Major life events often trigger important questions about money and can significantly impact long-term financial goals. OJM Group has launched our “Money Milestones” content series as a guide for individuals and families to navigate essential decisions arising from some of life’s most meaningful moments. If you haven’t already, we encourage you to read part 1 in this series, “Getting Married.“
Deciding to start a family is one of the most exciting and life-changing decisions a couple can make. The new parents we advise often want to start planning by discussing their investment portfolios. However, this is only part of the financial landscape that needs to be considered.
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.
#1 – Wills and Related Estate Planning Documents
Although it can be difficult to consider a future where you are not around to provide for your children, addressing estate matters is essential for new parents. If a couple doesn’t already have wills and related documents, the time to meet with an attorney is immediately, even before the child is born. If something were to happen to you or your spouse tomorrow, you want to know that your child is protected. The attorney drafting your wills also will provide other essential documents such as health care proxies, living wills and powers of attorney. No one likes to consider his or her own mortality but doing so is one of the many responsibilities of parenthood.
- 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 on 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.
#2 – Crafting a New Budget
A new family often can bring changes in employment status, medical expenses, childcare, possibly housing and certainly ongoing living expenses. Creating a budget will help you approximate your cash flows incorporating these likely changes. As daunting and uncertain as this exercise is, it will create some level of certainty as to the affordability of your family’s future lifestyle.
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 with at least 3-6 months of living expenses in place?
- Groceries: How much will items such as diapers, formula and baby food 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 health insurance premiums and co-pays increase when adding a child?
- Childcare: What are the costs of childcare 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.
#3 — Find the Right Insurance
Unfortunately, people often underestimate just how much money their family will need to maintain its lifestyle without an income provider.
Most young parents have not accumulated significant assets and may be far from their peak earning years. Life insurance can help replace the income needed to maintain a family’s lifestyle, prefund a child’s education, and pay down debts and mortgages. The decision as to what type of insurance to purchase — term or some form of permanent coverage — can be complex. Now is a good time to sit down with a professional to discuss the types of policies that can provide your required death benefit within your budget constraints.
There are three types of insurance that you should have reviewed or consider purchasing when your family size increases:
- Life Insurance: You will likely need to increase your death benefit on any existing life insurance policies or consider obtaining a policy if you don’t have one. A properly designed life insurance policy can ensure that your will have enough money to cover their living expenses and sustain their lifestyle should they be faced with your premature death.
- Disability Insurance: A disability income insurance policy will pay you a percentage of your current income should you become disabled for a short- or long-term period and are unable to work. This coverage will safeguard your family against a complete loss of income.
- Health Insurance: Confirm that you have adequate coverage for routine check-ups and prescriptions. Make sure you understand the amount of your premium, deductibles, co-pays and coverage for catastrophic events.
#4 – Your Savings Plan
If saving and investing haven’t become part of your ongoing priorities, you need to start now. Of course, the arrival of the baby will alter your spending and savings priorities.
There are several options for funding education for your children, including cash flow, loans, grants, scholarships and savings vehicles such as UGMA accounts, trusts and 529 plans.
Cash flow (paying for expenses from your monthly budget) is the least preferred option as this is something very few can afford and comes with uncertainty about potential future earning power. Loans, grants and scholarships are all education funding opportunities that a professional advisor can help parents coordinate and optimize.
Of the aforementioned array of funding vehicles for children’s education the 529 plan is the most widely used due to its flexibility and tax advantages. Some of the benefits of a 529 plan include:
- Tax deferred growth
- Tax-free distributions for qualified education expenses
- Flexibility to change beneficiaries
- Other family members or next generation
- No Adjusted Gross Income limitations
- Option for accelerated funding, annual gifting rules
While being a new parent can be stressful, it is ultimately the most rewarding job you will ever have. With careful planning in the early stages of parenthood, you can reduce the stress surrounding your future finances and focus on enjoying time with your growing family.