There are so many life events that trigger emotion that correspond with action. Graduation from college, a beautiful wedding day, purchasing your first home, but none like the day you find out you are due to have your first child! Sometimes the news can come as a complete surprise. Many times the news is awe-inspiring and you begin to get all your doctor appointments in order and tell your inner circle about the amazing news. While this is one of the most joyous times of your life, it is also becomes one of the most self-reflecting experiences. Am I ready to raise a child? Are my life and finances in good shape? Am I prepared?
“Failing to prepare is preparing to fail” – Benjamin Franklin
This article is designed to speak to the newly expecting couple, or trying family, in order to help them prepare for the next year as they navigate the finances and expectations of having their first child. My goal will be to take you on a trimester by trimester – from conception to birth – journey. Let’s go on this journey together…
Asking the hard questions
One of the very first things you need to ask yourself, and conversely ask your partner, about is the answers to a few key questions.
- Do we need to move? Do we have a support system near us? Do we need to move closer to family, or into a preferred school district?
- When the baby comes, are we both going to continue to work? Who will care for the child when we are working? How much will child care cost?
- Do we plan on saving and paying for our child’s college education?
- While our child is young, what are some of the moments you dream of creating for them (i.e. Disney World)?
The answers to these questions and others will begin to shape the way you think about your financial situation. While this is a very delicate and exciting time, the sooner you talk about it the better prepared you will be when the day comes.
Starting your budget
It is now officially time to start that budget you have been talking about for years! While some people may have one in place, the vast majority are just “going with the flow”. Since children are quite expensive it is vital to begin reconciling your monthly income and expenses. Doing so will better help you understand your financial position.
As you construct your budget you will need to categorize items like income, expenses, and savings. If the situation arises where there is excess money, otherwise deemed as savings, it is critical that you agree on where to allocate that money. For example, you could direct that money towards funding an emergency fund, retirement goals, or future vacations. On the other hand, if there is very little money leftover, its is time to evaluate your lifestyle and begin trimming excessive spending habits.
I cannot stress this enough… it is important to begin constructing your budget early! It takes a few months to start operating your budget with efficiency and effectiveness. Only after time has elapsed will you be able to assess your ability to maintain your budget.
If you are reluctant to starting your budget, you are not alone. Many times people resist looking at their financials at all costs. For these individuals it may be time to start looking for help from a financial professional who can assist in preparing your budget.
Identify new costs
An important item to pay attention to are the increasing costs over the following nine months. You will have the essential costs like ultrasounds, doctor’s visits, and prenatal vitamins. Then there is the potential variable costs like maternity clothes, baby clothes, car seats, cribs, etc… These expenses are variable because they can be bought new or “lightly used”. For the frugal families out there you can save a significant amount by buying lightly used items, or receiving hand-me-downs from family or friends. It is important for budgeting sake to identify these new costs. Doing this will allow you to identify all the places you can save.
Review your employer benefits
You’re only six months away and now is great time to review your employer benefits as well as your spouse’s benefits. Companies are becoming more accommodative with paid maternity and paternity leave. Many times spouses can stack their leaves so that someone is always on paid leave for the first 4-8 months of the babies life. Whatever your unique situation is—it is absolutely vital to understand what your employer is offering.
In addition to employer paid maternity/paternity leave it is important to understand how much paid time off (PTO) each of you currently have saved. Once the baby is born and the chaos ensues you won’t be able to plan for some of your personal days because the child is sick or needs to go to the doctors.
Once you bring a child into the world it becomes increasingly more important to understand your insurance coverage(s). Review your health insurance coverage because it directly correlates to the co-pays and deductibles you will have to pay during your pregnancy. If possible, it may be time to upgrade your coverage to help offset future payments. This may increase your monthly premium, but it could save you much more on the delivery expense, emergency visits, and even routine visits.
Another big insurance to review, or apply for, is life insurance. If you or your spouse do not own life insurance, now is a great time to consider purchasing it. It would be terrible if one or both of you died and left your child, or their future caretaker, without the necessary means to support them. Do not allow your child to suffer such an additional tragedy. While talking about life insurance can be an unthinkable experience to some—you need to be prepared. Both of you should speak to your financial planner, or insurance agent, to apply for coverage that best meets your needs.
