What is it?
As you prepare for life with your new child, it is time to develop a new financial plan for your family or make any necessary changes to your existing plan. You’ll want to consider how your baby will affect your budget, make sure you have adequate insurance, protect your child’s future with a well-thought-out estate plan, and determine how having a child will affect your income taxes.
1. Update Your Budget
Develop a new spending plan
The birth of a child is an opportunity for you to set up a new budget or review an existing one. You’ll have to consider the impact that your child will have on your living expenses as well as account for any shift in income that might occur if you decide to quit your job. You’ll also need to save more money to ensure that your family has money to meet its future needs.
Expenses that typically increase when you have a baby
• Your grocery bill: Diapers and formula (you may use some even if you are breast-feeding) are very expensive. Later, when your baby turns to solid food, you’ll have to figure in the cost of baby food.
• Your housing costs: If you do not already live in a house or large apartment, you may find yourself moving once your baby gets old enough to take up a lot of space with toys and equipment.
• Your transportation costs: If you have a small car or a two-seat convertible, you may find it difficult to fit in a car seat, and you may need to buy a new car. Or, if you have an old car, you may want to buy something more reliable now that you have to worry about your baby’s safety.
• Your clothing and household expenses: You’ll find yourself spending less on yourself and more on your child now that your budget has to stretch. You’ll spend a lot initially to buy essentials for your child and then spend a bit more each month than you are used to for items your child needs.
• Medical expenses: You’ll probably pay a co-payment for each of these trips unless your health insurance plan covers 100 percent of well-baby care. Your health insurance premium will likely dramatically increase as well, unless you already had family coverage for you and your spouse.
• Cost of childcare: Whether you look for full-time daycare or hire an occasional babysitter, you need to plan for the impact this will have on your budget.
TIP: For help calculating 1st-year baby expenses take a look at http://www.babycenter.com/baby-cost-calculator.
Saving for education
It is wise to begin saving for your child’s education as early as possible. There are several ways to do this. You can begin by depositing a certain amount every month into a savings or money market account, contribute to a college 529 savings account, purchase Series EE bonds, or take advantage of a wide variety of other investment vehicles.
Tip: Go to http://www.savingforcollege.com/529_plan_details/ to find your states 529 plan.
Saving for emergencies
If you do not have an emergency fund, now is the time to set one up. If your child gets sick, your car breaks down, you need to move unexpectedly, or you lose your job, you can dip into your emergency account. An emergency account should normally contain an amount that equals three to six months’ worth of living expenses.
TIP: See 3 Reasons You Need a Budget for more information about an emergency fund.
2. Create an Estate Plan
Estate planning is a subject many parents would like to avoid. After all, you’re celebrating new life, and it’s sad to think that you may not be around to raise your child. However, it’s crucial to the welfare of your child that you leave behind instructions that clarify your wishes in the unlikely event that you die before your child grows up. If you do not currently have a will, now is the time for you (and your partner, if any) to draw one up. If you do have a will, you’ll need to review it. You’ll want to nominate a guardian for your child and decide how you want your assets distributed. You may also consider setting up a trust to protect your child’s interests after your death. You should also review your beneficiary designations.
TIP: You should not name a minor as a beneficiary. Consider using a trust or UGMA/UTMA account as the designated beneficiary.
Will
Each parent should have a will to ensure smooth distribution of the parent’s estate. After your child is born, you should review your will (or draw up a will if you don’t already have one) to make sure that your assets are distributed as you would like, to nominate a Guardian for your child, and to choose an executor for your estate.
Tip: You may want to write a letter to your child that will be your testament (i.e., a message from you that your child can read at a future date). It can be about anything–your philosophy on life, the family history, or some advice that you’d like to give your child. You can attach a copy to your will or put it in with your important records for safekeeping.
Setting up a trust
Setting up a trust can be a good way of passing your assets along to your child. A trust document lists how you want any money left to your kids spent, and it can ensure that your child’s money is protected. A trust can help the Guardian manage assets and make sure that estate funds are used to benefit your children according to your wishes.
3. Review Your Insurance Coverage
Before your child is born, review your insurance coverage to make sure that you and your family are adequately protected. If you or your spouse is going to quit your job(s), you may cut off your life, disability, or health insurance benefits from that job, and you’ll need to buy more coverage.
Life insurance
Having a child will increase your need for life insurance coverage. Many experts recommend that you have life insurance equal to five times your annual salary.
TIP: Consider term life insurance for low-cost premiums and offers you pure life insurance.
Health insurance
The best time to check your maternity coverage is before you become pregnant. Make sure that you understand your deductibles, your co-payments (if any), and whether your policy covers testing, emergency care, and all the costs of delivery (including anesthesia, if necessary). Find out about claims-handling procedures, how long you will be able to stay in the hospital once you’ve been admitted for delivery, and whether your choice of doctors is limited. Usually, your baby will be covered from the time of birth, but check your insurance policy anyway to make sure. If both you and your partner are covered by or eligible for coverage under an employer-sponsored policy, you may need to decide which policy offers the best (or most cost-effective) family coverage.
Disability insurance
Before you had a child, you may not have worried about becoming disabled. Now that you’re planning to have a child, you may be thinking about what would happen if you suffered an injury or illness and couldn’t work for days, months, or even years. If you’re married, you may be able to rely on your spouse for income, but could your spouse really support all of you?
To protect your family in case your income is cut off due to disability, consider purchasing disability insurance if you don’t already have it. You may have a group disability policy through your employer, or you may want to purchase an individual disability insurance policy. A disability policy will not replace your total income, but it will likely replace 50 to 70 percent of your earnings.
