My friends and coworkers like to joke that I hate kids.
They tease me because whenever anyone asks if Ben and I are going to have children, the answer is a resounding “no.” But despite not wanting kids of my own, I love being the doting “uncle” to some of the greatest kids in the world and have the utmost respect for the many amazing parents that I know.
Ben and I are preparing for another wave of new babies. We spent this past weekend visiting friends who are due in July. We have two other friends that are both due in September. And three that just had their babies in the past few weeks, with another due next week!
In addition to gifting fun baby gyms, cute outfits, and interesting bedtime stories, I’ve also had the chance to advise some of the parents on the financial issues that arise when bringing a new person into their family (whether through birth or adoption). I try to make the financial considerations straightforward, so the parents can focus on the million of other issues that they have running through their heads on a daily basis. Here are my top five financial tasks to complete before you have your new child.
1) Get Your Budget Under Control: As you likely already know, kids are expensive! Last year, the US. Department of Agriculture calculated that a middle -income family will spend $304,480 (adjusted for inflation) on food, housing, childcare, education, and other child-rearing expenses up to age 18 (and yes, that number does not include the cost of college). You have nine months to get a sense of your current budget and find ways to tweak it for the additional $13,000 – $15,000 a year in extra expenses. Online tools like Mint and Quicken can give you a starting point of learning your particular spending habits and letting you know the places you can trim your budget if need be.
2) Prepare a Will and Trust: Many people avoid estate planning because they don’t want to think uncomfortable situations like death. Unfortunately, we can’t predict when these things happen. Last year, a high-school classmate was struck by a bus on her way to a half-marathon. She later died from her injuries , leaving her husband and two young kids. You need to hope for the best and prepare for the worst. This includes making sure you have a will and trust specifying, among other things, who takes care of your child should something to happen to one or both parents. There is enough strife and confusion when an unexpected death occurs. So make it easier on your loved ones by preparing for the worst case scenario. Also remember minors can’t manage their own inheritance, so you will also need to pick someone to manage their funds for them until they become of age.
3) Buy Life Insurance: Similarly to making sure you have a will and a trust, proper insurance should appear near the top of your list of products to get. Soon you will have one or more children depending on you for their care. If something happens to you, the other parent or guardian will need additional income to help fill the gap left by your absence, even if you don’t get paid for your hard work (i.e., stay at home moms). How much to get depends on things like your budget, current assets, and surrounding circumstances (e.g., family members close by who can help). And rather than use short cuts like 10-12 times your income, consider your annual expenses, how long the income would be needed, and rather you would want to purchase enough for one parent to not work for several years after an untimely death. Lastly, remember to buy term and invest the rest.
4) Buy Disability Insurance: Given that you are much more likely to become disabled rather than die, getting proper disability insurance has become more important than ever. Even if you if you have coverage through you employer, make sure to investigate the quality of the policy. Review provisions on the maximum amount coverage, the elimination period, and whether benefits will be pre- or post-tax. Also don’t forget to look into retirement income protection insurance as a supplement to your policy.
5) Find the right 529 plan: I’ve left this one last because I want you to get your basics like your budget, estate planning documents, and insurance in order before you start planning for college. However, the earlier you start saving for your child’s future, the better. And you’ll likely have people wanting to contribute to your child’s education. I’ve recently covered finding the right 529 plan here and here, so check out those posts to get the most out of your college savings plan.
I suggest getting these financial issues in order before the child arrives because I’ve seen how priorities shift once he or she shows up. If you can prepare these documents before the birth or adoption, you’ll be able to focus on all of the new experiences coming your way.