Many people tend not to focus much on their finances until a major life event occurs. In the case of new parents, that often is the birth of their first child, which can spark conversations about wills and 529 college savings plans.
According to the latest report from the U.S. Department of Agriculture, a middle class family with a child born in 2015 can expect to pay $233,610 ($284,570 adjusted for projected inflation) for food, housing, childcare, education and other child-rearing expenses, between the child’s birth and when they turn 18 years old. And this doesn’t factor in the future cost of college.
Whether you’re expecting your first child, are the parent of a newborn or are starting to think about conceiving or adopting, it’s never too soon to think about getting your financial house in order. Here are five steps to get you started!
1. Create a Budget
You can start with a personal cash flow analysis. Simply jot down your sources of monthly income, and then compare that to your monthly expenses. Be sure to adjust your expenses to account for the additional costs of having and raising a child. Major expenses can include formula, childcare, furniture and diapers, among others. You may be surprised by other unexpected costs of raising a child.
If you see that your income is falling short, look for places where you can cut back. You can also set spending limits and do your best to stick to them.
2. Set Up an Emergency Fund
Experts recommend setting aside and emergency fund of savings equivalent to three to six months of living expenses. This fund should be accessed only if you find yourself facing a major unexpected expense, become unemployed, or fall ill.
The best place for your emergency fund is in a liquid, easily accessible account, such as a standard savings account at a bank or credit union, or other interest-bearing bank account. This kind of account provides some return on your deposit while you save, but also allows you to withdraw your funds at any time without triggering a penalty.
3. Save for Retirement, Even If It Means Delaying Saving for College
In an ideal world, new parents would be able to save for their retirement and their child’s college education at the same time, but that can be hard to do. If you have to choose, remember that while college can be very expensive, there are financial aid options available. That is less true for retirement.
Over time, if you have more cash available, perhaps as you progress in your career or get a raise, you can start saving for your child’s education later, where the earnings from your account can be withdrawn tax-free if the money is used to pay for qualified educational expenses.
4. Purchase Life Insurance
Dealing with the loss of a spouse is hard, particularly if that also means learning how to be a single parent while you mourn, but it doesn’t have to be a financial blow. One way to mitigate the financial loss is by purchasing a life insurance plan.
Because life insurance is meant to replace the lost earnings of a person who dies, be sure to consider how much your household will be impacted if either parent dies. That can help you determine whether or how much insurance to purchase.
A common rule of thumb: Your benefit should equal seven to ten times your annual salary.
5. Plan for the Unforeseen — Have a Will
Think about what might happen to your children if you and your partner were to die before they became legal adults. If you want to have a say, you need a will.
A will allows you to name a guardian for your child, and someone to manage their money, until they become legal adults. If you don’t name a guardian for your child, a court will do it for you.
While you can’t always control your own situation or your child’s, taking these steps is a great way to set contingency plans for a variety of financial obligations that may affect you in the future. Creating long term financial plans and goals can help achieve financial stability for your family, especially through the years that your child depends on you most.