The increase in child care facilities over the last 20 years has been staggering. As the country has moved towards two income earners per household it has increased the demand for child care at a younger age. This increase in demand has also created and increase in the price. There have been times I’ve heard it called the “families’ second mortgage.” The sooner you can identify the who, when, and where about your child’s future care, the sooner you can make the proper arrangements. Some daycares take multiple months from the application process to when they accept new children. Be ready, be prepared.
Once you understand your health coverage, you can begin to research your in-network providers for pediatric care. This is a doctor you will be visiting and leaning on for advice quite often in the first year of your child’s life. It is absolutely important that you do your due diligence and find the right pediatrician for your family under your health coverage.
Fine-tune your budget
The budget has now been going strong for at least three months and you have seen many one-off expenses. Now is a great time to fine-tune your budget and truly understand what your monthly expenses will look like. This will allow you to project what they will look like as your new family member joins your family. By identifying the expenses that were a one time thing you will be able to incorporate future expenses like diapers, formula, and wipes for the first couple of years.
Pre-draft Estate Plan
This is a great time for you and your spouse to begin talking about your estate plan. You will need to discuss documents like a will, power of attorney, health care proxy, and living will. Discussing these documents will help you identify what your plans are for your assets, guardianship provisions to protect your child, and how to tie everything together. Addressing these documents you will be able to list the most appropriate beneficiaries of your life insurance policies, investments, real estate, and more.
You have been through a long nine months and now is a great time to just relax and unwind before the real madness begins! Take the last few weeks to take care of yourself and maybe go to your favorite places to eat or visit. You will soon become a homebody when your brand new infant arrives. Enjoy the last couple of days and know that you are financially prepared.
First 30 days
There are a number of documents that need to be completed after the birth of your child. For example, make sure you apply for your child’s social security number. This will allow you to open a custodial account in their name. Family and friends will want to spoil this child and some of them will give you cash or checks for the child’s future—you should have a place setup to put this money.
Since your child is a minor they cannot own an asset in their name, but since you opened a custodial account you should now consider updating your beneficiaries on your life insurance and 401k/IRA to add a “per stirpes” designation. This means your insurance and assets will pass to your lineal descendants. Just make sure you have your estate plan in place prior to the changes in order to support your updated designations; otherwise the court could end up making oversight decisions you may not want after you’re gone.
Finally, make sure you add your child to the family’s primary health insurance plan. If both parents have health insurance coverage with separate employers consider selecting the best coverage as primary then make the other coverage secondary. Doing this will allow more of the child’s expenses to be covered by both insurances which could improve monthly cash flow. Although I should note, before adding your child to a second plan make sure the extra premium is reduces what would have been out of pocket costs. In some cases adding a family member to a health insurance plan can increase one’s monthly premium dramatically. This comparison is important as you have a lot of check-up appointments coming in the next few months. Most plans allow you 30 to 60 days to make this change.
We’ve officially made it to the birth of your beloved child! This is an extremely exciting experience for you and your family. In the future, there will be projects and goals you will be striving to accomplish for your newborn. As your child grows older and develops dreams you will do everything in your power to allow them to achieve their dreams. While every situation will vary slightly, below is a list of future considerations to better prepare yourself for future goals:
- Setup a 529 or UTMA to consider saving for your child’s education in the future. A dollar saved today will compound over time and go much further in 18 years.
- Disability insurance or income protection insurance for whomever is the breadwinner is something to strongly consider. You are far more likely to become disabled then die. Therefore, the need to have income protection for your family, in the event you can’t work could save your family from serious additional suffering.
- Do not let the birth of your first or newest child stop you from considering your retirement. Continue to fund your retirement goals so you are setup and prepared to retire.
- Funding three to four months worth of expenses in a cash or liquid accounts in case of an emergency is a necessary goal. House projects and emergency health situations pop up unexpectedly so be prepared!
- You will want to meet with a lawyer to change or finalize the will with the new addition. The estate planning process may be a great time to find or lean on a licensed planner for advice.
There will never be any set amount of time or preparation that will get you fully ready for becoming a parent, but hopefully the above suggestions have helped create a better understanding of the financial implications of bringing a child into this world. As there are a ton of new responsibilities ahead of you, the above steps should help you in becoming much more prepared. If you don’t believe you have the time or would like assistance with financial planning, please feel free to reach out to us!
The material contained in this article was created for educational and informational purposes only and is not intended to provide specific recommendations, tax, or legal advice. The author, and the author’s firm, strongly encourages you to speak with a qualified tax professional before taking action on anything mentioned in this article.