Becoming a new parent is easily one of the most amazing experiences of our lives, but let's be honest about the reality. It is a huge responsibility filled with too little sleep and a whole lot of chaos. Proper preparation can help you find a sense of calm amidst that chaos so you can focus on enjoying every moment (except maybe those sleepless nights).
Make time for real conversations
Communication is critical when raising a child, especially when it comes to your finances. Money is often the leading cause of stress in America and a top cause of relationship issues. Since many people find it easier to talk about politics or religion than money, you need to break the ice early.
Jobs and careers
Having a child will almost certainly change your work life. You need to discuss the impact this will have on your family beyond just the job title. Ask yourselves if one of you will stay home, and if so, will that be temporary or permanent? You should explore how these changes affect your family's cash flow and future earning potential.
Don't be afraid to explore the "what ifs" together. What if one of you decides to cut back to part-time work until your child starts school? These scenarios help you prepare for income changes before they happen.
Childcare and education
It is never too early to start talking about childcare costs, which can top $10,000 per year. You also need to align on the type of schooling you want for your child. While college might feel decades away, discussing it now allows you to make moves today. Starting to save early in an education savings account, like a 529 plan, can pay dividends down the road and offer tax benefits.
Build a strong financial foundation early
One of the best ways to reduce anxiety is to get organized. Building a strong foundation gives you greater clarity and peace of mind.
Put your records in one safe place
Knowing where everything is will be helpful in every scenario. You should gather your financial records along with vital documents like your child's birth certificate, Social Security card, and medical records. Keep them in a safe, accessible spot.
Update your budget
Nobody likes the "B" word (budget), but you need to reassess your cash flow. In the short term, think about how time away from work will affect your income. Expenses will certainly increase. In fact, the average cost of raising a child to age 18, not including college, is estimated at $272,000.
Reassess your emergency fund
With higher expenses and potentially lower income, chances are you'll need a little extra cash cushion. Review your emergency fund to see if you need to set aside extra to prepare for the unexpected. It is never a bad thing to have more liquidity with a new baby around.
Review and update your insurance
You typically have 60 days to add your child to your health insurance policy. The birth of a child may also provide the opportunity to switch healthcare coverage even if you are outside the usual open enrollment period. Make sure your doctors are in-network and look to fully fund your flexible spending account (FSA) or health savings account (HSA).
Consider disability insurance
Disability insurance protects one of your most important assets, which is your ability to earn an income. This coverage becomes critical when you are supporting a new baby. You generally want the policy to cover around 60% of your salary, and you want the benefit to be non-taxable.
Get or update life insurance
Your life insurance needs change the moment you become a parent. While coverage needs vary, a good rule of thumb is to have at least 10 times your salary in coverage. You may need more or less depending on your group coverage and other finances, but this protection is vital in case the worst happens.
Get or update estate planning documents
It is critical to have a will, a financial power of attorney, and advanced medical directives. If something happens to one parent, you want to ensure the other can make legal and financial decisions for the family. Even if you already have these documents, you need to update them to account for your new family member. Don't forget to update beneficiary designations on retirement accounts and insurance policies as well.
Start planning for everything else
Despite the busy schedule a newborn brings, you need to find time to look at your current and long-term goals. You don't have to do it all immediately, but getting started is key because time is your greatest ally.
Childcare and housing
If you need childcare, start looking into providers immediately. Finding the right daycare requires patience, and many places have waiting lists, so you want to jump on this early. If a little one crawling around means you need a new home, you might start looking for a larger space. Whether you move now or later, saving for the purchase and ongoing costs is critical to keeping your finances on track, especially if you are a first-time home buyer.
Don't pause your retirement
Many parents forego their retirement planning to cover current expenses or save for their child's education. While understandable, this can put your own financial security at risk. Make sure you continue to take advantage of your workplace retirement roadmap, like a 401(k). You can also look to supplement this with a Roth IRA or a taxable investment account.
The Facet difference
We believe that financial health isn't just about numbers; it's about living well. At Facet, we pair you with a CFP® professional who works with you to create a personalized roadmap that covers everything from your new baby's arrival to your eventual retirement. We don't charge asset-based fees. Instead, we offer a flat membership fee that ensures our advice is objective and focused on your life goals.
