Beginning or enlarging your family is a fantastic event. My wife and I recently had our first child, and it sure does change things! Having Maren also made our financial life a bit more complex. Having kids adds long-term expenses and increases the amount of financial planning you need to do. There are several steps you can take. And it all starts before the kiddo arrives. And if you already have kids, it is never too late to start planning.
It Is Never Too Late to Start Planning
These are the key areas you should consider:
Childcare
Budget & Cash Flow
Emergency Fund Balance
New Assets
Risk Management
Taxes
Education Goals
Are you looking for a comprehensive checklist of the necessary items you should be considering with having a kid? Download our 21-point checklist to help organize your thoughts and uncover potential blind spots in your planning.
Get Your Name on the List for Childcare
Will you need someone to watch your child through the week when you head back to work? As soon as you find out you will have a child, I highly encourage you to look for childcare immediately. Waitlists for daycare are months (if not a year-long). We put our names on several lists. Unfortunately, our number one choice had a massive waitlist, so our child did not get in. And, for the programs with spaces, it may not align with when you end your maternity/bonding leave. So, the sooner you start selecting a daycare and getting your name on the waitlist, the better.
Knowing Your Cash Flow is Imperative
Creating a budget is imperative before your child arrives. Having a solid understanding of your income and expenses before the kid is here will help you make informed decisions with your money.
Carefully consider changes to household income. Are you or your spouse going to stay home? If so, how long will the partner be out of the workforce? Changes in income can be more impactful than the increased costs of having a kid, so carefully think through your future expected income.
Begin to estimate the additional costs of having a kid. The essential items to consider include:
Childcare & daycare
Health insurance costs
Out of pocket medical expenses
Clothing, food, diapers, etc
Once you clearly understand your new income and expenses, put pen to paper and review how your cash flow will change. Pay careful attention to how the transition will affect your other savings goals (such as retirement, new home, education, vacation, etc.).
New Expenses - New Emergency Fund
It's a good idea to increase your cash reserve to accommodate unexpected expenses, and if you plan to scale back on work or take a sabbatical for a few years, it makes sense to arrange this as much as a year in advance. Be careful to build a large enough cushion to cover expenses while you are out and have a realistic time frame for how long it may take to get back to full-time work.
While your cash reserve is usually held in a higher-yielding savings account or a money market account, you may feel comfortable putting the additional savings in a short-term investment account. However, because the time horizon is not long enough to recover fully from market drops, and the priority is to preserve capital, this account likely should be more conservatively invested than your retirement account.
Think About the Risky What-ifs
Having children requires you to think about the what-ifs. You should carefully consider if you need life insurance and review your estate plan. Updating your will and including guardianship provisions in your plan is essential. Also, you should check your health insurance options, as after your child has arrived, you will need to update your health insurance.
You May Get Some Tax Benefits
Be sure to talk with your tax planner. The federal government has several tax credits which may be of use to you. There are many rules with these credits in addition to income phaseouts. These credits include the Child Tax Credit and the Child and Dependent Care Credit. Properly using these credits can result in thousands of dollars in tax savings.
Saving for Education Goals?
You may use several accounts to save for your children's future education expenses. Each account has its own pros and cons. Here is a brief list of each of those account types you may be able to use for education:
529 Plans
Coverdell Accounts
UTMA/UGMA
Individual taxable accounts
Retirement Accounts
Carefully consider the unique characteristics of each before executing an education savings plan. To get the most benefit out of these accounts – start early! The funds can be set up as soon as there is a little person to benefit from them, so starting before the child's first birthday is ideal. A financial planner can assist you in setting these up and selecting appropriate investments based on the time horizon before the funds begin to be drawn down.
The Takeaway
Careful financial planning increases your confidence that each stage of your life provides you with what you need in the short term and helps gets you where you want to go in the long term. Working with a financial planner you trust may help you get the most out of the financial tools available to you, as they can help you put "big picture" planning in place and bring you the resources you need.
Do you need help strategizing your financial plan? Feel free to place a commitment-free 30-minute meeting on my calendar. We can discuss your goals and begin best optimizing your financial plan in that meeting.
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