My wife and I are expecting our first child this fall.
Like many people in our stage of life, we realize that our life is about to change forever!
A big part of this change will obviously involve our finances. With that in mind, below is a list of things for new parents to do before the baby arrives that are crucial to getting started off on the right foot financially.
Even if you have been parents for a few years though, you likely haven’t done some of the things on this list. So, if your children are in elementary, middle, or high school, don’t worry, it’s never too late to get started!
1. Put together an estimated budget
The key word here is ESTIMATED.
Whether it’s your first child or your fifth, there will be a lot of financial unknowns and things to do before the baby arrives, so you don’t need to get everything perfect. Rather, your goal with this task is to start living on a budget now, so that when the baby arrives, you’re already in the habit of doing so.
Budgeting isn’t much fun, so don’t make this harder on yourself than it already it is.
Use an app or online program like Mvelopes or Mint.com to help you keep track of all of your spending in one place. It will save you time and minimize the headache that usually comes with tracking your expenses.
2. Automate everything
Now that you’re living on a budget and tracking your expenses, take advantage of tools like automatic bill pay, direct deposit, and automatic savings deductions before the baby arrives if you aren’t already doing so.
Your life is about to change forever (in a good way!). Much of that change will be in your schedule getting busier, leaving less time to keep track of bills, savings, and the rest of your finances.
By automating as much as possible, you’ll save time and stay up to date after the baby gets here without even having to think about it.
3. Construct or reevaluate your estate plan
At a minimum, the parts of this step that relate directly to having children are outlined below…
- A. Will and/or trust
Most people know they need a will, but very few realize a trust might be beneficial in their situation as well, particularly when it comes to minor children.
If you own a house, have life insurance, and/or have money in retirement savings, then you should talk to an attorney and fee-only financial advisor about the possible benefits of establishing a revocable trust.
- B. Name a guardian for your little one(s)
This one is very important, but frankly, it’s something new parents tend to put off as long as possible. Unfortunately, they do so to their detriment. Even if you think you might change your mind down the road, it’s still good to get this information in your will ASAP because you never know when your time here on Earth is up.
And if you haven’t named a guardian in your will before you and your spouse die, then state law and the courts will decide who takes care of your child or children going forward. I don’t know about you, but I think I’d rather be the one to decide who takes care of my children when I’m gone, instead of the state’s legal system.
- C. Review and update beneficiaries
Regardless of what’s in your will, if someone’s listed as a beneficiary on a life insurance policy or financial account, that’s who will get the money if you die, so it’s important you have the right person listed! You’d be surprised how many people unknowingly still have an ex-spouse, a sibling, a friend, or someone else besides their current spouse or children listed as current beneficiaries on their accounts.
Contact the companies associated with each insurance or financial account to verify the primary and contingent beneficiaries on file with their office and make any necessary changes.
For more information about other types of documents to include in an estate plan, check out this blog post.
Also, since I’m not an attorney, make sure to contact a reputable estate planning attorney licensed in your state to help you with your individual situation. Find one who will work alongside your financial advisor to ensure that the things your advisor is recommending agree with what the estate planning attorney is recommending and vice versa.
4. Secure proper insurance coverage
Most new parents realize that it’s wise to have some sort of life insurance. But what about disability insurance coverage? Do you have it? Do you know if you have the right amount?
How about life insurance coverage on a stay at home parent? Should you secure this coverage? If so, how much?
And my personal favorite, does the baby need life insurance? (Check out this post to see what I think.)
Then there’s health insurance. How will the baby affect your healthcare coverage? Should you keep the same coverage or get a new plan? What about a health savings account (HSA)?
These are important questions to ask and consider before and after the birth of each child and the answers aren’t usually as cut and dry as people would like them to be since everyone’s situation is obviously unique.
5. Determine childcare arrangements
According to this website, the average cost of childcare for an infant at a daycare center in the United States is approximately $11,666 per year ($972/month).
Talk about a budget buster!
Obviously, costs vary though and it all depends on your individual situation and location, so very few parents end up paying this amount for one infant. Current tax law also helps lessen the burden a little bit with things like the childcare tax credit or a dependent care flexible spending account (FSA) offered through some employers.
Talk to a fee-only financial advisor who will work alongside your CPA (Certified Public Accountant) to see which option saves the most money in taxes in your situation.
Money shouldn’t be the only factor here though, so make sure to take time to discuss expected childcare arrangements with your spouse and evaluate all of your options, including the possibility of one parent staying home while the child is young. In most cases, it’s not that difficult for one parent to stay home to care for a child.
It usually just means making small sacrifices in your current standard of living to make up for the loss in income. And when it comes to raising your children, I think most parents would agree they’d be happy to do whatever it takes to best care for their little ones.
6. Beef up your emergency savings
I typically recommend people have between 6 to 12 months of living expenses in their “rainy day” fund (i.e. savings account, CDs, etc.) for unexpected financial emergencies.
The only exception to this rule would be if you have high interest debt like credit cards, personal loans, etc. In that case, it usually makes more sense to pay off the high interest debt before adding to your emergency savings because you’ll typically save more money in interest over the long-term this way.
Why the equivalent of 6 to 12 months of living expenses in a rainy day fund?
Because when it rains, it usually pours!
Even if you don’t think you can save up that much money before the baby arrives, every little bit can help. By increasing your emergency savings before the baby arrives, it also gives you the chance to practice “living on less” because odds are good that your expenses will go up significantly, the moment you bring the baby home from the hospital, if not before!
7. Start saving for college (maybe)
While college may seem like a long way off for new parents, 18 years will go by fast!
Combine that with the fact that college costs increased around 6-9% per year in each 17 year period from 1958-2001 and you can see why it’s important to start saving early! The earlier you start, the more time for your savings and investments to grow.
Many states also offer a tax deduction or tax credit to residents for amounts contributed to that state’s 529 college savings plan.
If you don’t know what a 529 plan is or whether it’s a good fit in your situation, a fee-only financial advisor can help you determine the best way to help you save for your children’s future educational needs, including helping you choose the right type of account and the investments for that account.
Before saving for college though, make sure you have any high interest debt paid off and make sure you have 6 to 12 months of living expenses saved up in your rainy day fund as I mentioned above.
Also, make sure you’re already saving 10-15% of your gross income towards your long-term savings goals such as retirement, when you add up your contributions and any employer matching contributions to these accounts, before you even think about saving money for your children’s college fund.
There are plenty of ways to pay for college such as working part-time while in school, grants, scholarships, student loans, etc. But I’ve never met a person who was offered a scholarship or loan for retirement (or “reHirement” as I like to call it)!
Other things to do before the baby arrives?
This list isn’t all-inclusive, but it should give you a good start and help you realize how much busier your life is about to get when the baby arrives, that is, if it hasn’t already gotten busier!
When life gets hectic, it’s really easy to put off financial tasks until the last minute, so most people find it helpful to delegate some of these things to a professional who is licensed and trained to help you with these tasks and dozens of other financial planning topics.
Regardless of whether or not you delegate some of these tasks to a professional though, the idea is to get them done as soon as possible, ideally before the baby arrives, because the minute you take your new child home from the hospital, your life will change forever (in a good way!).