Those first few months after bringing your baby, or child, home are a whirlwind of family and friends visiting, pediatrician appointments, nonstop grocery and drugstore runs and a complete and utter lack of sleep! Despite this craziness, I am going to suggest you make time to think about and discuss your finances. If there is one thing I know, it is that children do not cost less or take up less of your time as they grow! They eat more, outgrow their clothes, have birthday parties, need braces, require dance and sports accessories, attend summer camp programs and don’t get me started on college tuition!
Here are five great tips to consider when planning your financial success as a family:
1. Prepare a Budget: Write down all of your new and obvious monthly expenses, such as diapers, baby wipes, bottles and formula, daycare if you both go back to work. What do you plan to spend on baby gear such as a crib and changing table, high chair, stroller, car seat? What are your typical, monthly, household expenditures? Now is the time to rework your budget so that you include the new expenses and they do not catch you open-mouthed and unaware after a couple months. Lack of sleep and financial strain are not good for one’s health. Prepare yourself and avoid unnecessary surprise and stress at the end of the month.
2. Update your Wills and Life Insurance. Now is the time to insure your family’s security if something were to happen to you. “You need a will, not only to determine who are the beneficiaries of your assets, but also the manner in which they pass. If you prefer your assets to be protected for your child until she reaches a certain age, you may want to create a trust for her,” says Sharon L. Klein, President of Wilmington Trust in the New York Metropolitan region. You will also want to make the important decision about who should raise your child, should you not be around, and name the guardian of your choice in your will. In addition, you want to prepare health care proxies, which allow someone of your choosing to make medical decisions for you in the event you are unable to do so, and “Living Wills”, for each spouse, which express the desire not to be kept alive by machinery. If your family relies on you financially, you need life insurance! Klein notes that “term life insurance is a less expensive way to protect your family than whole life insurance, in the event that the bread winner has an unexpected, early demise.” Have you considered how your spouse will afford the mortgage? You may want to also consider purchasing life insurance on the non-working spouse. If the non-working spouse passes, this insurance will pay for necessary child-care, so the working spouse may continue to work. Klein warns, however, “that life insurance does not pass under your will, rather it has a separate beneficiary designation, so it is critical to insure that the insurance passes in a manner that dovetails with your overall estate plan.” Of course, if you are a single parent it is readily apparent that you must make these decisions, in advance, so that it is not the court or a family member who determines your child’s future. You are best advised to avoid the on-line sites, which allow you to prepare “do it yourself” wills. When it comes to the critical decisions that will impact your cherished family and your hard-earned assets, you should seek the assistance of a lawyer to customize your plans to best fit your circumstances.
3. Prepare for Retirement and Emergencies. Retirement may seem like a long way away, but this is surely an expense we all face eventually. Thomas Henske, Certified Financial Planner and Partner at Lenox Advisors, notes that “Putting yourself in a good place for retirement savings is all about building good habits. It is more important that you establish a regular savings routine (monthly, for example) than actually getting the right amount to save at the start of this endeavor. You can always adjust the amount up a few dollars without it making a noticeable difference to your lifestyle.” Henske advises to save regularly, not just when the mood hits you. If your employer has a 401k plan, sign up for automatic pre-tax deductions from your paycheck to go to your account. Employers often match their employee’s pre-tax contributions up to a certain amount. This is free money, so look into it! If the 401k is not available, it is easy to set up an IRA. Retirement loans are not easy to find late in life. The sooner you start saving for retirement, the more money you will have thanks to the compounding of interest and dividends.
A rainy day fund for unexpected emergencies is also an important item to include in your budget. Experts say it is good to have six to nine months of salary put aside in case of unexpected job loss or a big emergency. If only one of you is working, you may want to put away closer to one year’s salary. You may have 30 or 40 years to save for retirement, but one never knows when you will have to dig into emergency savings funds for a new car, new roof, or medical care. It is important to set up this savings account so that if that emergency arises, you do not have to dip into a retirement fund and suffer taxes and penalties for early withdrawal.
4. Think about starting a College Fund. The cost of college is going up, up, up! The good news is you have close to 20 years before this big ticket item hits your budget. There are also many venues for scholarships, loans, and grants to help with the cost of college. There are many options, such as stocks and bonds, to begin putting a little away for college now, which will grow and save you a bundle down the road. Many experts recommend 529 accounts because they are designed specifically to save for tuition, to compound and grow tax free and they are easy to set up. Money withdrawn for future college expenses will be tax free, but experts caution to be comfortably saving for retirement before you start putting away money for college.
5. Establish A Regular Schedule. Above all, set up a regular schedule to discuss your savings and financial goals with your partner, or if single, revisit your progress and determine whether you are on track to meet your goals. It takes time to change spending and savings habits. Keep the channels of communication open with your partner and make sure to plan for grown up fun and time out!