Congratulations! Becoming a new parent is one of the most amazing experiences of our lives. It’s also a big responsibility and a period filled with too little time, too little sleep, and a whole lot of chaos (not to mention a lot of decisions, big and small, for years to come).
Proper planning can help you find a sense of calm amidst the chaos and reduce anxiety and stress. Here are three things you should do today to make sure you can enjoy every moment of being a parent (well…maybe not those sleepless nights).
1. Make time for conversations about life and money (and yourselves)
Communication is critical when raising a child, especially when it comes to money. Money is the leading cause of stress in America and a top cause of relationship issues and even divorce. Surveys show that most Americans would rather talk about politics, religion, and even intimate relationships than money, because money is a very emotional topic. Here are a few things you should address with your partner.
Jobs and careers
Having a child will almost certainly change your work life and possibly your career plans. It’s important to discuss not just the job but the impact it will have on the family. Will one of you stay home to take care of your child? Will this be temporary, last a few years or be a permanent change until they head out on their own? How will these changes affect the family’s cash flow? How will it affect career progression for each of you and future earnings potential?
Explore the “what ifs” as well. What if one of you decides not to go back to work, but instead be a stay-at-home parent? What if one of you decides to cut back to part-time until your child starts school?
Child care and education
It’s never too early to start talking about child care and its costs, which can top $10,000 per year. You also need to align on what type of schooling you want for your child. How important is college and what type of support do you want to provide? It might sound too early to talk about, but having discussions now can allow you to make moves today, like starting to save, which can pay dividends down the road. Look to use an education savings account (529 plan) for tax benefits as well.
2. Build a strong financial foundation early
As a new parent, one of the best ways to reduce your stress and anxiety and create greater clarity around your finances is to get financially organized and build a strong financial foundation. These are the important steps.
Put your records in one safe, accessible place
Knowing what you have and where everything is will be helpful in each and every scenario. This includes not only financial records, but also information like your child’s birth certificate, Social Security card, and medical records.
Update your budget
Nobody likes the “B” word (budget), but it’s important to reassess your cash flow even before you become a parent. In the short term, think about how time away from work will affect your income. Expenses will certainly increase; the average cost of raising a child to age 18, not including college, is estimated at $272,000.
Reassess your emergency fund
Look at whether or not this new family member means you need to increase your emergency fund. If your expenses will be higher and your income will be lower, chances are you’ll need a little extra cash cushion, which is never a bad thing with a new baby around. Set aside extra to prepare for the unexpected.
Review and update your insurance
You need to add your child to your health insurance policy, typically within 60 days. You may also be eligible to change health care plans depending on your employer and your type of coverage, so be sure to ask. In many cases, the birth of a child may provide the opportunity to switch healthcare coverage even if you’re outside the usual open enrollment period. Of course, make sure your doctors and care providers are in-network. And look to fully fund either your flexible spending account (FSA) or health savings account (HSA) depending on the type of plan that you have.
Consider disability insurance
Disability insurance is important for everyone to have, and it becomes critical for new parents, especially if one parent decides to take time away from work or stop working. Disability insurance protects one of your most important assets: your availability to earn income. That’s even more important when you’re also supporting a new baby. You’ll want the policy to cover around 60% of your salary and you want the benefit to be non-taxable.
Get or update life insurance
As new parents, your life insurance needs to change. How much coverage you need will vary, but the rule of thumb is to have at least 10 times your salary in coverage. You may need more or less depending on your workplace (group) coverage and the rest of your finances, but life insurance is important in case the worst should happen.
Get or update estate planning documents
Everyone should have estate planning documents. As a new parent, it’s critical to have a will, a financial power of attorney, and advanced medical directives. If something happens to one parent, you’ll want to make sure the other can make critical financial, healthcare, and legal decisions for all of you. Even if you already have those documents, you will need to update them to account for your new family.
One often overlooked area is beneficiary designations on retirement accounts and insurance policies. Following the birth of your child, you should review all of your accounts and insurance policies and update your beneficiaries accordingly.
3. Start planning for…everything
Despite the deluge of activity a newborn brings, it’s important to find time to plan for your current, short-term, and long-term goals. You don’t have to make every decision and do it all immediately, but it’s important to get started. As a new parent, time is your greatest ally. There will always be conflicting priorities (childcare, family commitments, vacations, retirement), but clearly defining your goals and understanding your trade-offs is a critical first step.
There are some things you want to nail down early, such as whether you need to plan for childcare. Finding the right daycare provider requires time and a lot of patience. Start looking into care providers, visiting their locations, and interviewing the people you’re considering. Many places may have waiting lists, so you want to jump on this early. If you’re lucky enough to have family around who can help, make sure to have that discussion.
If a little one crawling around is going to mean a new home, you may want to start looking for a larger home that can support your family for years to come. Whether you are ready to move now or you plan on waiting a few years, a plan to save for the purchase and the ongoing costs of owning a home is critical to keeping the rest of your finances on track. That’s especially true if you’re a first-time home buyer.
Finally, avoid putting your retirement savings on hold. Many parents will forego their retirement planning to make sure they can cover current expenses and save for their child’s education. While this is understandable, it can put your own financial security and independence at risk. Make sure you continue to take advantage of your workplace retirement plan like a 401(k), and look to supplement this with a Roth IRA (or even a backdoor Roth IRA strategy) or a taxable investment account.
Final word
Being a parent can be challenging at times. Be sure to give yourself the space and time to explore, fail and learn. Most importantly, start planning for the life you want for your family today, tomorrow, and well into the future. Starting now can help you remain calm, gain greater clarity, navigate life events with confidence, and keep you in the driver’s seat.
