person) for a set period of time.
Not just for the ultra-wealthy, estate planning allows you to make decisions today about who would be the guardian of your kids and what would happen to your assets in the event of your death. Through the estate planning process, you can create documents such as a trust, will, guardianship, and powers of attorney. Like a life insurance policy, it provides peace of mind that your dependents would be cared for in the event of a tragedy.
Plan for childcare
When it comes to childcare, be sure to weigh all the options available to you. Are you thinking one parent will stay home? Create this scenario in your new baby budget to see how it would impact your monthly cash flow. Be sure to account for any changes to health insurance costs, employer retirement contributions, or other lost benefits.
If both parents plan to continue working, you’ll still want to adjust your new baby budget accordingly by adding the estimated monthly expense of day care or a nanny and calculating how that will affect your monthly cash flow. Start looking at various childcare options early, as there are usually waitlists to enroll your child.
You can utilize tax benefits, such as Dependent Care FSAs or Child Tax Credits, to help offset the cost of childcare as well. Your financial advisor or tax planner can help you decide which is best for you.
Start saving for future education expenses
The key here is to start early, even if it is only a small amount. While college will likely be the costliest expense on the horizon, there are other factors to consider in the meantime, such as private elementary or high schools. Check out our article on saving for education and remember the power of interest!
And our last tip: enjoy every moment! Preparing for parenthood can be full of excitement and joy, and once your financial plans are in place, you can spend less time worrying and more time nesting.
If you want help planning your finances before Baby arrives, our team at Commas can help.
Commas is a wholly-owned subsidiary of Truepoint Inc., a fee-only Registered Investment Adviser (RIA). Registration as an adviser does not connote a specific level of skill or training. More detail, including forms ADV Part 2A and Form CRS filed with the SEC, can be found at www.usecommas.com. Neither the information, nor any opinion expressed, is to be construed as personalized investment, tax or legal advice.