By Jon L. Ten Haagen, CFP ®
Having a baby is one of the most exciting things we can do. It can be, and most likely will be, stressful for, among other things, the added financial burden. Along with the added financial needs there is another commodity you will find in short supply: Time.
Following are a few things to consider financially to make the arrival of your most prized procession.
Set goals for your family: What is most important to you raising your family? Do you need extra time off when the baby arrives? Is daycare in the cards? What about the cost of babysitters? Do you want the financial responsibility of paying for your child’s college expenses? This is the start of the map from which all future financial decisions will evolve.
Before the baby arrives in your world: Money is not the No. 1 commodity to focus on, it is time. Start reviewing your finances now before the baby is here. Think about how your life will change. Once the child is here you will be too busy to find the time to preplan. Diapers, bottles, etc.
Look at your cash flow: A new child will increase your expenses. Read some baby books to determine the expense of diapers, formula and clothing. Call day care centers to find what they cost. Ask around to your friends to see what babysitters cost today and which ones they think are reliable. Babysitters do not come in one size fits all. Add at least 10 percent to all the numbers you get. Then add a cushion for future financial surprises.
Determine medical costs: Review your medical insurance coverage to determine exactly what your policy will pay for and what you will need out of pocket. All medical policies are different so be prepared up front. Some will pay everything, others will start to cover after a set amount you have to put out of pocket and others will pay a percentage of the costs.
Review – or make – a will: Be sure you and your spouse have current wills the most important is to discuss who you want to be guardians if you are not around. Think carefully. Do you want the brother (or sister) who is always the laugh of the party but has no common sense? This is a very critic decision and needs a lot of thought and input. The courts will make the decision for you if you do not. Speak to the people you are considering and make sure they have the capacity and desire to step in if needed. Then adjust your wills accordingly.
Determine is you have enough insurance: Review for you and your spouse. So many people look to cover the bread winner, however they do not take into account the value of the stay at home spouse. Consider the cost of day care and sitters, etc. I see too many cases where a couple in way under insured and I dread to think of what will happen to that family if a tragedy occurs. If you want a policy on your child consider a rider on your own policy – it could be less expensive. Make sure you review your own disability policy. Insurance should protect you against major losses. Review your deductible amounts on your policies and consider increasing them on the property-casualty (PC) which could reduce the premiums – this could fund your extra life and disability costs.
Begin saving. Start by throwing your lose change in a jar. Then look at saving a little each month and increasing the amount periodically. The easiest way is through an automatic saving plan or a good mutual fund – out of sight – out of mind. This is painless and you will accumulate toward a future college fund or an emergency fund.
Once your bundle of joy arrives you will be entitled to a deduction which will help save taxes on savings. Change your exemptions by filing a new W-4 form at work (both of you). Check with your accountant (CPA) to get the maximum allowable. Check with your employer – they may have pre-tax program on day care.
Talk with your employer: Talk with your HR manager. They can review with you and determine the best route for you to follow and help you to do the proper paperwork to adjust your paycheck.
As we stated in the beginning this is a complex and diverse area. Consult with both your CFP and CPA along with your religious guide to help you make the right decisions the first time. A good CFP can help guide you through the practical and emotional issues you are about to face. They can provide you with practical money-saving and wealth building advice.
We wish you the best when starting your new family. Remember you do not have to go it alone with financial decisions. We are here to help with guidance and experience.