Welcoming a new child into your family is one of the most joyous occasions any couple can celebrate together. Bringing a baby into the world to love and care for is unlike any other experience. I'm overjoyed to announce that my daughter (and Lindsey & Lindsey VP), Christina, is expecting a child in February. My wife and I are excited to welcome our second grandchild into our family in 2016!
While this was one of the most exciting pieces of news she's shared with our family, it's also true that having a child is one of (if not the most) significant financial decisions a young couple makes. For the next 18 years (sometimes longer), a family is responsible for feeding, clothing, educating, and sheltering a young life. Couple this with the uncertainty of our economy and rising healthcare costs, and it is easy to understand why proper financial planning is a key aspect of raising a child.
An article written by Deborah Gaines, Huffington Post and Baby Magazine contributor, for Parents.com notes,
“The U.S. Department of Agriculture speculates that a middle-income family will spend more than $165,000 (in today's dollars) raising one child to the age of 18. That's not counting fertility treatments if needed, adoption costs, private schools, after-school lessons, or college, which can add $100,000-300,000 to the bill.”
Seeing dollar figures that size is a shock to most of us. But don’t fear! Christina and I have some thoughts to share about how to prepare for your new bundle of joy.
1. Address the “Must”
There are many to-do’s that arise when you are having a child, but there is one item that you MUST address immediately. Make sure you update or draft a will that includes an appointed legal guardian. While an occasion for so much joy seems at odds with such practicalities, it's important to plan for them.
Also use this time to review your life insurance plans. Make sure both spouses are covered under your life insurance protection. If universal life insurance is an affordable option for your family, you can kill two birds with one stone by providing coverage in the event that something tragic happens and also creating a college savings plan. The question of how much you need and for how long is best determined in a conversation with a financial advisor. But, if money is an issue, Gaines suggests,
“…choose 20- or 30-year term life insurance — it will cover the time period when you need it most, for substantially less than universal or variable coverage.”
Addressing these two difficult issues first will ensure your baby’s future should anything happen to you.
2. Calculate the Costs
Next, gather a list of all the anticipated expenses of the coming months and make a plan to budget for all the expenses over time rather than pay them all at once. Consider doctors visits, unpaid days off, wardrobe updates, and baby essentials — cribs, diapers, clothing, food, etc… Once you have your list, calculate the total and divide that by the total term remaining in the pregnancy. Which sounds like a more intimidating number: $5,000 or $625? Saving $625 each month for 8-9 months is much more manageable than adding $5,000 to one month’s total budget.
Tip from Christina: “An often overlooked cost in preparing financially is the cost of labor delivery, hospital, medical bills, and then the ongoing cost of adding an additional child to your healthcare plan. I haven’t even made it to my 3rd trimester yet and I already got hit with $1,000 in doctor bills.”
3. Balance the Budget
While it's a great practice to start investing in a child's college fund as early as possible, we can't safely do so until we have our own finances in check first. The fact is that your budget is going to change, whether this is baby number one or five! Use the time before the child's birth to create a solid plan to get any outstanding debt under control and draft a plan to address it moving forward.
Tip from Christina: “Making sure your financial house is in order when it comes to debt is also important before you start racking up more spending on the latest baby items… A good place to start is with your credit cards, which cards have a high interest payment. Is there a way to transfer debt to one card with a better interest rate? Or better yet, do you have any home equity that you could use to open a home equity line of credit to strictly consolidate your high interest debt with a lower rate and make that interest tax deductible through the mortgage interest deduction?”
4. Battle “Baby-Buy” Fever
As cute as that pink-polka-dotted jumper or those tiny, bright red baby Air Jordans are, some of these expenses qualify as not worth it in the long run (babies feet grow fast!). Avoid being drawn in to making “splurge” purchases such as these. While items such as strollers, cribs, and car seats are worth investing larger amounts of money in to ensure they hold up over time, spending large sums of money on items you'll have to replace every few months isn't a great idea.
Tip from Christina: “I think an important reminder that I give my expectant clients on a tighter budget is to keep in mind they don’t have to have every baby item brand new. Often times you can order certain nursing items through your health insurance that are fully or partially covered. Another great way to get inexpensive “necessities” are through Craig’s List and local Mom networks, so many of them have baby items for sale at a fraction of the cost brand new would be.”
5. Analyze Work Leave Benefits
Both spouses should look into their respective company’s policies for maternity and paternity leave. Find out what’s paid and what’s not. Depending on where you work, these policies can vary drastically. There is also the possibility of additional unpaid time off under the Family and Medical Leave Act, although your company is only required to honor these policies if they employ more than 50 people.
Tip from Christina: “I think it is extremely important to have employment stability as a couple and have the conversations regarding whether or not you will work or continue to work as a mother.”
6. Don’t Forget You
It is easy to think about this new life and begin daydreaming of all the big milestones in your child's future. But don’t forget about yourself! Make sure that these preoccupations don’t keep you from managing your own future, which will have a huge impact on your child as well. Keep thinking about retirement and contributing to the plans have in place.
Getting ready to welcome a new child into the family is one of the more hectic times in our lives. It feels like we’re constantly running, preparing, and planning for the future. Don't forget to take some time to enjoy it! It's a truly a one-of-a-kind occurrence. Plan for what you can now so that when your beautiful new baby arrives you can give him or her all the attention that a new life deserves.
What financial challenges were a surprise for you in having a child? Join the conversation by tweeting @Lindsey2Wealth!