Wealth Management Adjustments To Consider When Expecting A Newborn
Wealth Management Adjustments To Consider When Expecting A Newborn
When you've got a little one on the way, your financial priorities often change. Besides budgeting for a baby, you may need to revisit your investments, insurance, and emergency funds.
Let's look at five financial challenges new parents often encounter and how to solve them.
Insufficient Emergency Funds
A new baby can deplete an emergency fund fairly quickly. Having a new family member join your household means more potential unexpected expenses that you will want to appropriately plan for.
If you haven’t already, it’s a good idea to start saving or expanding the savings you have set aside to cover unplanned financial hardships such as unemployment, medical emergencies or the loss of child care.
How much does it cost to raise a child?
Your new baby will cost about $233,610 — not accounting for inflation — according to the U.S. Department of Agriculture's (USDA) research. The USDA found that a middle-class family with two parents and two children spends $12,980 yearly in child-rearing costs.
The first year of a child's life is often the most expensive especially for first-time parents. Not only are youpurchasing supplies like diapers, baby formula and extras like a car seat or stroller, but you will also need to cover medical bills and potential housekeeping or child care help after the child is born.
If you've saved 3-6 months of expenses in your emergency fund — and only about half of us have done so — all these additional expenses can eat up your savings if you haven’t properly budgeted for them, leaving you nothing for emergencies.
What can you do about it?
If you still need to do so, establish a dedicated savings account and set up automatic monthly transfers to build an emergency fund. Calculate living expenses for 6-12 months and save accordingly to ensure you are adequately covered in case of emergencies.
Be careful with this money. Emergencies are unexpected events such as car or home repairs, job cuts, or emergency room trips — not things like new sofas or upgrades to your wardrobe. These should come from other budget lines.
An emergency fund makes financial sense but also serves a greater purpose. Providing financial security aligns with a Mom or Dad's instinct to protect and provide for the family.
How much should you save?
Most personal finance advisors suggest holding enough cash to meet 3-6 months of expenses in an easily accessible savings or money market account. Since you're considering covering costs for a new baby and your current expenses, you'll likely want to budget more, putting aside enough to cover at least six months of expenses .
How to start or build an emergency fund
Build your emergency fund before you do anything else — even before paying off debt. Budget for it. Buy cheaper food, use coupons, cut services, buy or borrow items second-hand, add overtime, or pick up a part-time job until you meet your goal.
Inadequate Insurance Coverage
About 35% of American children are inadequately insured. As a result, many babies and children miss out on critical healthcare as they develop. To avoid this happening to your family, you'll want to evaluate your current insurance policies and consider increasing coverage if necessary.
Health coverage after you have a baby
Babies get sick and sometimes need specialist care. Even though they are small, these little patients don't get free treatment. Your baby needs insurance just like you do.
If you pay for private insurance, purchase care on the marketplace, or receive insurance through your employer, you generally need coverage extended to your baby within 30 days. It's vital to talk to your insurance agent as soon as possible after your baby is born.
Life insurance after you have a baby
You now have a new life depending on you for everything. What happens if you aren't there? Obtaining life insurance is the most cost-effective way to ensure your child’s needs will still be met even after you’re gone.
There are two main types of life — term life and whole life (sometimes called cash value). In general, term life is a more affordable policy, so many people with children purchase term life insurance for 10-12 times their annual income. Talk to your agent about getting a new policy or adding to the one you already have.
Thinking beyond life and health insurance
Disability insurance can help bridge your family's expenses should you need to be out of work for a while. If you don't receive short-term or long-term disability insurance through your employer, you may want to consider adding such coverage privately.
Insurance helps you shield your loved ones from financial hardships in an unforeseen catastrophe. Strive for comprehensive insurance coverage that adequately safeguards the family's economic well-being.
