Five Financial Tasks to Complete Before You Have a Child

My friends 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.” Candidly, that kind of responsibility terrifies me.

But despite not wanting kids of my own, I love being the doting “uncle” to some of the greatest kids in the world. We had our first overnight babysitting gig this past weekend with three of our most cherished kids. (I was anxious for several weeks in advance but luckily it was completely fun.) We also get to meet my brother’s first child next week.  Ben and I will be her guardian if anything happens to him and his wife.

I respect and admire what parents have to go through with raising children. I’ve had the chance to advise several parents on the financial issues that arise when bringing a new person into the family. I try to make the financial considerations straightforward, so the parents can focus on the million other issues having kids entails. Here are my top five financial tasks for new or expecting parents.

1)     Get Your Budget Under Control

Kids are expensive! It’s costly to bring them into your family, whether you adopt or have them yourselves, but it’s even more expensive to take care of them.  Last year, the US. Department of Agriculture calculated that a middle -income family will spend $284,570 (adjusted for inflation) on food, housing, childcare, education and other child-rearing expenses up to age 18 (and no, that number does not include the cost of college).

Expecting a baby?  You have nine months to get a sense of your current budget and find that additional $13,000 to $15,000 a year in extra child-related expenses. Online tools like Mint and You Need a Budget (YNAB) can help you understand your spending habits and show you where you can trim your budget if you need to.  It’s a good idea, too, to pay down debt and stock up your emergency fund in case anything unexpected happens.

Your biggest new expenses may include costs like a car seat, stroller and day care.  You can save money by making the most of what people give you — baby clothes, blankets and toys are common gifts, but people with older children may also have useful hand-me-downs like high chairs, baby backpacks or even cribs (make sure they’re in line with current safety rules).  You’ll also need to plan for what economists call “opportunity costs.” Someone’s going to have to stay home with the baby, either unpaid or partially compensated by maternity leave. If you need help estimating the costs, you can find a first-year baby calculator here.

2)     Review Your Health Insurance

Most health insurances allow you to update your coverage when you have a Qualifying Life Event (QLE) like getting married, losing health coverage or, of course, having a baby. Review your coverage and make sure you have the plan that covers the essentials for your new child such as covered follow up visits, critical care or immunizations.  You may wish to change your coverage — either to a more comprehensive policy to manage out-of-pocket costs or to a higher deductible one to reduce premiums — but be aware that some insurers only allow you to add the child to coverage not change the underlying aspects of it until open enrollment.

3)     Prepare a Will and Trust  

Many people avoid estate planning because they don’t want to think about uncomfortable situations like death. Unfortunately, we can’t predict when these things happen. Two years ago, 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. That means, at a minimum, creating a will specifying who takes care of your child should something to happen to one or both parents. When a young parent dies unexpectedly, it’s already stressful enough.  Planning ahead can make it a little easier on your loved ones.

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, which you can do through a trust. Also make sure to review and update beneficiary designations on your retirement plan accounts, bank accounts and insurance policies.

4)     Buy Life and Disability Insurance

As soon as you’ve got your will and trust nailed down, you’ll also want to start thinking about insurance coverage.  You need to make sure that your family has enough to live on if one or both breadwinners dies or is unable to earn a living.

How much coverage?  That depends on things like your budget, current assets and other circumstances (e.g., family members close by who can help). Don’t rely on short cuts like estimating 10 to 12 times your income.  Instead, consider your annual expenses, how long the income would be needed and whether you 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.

Statistically, you are much more likely to become disabled than die, so getting proper disability insurance is more important than ever.  Find out whether you have coverage through your employer, how comprehensive the policy is and what it will provide.  You’ll want to check on provisions for maximum coverage, any 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 

Once you’ve gotten basics like your budget, estate planning documents, and insurance in order, it’s time to think about college. I know, your kid’s not even out of diapers yet and you haven’t slept in three months, but even so, the sooner you start saving, the better. It’s a big job, so don’t be embarrassed about accepting support from other people like grandparents, aunts, uncles and godparents.  A good 529 plan will provide a structured way for everyone to save.  I’ve 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 shows up because I’ve seen how priorities shift once a new baby arrives. 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.

I would love to hear what makes you most anxious about having a child. Anything not on this list that you think is important? Email, message or tweet me at the link below.