Oh, Baby! Financial Planning for Young Families
You recently received news that will change your life forever – you are about to become parents for the first time! But are you ready for your new obligations and expanded financial reality? Allow me to share some guidance based partly on my own experience as a new dad.
I remember exactly when and how I first learned Sarah was pregnant with our daughter Bayla, now 18 months. I was on my way home from a meeting in Louisville and Sarah said she had a huge surprise for me. I walked into our apartment and our dog, Shannie, was wearing a sign that said “I am going to be a big sister.” I could not have been more excited. We jumped in the car and raced to Highland Park to tell both sets of our parents.
The next day, feet not yet back on the ground, it occurred to me that there were some important steps that needed to be taken before the baby arrived. So I began to create a timeline. I found the use of a timeline very helpful for planning our wedding, allowing us to not become overwhelmed with the seemingly endless to-do list.
While many of the items listed below may not be high on a first-time parent’s priority list, each is important and will help avoid unforeseen consequences. I assure you that each item can be accomplished without giving short shrift to the fun events leading up to the birth of your child, such as giving your wife back rubs, deciding which crib to buy and attending new-parent classes.
1st Trimester: Insurance
Health – Do the math to determine which policy your child should be covered under and whether it makes sense for both parents and child to join a single-family policy during the next open enrollment period. It is not uncommon for the child to be listed under Dad’s insurance policy and Mom to continue to keep her own policy under her employer.
Life – Both parents need to buy more life insurance. You will want to buy enough insurance to cover lost wages, child-care expenses and college costs. Contrary to some beliefs, stay-at-home moms need insurance. Pregnancies can sometimes be complicated by pregnancy-related issues like gestational diabetes, so I suggest getting life insurance as early in the pregnancy as possible. Term insurance, typically 20-year guaranteed level premium, is the way to go as it offers the most bang for your buck.
Disability – Your employer may already provide some coverage but it can make sense to purchase more. Disability is unpredictable and can happen to anyone at any age, taking away financial support from family members dependent on the income.
2nd Trimester: Saving
If you have not already begun to save for the baby and all of the associated expenses, now is the time. I recommend putting together a realistic budget that you can stick to. The budget should include saving money in retirement plans, such as 401(k)s or 403bs, and IRAs. In addition, you should have an emergency fund that has three to six months of living expenses in cash. In order to earn a bit more interest on the money than your local bank account offers, you may decide to keep the cash at one of the online high-yield savings accounts. These accounts are offered by many financial institutions including Discover, Barclays and Capital One.
This is also a good time to start deciding who will take care of your child. Will one parent stay home? Day care? Nanny? Relative?
3rd Trimester: Estate Planning
Creating a will is especially important for people with young children. As long as you are establishing it as the cornerstone of an estate plan, it makes sense to put the other basics into place too.
- Will: Appoints guardians for your minor or dependent children and outlines exactly how you would like your property distributed. If you do not put a will in place, the court will decide.
- Living will/advance directive: Your wishes for end-of-life care. Do you want extraordinary measures taken?
- Durable power of attorney (DPOA) for health care: Provides a trusted person the authority to carry out the wishes in your living will/advance directive and to make other medical decisions if you are not able to do so.
- Durable power of attorney for finances: Similar to a DPOA for health care but it gives a trusted person authority over your assets.
- Revocable/living trust: All assets are put into the trust during your lifetime and remain in your complete control. After you die, a trustee named by you will distribute the assets according to your instructions while avoiding probate.
Month One of New Baby
Having a new baby is fun, amazing and extremely exhausting. Remember to stay calm and enjoy every moment between the feeding, diaper changing and all the rest. Here is a list of a few items that should be completed within the first couple of weeks of your baby’s arrival:
- Add the baby to your or your spouse’s health insurance policy.
- Apply for a Social Security number for the new member of your family.
- Once you receive their Social Security card, start a 529 college savings plan for the baby. Saving even a little each month can go a long way over 18 years. Many states also offer a tax deduction on your state tax return, if you use your state’s plan. A great website to learn more and do research on the different plan options is www.savingforcollege.com.
- Update retirement account beneficiaries – IRA, 401(k), 403(b), etc.
I will not kid you (pardon the pun) – nothing can fully prepare you for the upheaval that a new child will bring to your life, along with all the joy. But if you follow a timetable or checklist of important preparatory steps, you can be much more confident in having the big picture under control when the little one arrives.
The material shown is for informational purposes only and should not be construed as accounting, legal, or tax advice. Altair Advisers LLC is a registered investment adviser with the Securities and Exchange Commission; registration does not imply a certain level of skill or training. While efforts are made to ensure information contained herein is accurate, Altair Advisers cannot guarantee the accuracy of all such information presented.