Increased Expenses Due to Childcare
A 2022 survey from Care.com found that 67% of parents spend 20% or more of their annual household income on child care. High-quality daycares are increasingly hard to find, and nannies can easily run 2-3 times as much as daycare. If you live in a state with a high cost of living, like California, the numbers increase even more.
If you or your spouse plans to be a stay-at-home parent, you can erase those costs, but you also eliminate a wage earner from your income-to-expense equation. No matter how you slice it, childcare simply adds to your expenses or reduces your income.
Here are six things you can do about it.
Ask your family to pitch in. Grandma or grandpa can be an excellent caregiver and a big money saver. Family care is not an unusual arrangement. About one in five grandparents say they provide regular childcare.
Explore the benefits of the Child and Dependent Care Credit. You may receive a tax deduction if you provide care for a qualifying dependent, including a child under 13 years old. Check with your tax preparer about how this tax credit may affect you.
Start saving in a Dependent Care Flexible Spending Account. You can contribute pre-tax dollars to this account for qualified out-of-pocket dependent care expenses.
See if you qualify for Childcare and Development Fund (CCDF) aid. This fund helps qualifying families who meet income requirements to pay for childcare.
Take advantage of your workplace daycare. In addition to placing you near your child and cutting your commute time, a workplace daycare can be a cost-saving tool for your family.
Share a nanny with a friend or neighbor. Sharing a nanny's cost with one or two friends can cut your total expenses while giving your child the attention of a qualified caregiver.
While children surely generate many expenses, they are nevertheless a blessing that God has entrusted to parents to nurture and provide for. Having a well-thought-out plan in place for caring for your child will lead to greater joy and harmony for everyone in your family.
Diminished Income During Parental Leave
Many employers offer paid parental leave. If your workplace is one of those, by all means, take full advantage of it. However, if you are self-employed, work part-time, or serve at a small company, you may get little, if any, paid leave, which may leave you with only eight weeks of PTO, vacation leave, and sick time. If that's the case…
Plan now for ways to cover the income you may lose during parental leave. An excellent place to start is with your budget. Simply calculate the anticipated reduction in income and adjust monthly expenses to align with your new financial situation.
You might also consider discussing work-from-home opportunities or part-time options with your employer. In addition, this may be the perfect time to look into setting up a freelance business or side hustle. Also, determine if you can use vacation time or tap into a short-term disability insurance plan.
While it might be tempting to take out a personal loan, use your retirement savings, or apply for a HELOC to cover unpaid parental leave, we don't generally recommend these options. Debt is not a legacy you want to leave your new family.
As a new parent, strive to maintain financial stability and achieve your financial goals despite the temporary reduction in income.
Inadequate Investment Planning for Your Child's Future
While the early years can be pricey, children require a lot of investment over at least two decades. For instance, you may want to put your child in private school or take a break from work to homeschool for a while. Then there are recreational costs such as music lessons, sports, vacations, and summer camps. As your child approaches young adulthood, likely want to help invest in their future by paying for college, vocational school, or entrepreneurship endeavors. Your child's hopes and dreams have no expiration date.
What does it mean to invest today for your child's future?
Set up a dedicated education fund and regularly contribute to support the child's future education expenses. Calculate the estimated cost of education and set investment goals to meet the financial requirements for education. After all, investing in a child's education empowers future generations and supports their growth.
Remember your children in your overall wealth management strategy. As a person of faith, you aren't just saving for retirement. You're also building a legacy for the generations that come after you. By keeping this long-term goal in mind, you can help ensure that your values continue to influence the world long after you are gone.
Teach your children about the blessings of a generous lifestyle. Children can volunteer to serve others, tithe on their allowance, help sponsor another child overseas, or donate their birthday gifts to a favorite charity.
Adding a child to your family through birth or adoption is a joy-filled opportunity packed with new adventures. The less financial stress you have, the more you can enjoy the experience. If you want to talk about adjusting your wealth management strategy as you grow your family, call us today. We would love to talk (and celebrate) with you!