You’re in week 39 of your pregnancy. You’ve read every “How To” book for new parents. You found a crib, a stroller, and this car seat rated 4.97 stars on Amazon that could withstand a nuclear war. You baby-proofed every room in your house, have scheduled your parents and grandparents for weekly baby-sitting duty, and have enough diapers to fill a Costco warehouse. You’ve got this. No one is more prepared for this than you are right now. So why do you still feel totally unprepared?
The anxiety of the unknown that comes with a new challenge or adventure can make even the best of us uneasy. Bringing a child into this world is without a doubt one of the most challenging and rewarding experiences we face as humans. So while you’ve laid your best foundation plans on the emotional and “child-rearing” side, don’t skimp on preparing for the financial side. For those expecting, here are five financial planning tips to follow before the baby arrives.
Make a Budget
If you are already working with a budget, then great! You’re a step ahead of the game. This section could just be reminder to add miscellaneous expenses to what you’re already anticipating. If this is your first time building a budget, its crucial to sit down to track where your paycheck goes every month and take the steps to determine what your expenses might look like. This may seem daunting, but I promise, we’ll make it through together. This post does an excellent job outlining steps required to make a budget. Personally, I am a fan of the Mint.com app for monitoring and tracking my budget.
Once you have a handle on your current expenses, you can start determining what it will cost to add a child to the equation. Check out this great calculator to help determine what your annual costs in year one and two might look like. Some of the biggest financial decisions revolve around a spouse deciding to stay home or continuing to work, so understanding what your local daycare costs may be a major factor in this decision.
Budgeting will also allow you to decide what items on your list are “needs” versus “wants,” allowing you to more efficiently prioritize where to spend your dollars.
Update Your Estate Planning Documents
Updating your estate documents after having a child or children is a necessity. Your and your spouse’s documents should reflect the addition of your children and plan for your wishes should both of you pass unexpectedly, in terms of both finances and guardianship. The most important – and often most challenging – question for married couples is who they feel comfortable naming as a guardian for their children. Often, relationships with siblings and relatives can be complex and not achieving an agreement can lead to incomplete estate planning documents.
However, if you and your spouse cannot agree as to the most appropriate guardians, it is important to find a compromise in lieu of doing nothing, which could result in a court-appointed guardian for your future child. And remember, your estate planning documents can always be changed should your relationships change in the future.
Notify Human Resources
Your HR Representative will become a huge resource to you in this transition phase, as there are a few opportunities to make changes to your current benefits. However, don’t delay action; the window to make many of these changes is 30 days.
Update your withholding on a W-4 – The W-4 Form you filled out when you started working allows you to adjust the amount of your salary that is withheld for taxes. For married taxpayers, you may have entered 1 (you) or 2 (you and your spouse) when selecting your number of dependents. Now that you have a child, you’re entitled to claim another dependent and can elect to have less of your income withheld.
Update your Health Insurance coverage – Don’t delay on this one! You have 30 days after a life event — like marriage or childbirth — to add a spouse or child to your health insurance policy. If your spouse is staying home to take care of your child, it is important to notify your health insurance provider and add both to your policy.
Update your beneficiaries –Your work sponsored life insurance, disability insurance, and 401(k) policies need to be updated to coordinate with your revised estate plan. When reviewing 401(k) beneficiaries, make sure to revisit who you have listed as the beneficiary to your IRA or an old 401(k) as well. Did I mention your HR Representative would become your new best friend?
Increase Your Insurance Coverage
Insurance, generally speaking, is a risk management tool for financial planning. Mitigating risk is a crucial piece of developing a successful financial plan. Planning for your own death is an uncomfortable concept; however, it is much better to plan and not need, than it is to need and not plan.
If both you and your spouse are planning to continue working full time, term life insurance policies covering around 8-10x each of your annual salaries plus the remaining balance on your mortgage will should provide sufficient coverage according to the College for Financial Planning. Term life insurance covers a need for a fixed number of years (e.g. 20-Year Term, 30-Year Term) and is typically the least expensive form of life insurance. The term should be long enough to cover you until your child(ren) is financially independent and for approximately the number of years you plan to remain employed.
So, for example, if you and your spouse are both 30 and currently earning a total of $175,000 a year, you have a $250,000 balance on your mortgage, and are expecting your first child, a 30-year term life insurance policy with a death benefit of $2,000,000 may be an appropriate risk management solution for each of you.
If you or your spouse is planning to adjust your career and/or become a stay at home parent, a term life insurance policy on that person is also important, yet often overlooked. Childcare costs can be very expensive depending on where you live. The death of a stay at home spouse creates a need for child care as well as additional home maintenance-related costs like cleaning. A smaller policy in regard to both length of coverage (10-15 year term) and death benefit ($250,000-$500,000), would be appropriate to cover the costs of childcare, education, and allow the surviving spouse to take unpaid leave or change careers in order to take on increased “at home” responsibilities.
Continue Saving for YOUR Retirement
A mistake that many young parents make is putting college savings ahead of retirement savings. With the expected costs of 4-year college reaching $250,000 and student loan debt growing, parents want to set their children up for success; however, this should not be at the detriment of your own retirement. There are an increasing number of options to help manage the rising cost of college. Student loans, federal grants, and scholarships can all be used to reduce the cost or extend the payment window of annual tuition.
State-sponsored community college programs like the NJ STARS and NJ STARS II allow high-achieving students to go to community college for free and (upon completion of an Associates Degree) apply for $2,500 annual scholarships at in-state schools like Rutgers or The College of New Jersey. As of the publishing of this blog, the only alternative to saving for your own retirement is total reliance on social security and employer-sponsored retirement benefits, which often proves insufficient to maintain your lifestyle once you’re no longer earning a paycheck. While the exponential increasing of college costs may be frightening, saving for your own retirement should take priority.