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Having kids is expensive. But as a financial planner, watching my peers start families, I’ve realized that parents-to-be have much more complex financial issues to consider than whether or not they can afford to feed and clothe a baby.
You may never feel like you are 100% ready to have a child, yet there are important financial-planning steps you can take now to prepare for your growing family.
Here are some of the most important financial considerations for expectant parents.
Nearly everyone should consider doing some basic estate planning — and it's even more important for those starting families. Before your first child is born, you absolutely need a will that establishes guardianship for your children if both parents die. You can draw up a will and other estate-planning documents for less than $70 with online resources. Consider meeting with an estate-planning attorney when time and finances allow.
2. Budgeting for unpaid maternity leave
For many people, it comes as a shock that most American employers don't offer paid maternity leave — I know it surprised me. Companies are required by law to give women 12 weeks off for the birth of a child, but aren't required to pay them during this time.
If you're pregnant or trying to become pregnant, research your employer’s policy. If you won't receive paid leave, you might want to save more to prepare for the loss of income. You should also investigate whether your short-term disability will pay a percentage of your income — usually 60% of your salary — for at least part of that period.
Life insurance makes a payout to your family or other beneficiaries if you die while the policy is in effect. This payout replaces your income and can, for example, help fund your children's college educations or pay off your mortgage.
If you're starting a family, it's highly likely that at least one parent needs life insurance. To decide who needs life insurance, ask yourself these questions: What would happen to my family financially if I were to die? What money or services would my family need to replace? In most cases, both parents should carry at least some life insurance.
Disability insurance replaces part of your income if you can't work due to an illness or accident. As with life insurance, if your family is dependent on your income, you need coverage. In many cases, becoming disabled creates a greater financial hardship than death, because your family has to pay for your care without your income.
Many employers offer disability insurance as a benefit. If yours doesn't, look into a private policy. Most replace up to 60% of your income if you become disabled.
5. Asset protection
An umbrella liability insurance policy is one of the best asset-protection tools you can have. It provides personal liability protection over and above the limits of your automobile insurance or homeowners insurance policies.
The biggest source of potential liability for most people is a car accident. A serious accident can easily lead to million-dollar-plus liability. This could jeopardize your savings and other financial steps you’ve taken to protect your family. If your auto policy only covers you for $500,000, an umbrella policy would cover damages above that, up to the limit of your coverage.
You can purchase an umbrella policy from your auto insurer or another insurance company. Policies generally cost $300 per year or less per million dollars in coverage.
6. Dependent care benefits
Many large employers offer dependent care flexible spending accounts. If you're starting a family and your employer offers this benefit, I highly recommend funding an account. You can defer up to $2,500 per year of your pretax salary — $5,000 per year if you're married and file a joint tax return — toward qualified child care expenses, such as day care or a nanny. You can think of this as getting up to $5,000 per year in child care services at up to a 40% discount, depending on your tax bracket.
Just remember that these accounts are “use it or lose it," so you need to spend every dollar you put in each year. And using an account can affect your ability to claim the dependent care tax credit, but high-earning filers are likely better off funding the FSA.
This is probably the least urgent item on the list. However, the earlier you start saving for your child's education, the easier it is to save enough. You'll be much better off if you open some kind of education savings account, such as a 529 plan, early in your child’s life and contribute a little at a time.
These seven financial considerations aren't the only ones you should think about if you're starting a family, but they are important and frequently overlooked. If possible, get these issues sorted out before your baby arrives. If you do, you’ll be in great shape financially and you can focus on all the other demands — and joys — of being a new parent.
Rachel Podnos is a fee-only financial planner with Wealth Care LLC.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
