Making the decision to start a family is not an easy one. It’s one that comes with excitement, terror, and the need to get both your physical and financial house in order. As new parents, you will be faced with the prospect of adjusting your spending plan, creating an estate plan, and ensuring you have the appropriate insurance coverage in place so that you and your little ones are protected.
When budgeting for a baby, the below are just a few of the items you need to consider within your spending plan:
- Emergency Funding: Do you have an emergency fund of at least 3-6 months of living expenses in place?
- Groceries: How much will items such as diapers, formula and baby foods affect your grocery bill?
- Transportation: Does your current car provide safe and adequate space for a car seat? Will you need a second or replacement vehicle?
- Medical Costs: How much will your costs for medical premiums and co-pays increase when adding a child?
- Childcare: What are the costs of child care in your area? Will you or your spouse stay home from work as opposed to paying for daycare? If so, how does that affect your income situation?
- College Funding: Consider the costs of a college education for your children and start saving as early as possible. Even the smallest amount today can help trim future out-of-pocket costs.
- Overall Cost: According to the U.S. Department of Agriculture, in 2010, the average cost of raising a child to age 18 was $226,920 for middle income parents. This includes costs for housing, food, transportation, clothing, health care, child care, education, personal care and entertainment expenses. Keep in mind that extracurricular activities such as sports, dance classes, and more can add up over the years.
In addition to evaluating your spending, it’s imperative that you update or implement an estate plan. Although no one likes to think about the possibility of not being around for long, it is in your (and your future children’s) best interest that you begin to prepare for the unknown.
- If you don’t have a will in place, now is the time to create one. Not only will this ensure that your assets are distributed in line with your wishes, but it will allow you to appoint an executor for your estate and select a guardian for your children.
- When choosing a guardian for your children, take time to reflect upon with whom your children would feel most comfortable. Who do you believe could support them emotionally? Ask yourself who shares your same values and beliefs around parenting. Remember to have a discussion with the person you select and to also nominate a contingent guardian should your primary choice be unwilling or unable.
- Consider creating a trust. A trust document can spell out how you want funds left to your children to be managed and spent. In addition, you can appoint a trustee to manage the funds.
Along with the need for an estate plan comes the need for increased insurance coverage to ensure your family is adequately protected in case the unexpected happens. Evaluate your existing life, health and disability coverage. Be sure to consider the below in your review:
- Life Insurance: You’ll likely need to increase your death benefit on any existing life insurance policies, or look into obtaining a policy if you don’t have one. By purchasing life insurance, you can ensure that should your family be faced with your premature death, they will have enough money to cover their living expenses and sustain their lifestyle. Be sure to consult with your agent on what type of policy and how much coverage is appropriate for you.
- Disability Insurance: Purchasing a disability income insurance policy will ensure that you are paid a percentage of your current income should you become disabled for a short or long term period, and are unable to work. This will safeguard your family against a complete loss in income.
- Health Insurance: Ensure that you have adequate coverage for routine check-ups and prescriptions. Make sure you understand the amount of your premium, deductibles, coverage for catastrophic events, and co-pays.
The above are a few of the basics to consider when starting a family of your own. Parenting is a “learn as you go” system, and while you may not have all the answers all of the time, you can ensure that you and your family are adequately prepared and protected for the financial unknown.
By Mary Beth Storjohann, CFP®, CDFA
Special to FPA