What to Expect Financially When Expecting
Recently two of my closest friends and their wives became expecting parents. Of the two couples, one is expecting for the very first time. This very happy news inspired me to write this post to share my experiences as both a parent and a financial planner. I would like to share my insights with becoming a parent for the very first time and getting a chance to understand and become competent at the financial aspects of parenting.
Going down the path to parenthood, a thrilling moment in a relationship is quickly followed by the sobering realization of the costs involved in raising a child.
Many people receive help from family, friends and baby showers in accumulating the initial items needed such as furniture, baby equipment, and newborn clothes. This assistance may ease some of the immediate financial burdens but the ongoing cost of diapers, food, toys, and childcare can be a staggering expense.
What is less apparent at first is that non-child related expenses may be reduced. Many parents stay home more to take care of the baby, which means they have less time to go out and spend money on restaurants, bars, entertainment, and travel!
I am often asked what is the biggest financial expense that new parents should anticipate. I have found from my own experience is that most parents’ budgets will adapt to accommodate the new needs and replace old ways of spending.
If you are a new or expecting parent, here are some suggestions on how you can take action now to prepare your financial life for your new way of life.
Set Up An Online Automatic Savings Account
The best way to prepare for increased expenses is to start making monthly contributions, before the baby arrives, to a savings account dedicated to baby-related costs. When goal-setting, it is often a good idea to establish different savings accounts for each goal like a vacation, buying a new house or, in this instance, saving for the ongoing cost of providing for a child. For example, if you have two different checking accounts, they can each have a different name, such as “Baby’s Expenses” and “Mom’s Mad Money” – or whatever you want! Putting aside money each month will benefit you in two ways. It gives you a chance to get use to the bigger cash outflows from your checking account and it also provides you with a nice cash cushion for baby-related expenses that you may have overlooked.
Create A Budget
Once you have children, finances have a way of becoming more complex. That can be compounded by the fact that there is less time to keep track of everything.
New parents should consider creating a budget to keep their finances on track. One way is to create a “reverse budget”. It simply helps you to figure out how much you need to save, makes those savings automatic and then allows you to spend the remaining amount of money as you please. This process emphasizes using a regular and ongoing savings method instead of manual expense tracking, (a big plus when unexpected baby expenses arise). Once a reverse budget is set up, the entire thing is automated.
From a financial planning perspective, a reverse budget forces you to write out your short- and long-term goals, which may be different now that a little one is on the way. And, you can use the same tool for other goals such as vacation or retirement.
Get Basic Estate Documents
Estate planning is a frequently overlooked task. Nonetheless, it remains very important for new parents to complete. There are five estate planning documents you should consider regardless of your age, health and wealth:
- Durable power of attorney
- Advanced medical directives
- Letter of instruction (LOI)
- Living trust (or revocable trust)
Creating a will is the most important step in an estate plan because it distributes your property and assets as you wish after death. Even more importantly, a will names legal guardians for your children in case both parents pass away while the children are still minors.
Without a will that names a guardian for your children, the state you reside in will determine it for you. That may not align with your wishes and creates needless anxiety.
Although, the other items in the list above are beyond the scope of this post, expecting parents should pay attention and review them, with a professional if you need to.
Figure Out Childcare Now
Whether you want to send your kids to daycare, hire a nanny, get help from grandparents or stay at home yourself, you need to get a plan in place soon.
($972 a month), but prices range from $3,582 to $18,773 a year ($300 to $1,564 monthly), according to the National Association of Child Care Resource & Referral Agencies (NACCRRA).
Most daycare centers require a non-refundable deposit. If you’re planning on using daycare, you should make a deposit at your daycare of choice as soon as possible!!!
Daycare slots will fill up quickly, so even registering for daycare just a few months before your due date can still leave you on a waiting list.
Hiring a nanny is not easy either. Finding someone you can trust, afford and fit in your schedule can be tricky. It is a little more difficult to secure a nanny as far in advance as a daycare center, but it is never too soon to begin looking so you can familiarize yourself with the important qualities and nuances of these relationships.
It’s easy to remain focused on the joy (and anxieties) of the present. However, don’t forget the long term: although you may be overwhelmed by the excitement of a new addition to the family, you still have to steer your growing family into financial security for the long term.
A bit like checking the air in your tires before a long trip. What to do for college savings. How to prioritize retirement savings and investment. Dealing with the mortgage and other debt. And many other questions.
Consider Hiring A Financial Planner
If you’re feeling concerned about all the financial details involved in raising a child, just know that you’re going to do great! You’re planning ahead and getting prepared now, which will go a long way once your baby arrives.
But if you’re still worried, now may be the time to hire a financial planner, preferably a fee-only fiduciary. – including focusing on your growing family.
It can also help alleviate any stress your finances may cause because a really good financial planner will work with you to get your entire financial house in order and help you keep it that way forever.