Preparing for Parenting: Staring Down the Financial Precipice
Kurt Wunderlich, Associate Wealth Advisor, 7/8/2019
Adding a family member is an exciting time. Decorating the nursery, picking out names, going to baby showers, and attending parenting classes all prepare you for your baby’s arrival home. But with the joy of a new family member comes additional responsibility. A whole lot of it. After all, your child is 100% dependent on you for all his or her needs.
Once you learn the exciting news, preparing for parenthood financially can help reduce future stress. Done properly, it also will ensure your child is taken care of should some of life’s more painful “what ifs” unfortunately come to pass. What’s more, getting a financial plan in place early can give you more time to spend enjoying your new family. After all, who wants to waste a precious Saturday afternoon at home scouring the internet for reliable information to deal with some overdue financial decision or unnecessary shock to your budget?
I’ll cover some areas across the financial spectrum you may want to consider addressing before your family grows, specifically: child care, cash flow planning, an emergency fund, risk management, estate planning and education savings.
A parent leaving his or her job to stay at home versus sending your child to daycare is a decision you’ll have to make based on your values and financial circumstances. A parent staying at home to provide care likely means a one-income household. Don’t panic too much, though; if you go this route, you’ve already found the best child care! On the other hand, two paychecks should mean more combined income, but daycare can be costly.
The best tip my wife and I received from our caring friends when we found out we were expecting our first child was to begin the search for child care immediately. Starting early allows you to see a wider range of options, reserve a place for when you’ll need it, and better understand child care’s actual cost. Prepare your lifestyle for this hit to your budget by setting up automatic transfers from your checking to a savings account to simulate paying for child care.
Cash Flow Planning
With the joy and excitement of having a child comes the financial responsibility of taking care of one. Children stretch your finances, racking up bills for everything from healthcare to clothing to baby-proofing your home. Creating a spending plan and building up your emergency fund before your child arrives gives you a buffer for the unexpected.
An emergency fund is the safety valve on a new parent’s financial plan. Another person is now counting on you for his or her well-being. Keeping enough money set aside in a designated account allows you to cover unexpected costs without taking out a high-interest loan or sacrificing your lifestyle or retirement savings plan. We generally recommend for a family with two or more sources of income to save an amount equal to at least three months of spending and for a single-income family to put away six months of spending or more. Single-income families need a larger buffer to compensate for their reliance on just one paycheck. Keep your emergency fund in a high-yield savings account or money market account to earn at least something on it, to access it easily, and to avoid significant changes in value.
Insurance helps prepare your family financially for those infamous “what ifs” in life. While it does not take away the hardship of losing a loved one or recovering from a major injury, insurance can ensure your family does not have to worry about money in such already difficult times. Getting or appropriately increasing your insurance coverage is a wise thing to do when you receive the happy news that you’re adding a family member. Insurance costs typically increase with age, so waiting can result in unnecessary expense.
Life insurance: Life insurance is there to provide for your family should a parent (or both parents) pass away unexpectedly. The more a family relies on an income, the more protection that income source needs. One popular rule of thumb is to have 10-15 times your annual income in term life insurance.
Disability insurance: This pays the bills by replacing a portion of lost income when a parent is unable to work. Without proper insurance, a disability can have a larger negative impact on a family’s finances even than losing a parent. Can your family cover its monthly expenses should you be unable to work?
Health insurance: Many health insurance companies allow you to change plans within 30-60 days of your child’s birth. Check with your plan administrator to determine if this is possible, then review the monthly cost (premium), deductible, total out-of-pocket maximum, and type of plan or network to ascertain which coverage is the best option for your situation. Understanding your plan allows you to better forecast potential out-of-pocket health-care costs.
Having an estate plan solidly in place can be an incredibly affirming experience for a young family. It allows you to choose where your assets go, pick who will care for your children, and detail other wishes. Without the proper legal documents, the state may select your child’s guardian and (through the probate process) decide how to divide your assets, all in a public setting and potentially costly manner. An estate plan’s basic documents are a will, financial and health-care powers of attorney, and health-care directive (also called an advance directive or living will).
Will: A will allows you to choose who will receive assets from your estate and who will care for your children if you are no longer around.
Powers of attorney: There are two types: health care and financial. Both involve appointing a trusted family member or friend to make decisions, either medical or financial, on your behalf if you are unable. Without these documents, you may not be able to pay your bills or collect income if you are incapacitated, and your family may be left to choose the health care they think you would have wanted.
Health-care directive: In conjunction with a health-care power of attorney, the health-care directive gives the appointed decision-maker a roadmap for your medical care. In it, you identify the steps you want taken medically if you are unable to make decisions for yourself.
Prioritize saving for your own retirement over saving for your child’s education, or down the road you may require financial support from your adult offspring. If paying for college is one of your goals, you can take out a loan to pay for school should it become necessary, but not for your retirement.
529 college saving plans offer a way to save and invest for future education expenses. Anyone can contribute to your child’s account, and these contributions make great holiday or birthday presents. Each state has its own plan, and some plans are better than others. The tax benefits between plans vary as well. All 529 plans offer tax-free growth of the investments in them and tax-free withdrawals for qualified education expenses.
Becoming a parent can seem like a daunting proposition. Talking with family, friends and advisors will help prepare you for the needs of your growing circle. Preparation reduces stress and allows you to proactively think through the upcoming changes in your life rather than just responding to them as they appear. By considering these topics you already are ahead of the curve. As you plan, keep in mind that parenting is not new ground; there is a path for you to follow. Plus, our capacity to recover from missteps is better than ever before. So just remember, you got this!
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© 2019, The BAM ALLIANCE®
As an associate wealth advisor, Kurt works with an advisory team to manage portfolios, offer advanced planning and identifying tax-efficient strategies. But what Kurt most enjoys is helping people gain a better understanding of their finances and aligning their goals and values. The most rewarding part of Kurt’s day is hearing that he helped someone construct a plan to realize their goals.