The 8 Money Musts Before Baby Arrives
When you’re a new parent, it’s hard enough to figure out how to change a diaper, let alone how to set your family up for financial success. You’ll be busy snuggling baby, feeding baby, bathing baby and soaking in every moment that new bundle brings with him or her. And that’s how it should be. The time to get money-wise about parenthood is before baby arrives. Preparing early will allow you time to think through your options and come up with a game plan that will take you from hospital bills to college!
The good news is you don’t have to do it alone. In fact, one hospital is taking an active role in equipping and educating expecting parents on money matters as a part of its larger parenting classes. Northwestern Mutual Wealth Management Advisors Brent Shaw and Jeff Gayonski are partnering with UC Health–West Chester Hospital near Cincinnati to help parents-to-be figure out what their financial priorities should be before baby comes. Here are their eight top tips:
1. Create a parent budget. “Your budget changes drastically when a child arrives. Some of it is expected and some of it is not,” said Gayonski. So he has expecting parents write down what’s coming in and going out each month. You will need to factor in things like diapers, formula if needed, childcare, clothes, toys and taxes, which can work in your favor (child tax credit anyone?). The numbers should include everything you need to keep your household running.
2. Calculate the cost of your new baby. The cost of your new baby can be more than $16,000 just in the first year! Contact your health insurance carrier or double-check your policy to make sure you know what will be covered and what you will pay for. Does your employer offer short-term disability income insurance? Will that cover any lost income if a parent stays home for a time with the baby? You need to know these numbers so you can plan accordingly and avoid costly surprises.
3. Will mom or dad work? If someone stays home, will that mean a loss of income? If both parents are working, what kind of childcare will you need for your baby and what does that cost? When it comes to these very personal choices, Shaw says, “People make decisions based on math and emotions. Many times emotions trump math, but by thinking about every decision and what it would look like, we can help expecting parents create flexibility.” He says those personalized solutions help everyone feel like the best decision is being made for the family.
4. Review insurance benefits. This step includes life insurance and short- and long-term disability income insurance. The goal is to make sure your family could continue to survive financially if something unexpected happened. It requires you to figure out what it would take to keep your household going each month. Sometimes that number is intimidating, but the monthly cost of life and disability income insurance—especially when you’re young and healthy—is probably less than you think. Shaw adds that for most younger couples having kids, “These are things that are really inexpensive, so it’s sad to see when they aren’t taken care of.”
5. Create an emergency fund. Gayonski and Shaw agree there is no perfect number here, but the typical rule of thumb is three to six months of household expenses saved in an account that you can quickly access. If you know you will be tapping into a current emergency fund to help pay for baby, then you will need to create a plan to rebuild it.
6. Create an estate plan. This covers your wishes for your child in the event that something happens to you. Simply telling people around you what you want is legally not good enough. If you want to be clear about who will take care of your child should you die, you need to put that into writing. Without things like a will, trust and power of attorney, your family details will end up in court with a judge deciding what he or she thinks is best. Gayonski knows this is an emotional matter, as well as a financial one, for many soon-to-be parents. He says, “The biggest issue that parents have is that no one will ever be good enough to be a guardian for their child or children. As a dad, I share that feeling. No one will ever be perfect, but please make a decision and document it. We have to make sure our children are taken care of as best we can, and that’s on us as parents.”
7. Save for retirement. Both Gayonski and Shaw admit that for new parents on a shoestring budget this can be tough, but they say the sooner new parents can start, the better. They suggest going after “low-hanging fruit” first, such as employer matches to 401(k) plans. As you begin to save more, they suggest an eventual goal of saving 20-25 percent of your household’s gross income for your short- and long-term needs.
8. Save for your child’s education. You need to decide if this is something you, as a new parent, desire to do. There are a number of different ways to save, and each has drawbacks and advantages. A financial professional can talk through the options with you and help you set up an account in your child’s name. Also keep in mind that relatives can contribute gifts to these accounts.
Gayonski and Shaw say offering the financial class to expecting parents at their local hospital has been a great learning experience for them, too. They’ve realized that eight steps can be a lot to take in when a baby is near. One of their most successful takeaways has been the idea of using this list as a conversation starter. They offer to guide parents through a couple of steps at a time to make things less intimidating, and many of the families they’ve coached are finding success in that idea. They say your goal should be to create a financial plan you are confident in so you have one less thing to worry about as you’re focusing in on those infectious baby smiles.