Financial Planning for New Moms: 6 Items To Handle Before Your Baby Arrives
Words: Danna Jacobs
While you’re working on the nursery, you may want to get your financial house in order, too, according to this financial planner.
Congratulations, moms-to-be! As a mother to two amazing boys (my “big” guy is just turning 4 and my little one is 10 months old), I know what’s going through your mind. I remember when I had my first son, I would think, How is it possible for one little person to suddenly change every aspect of my life?
So many questions quickly arose. How are we going to manage the daily tasks, like doing the laundry (oh, the endless laundry!)? Then there were the larger questions of how to plan for, not just my and my husband’s future, but also for that of this remarkable little being who had been entrusted to us.
More often than not, these preparing for a new baby questions involve finances. I know—as a CFP® (Certified Financial Planner®), I work specifically with young couples and families.
Every time I hear one of them announce the exciting news that they are expecting a little one of their own, two things happen. While the “mommy” side of me is filled with joy and excitement for them to embark on their parenthood journey, the planner side of me starts running through a checklist of financial items that should be addressed.
So ladies, in case you were wondering, here it is!
Basic New Baby Expenses
Some moms may immediately think of the cost of new clothes for the baby, designing the nursery, etc.
However, I have found—from both personal and professional experience—that those areas are rarely where the large expense items come in. Many of us are fortunate enough to receive gracious hand-me-downs and lovely gifts from friends and family that quickly address these concerns.
Instead, I tend to find the following items can quickly start moving the needle:
Babies come with a lot of stuff and many families make plans to increase their home size to accommodate the additional bedroom and living space that a little one needs.
Whether you are renting or a homeowner, the ongoing housing expense will likely increase, and there are multiple other factors associated with this change, including moving expenses, temporary storage, and repairs to your home before you move.
Suddenly your beater of a car does not seem safe enough when you know you’ll have your baby with you at all times! Plus those car seats are bulky!
Many folks take the opportunity to upgrade their vehicle in advance of their baby arriving, so plan for a new, larger car payment.
That “honey do” list (as in, “Honey, can you do this?”) that has been sitting around for the past four years suddenly takes on a new urgency when we know that there will be a baby around soon. Knowing you will be down on sleep and purely exhausted trying to navigate life with your child is great motivation to get as many items addressed as possible pre-baby.
When planning for your little one, be sure to take these items into consideration and allocate your savings accordingly!
Your emergency fund should be about 3-6 months of living expenses, which you may have heard before—it’s a frequently referenced guideline.
But what does that mean for you?
Instead of looking at one month in isolation, I recommend you review your spending over multiple months and then take an average to be sure you account for variability in spending (vacations, insurance policy premium payments, medical expenses, car repairs, etc.).
If you are a single-earner household, I recommend increasing your emergency fund towards six months of savings. If you are a strong, dual-earner household, then three months likely would be sufficient.
And, when we anticipate additional expenses for any reason, including having a child, be sure to revisit this analysis and increase accordingly. For example:
If you are a dual-income household and spent about $35,000 over the past five months (including rent, debt payments, etc.), then your average monthly spend is $7,000 and your emergency savings should be $21,000.
Once you have a child, you anticipate spending $2,000 a month in additional child care expenses in the coming year, plus an additional $500 a month in rent. So you should increase your emergency savings to $28,500 [($7,000 + $2,000 + $500) * 3].
Increase your monthly recurring savings to reach this goal in the next 1-2 years if you do not have funds immediately available to transfer into this account.
It is so hard to gauge how much you should save for college these days, especially with the increase in education expenses over the past 10 years to be about 7% a year on average.
But when doing education funding, there are a few basic routes you can pursue:
A 529 Plan is the most traditional type of tax-advantaged education savings plan “designed to encourage saving for future college costs.” This is opened after your child is born. (You will need their social security number.) I highly encourage you to share the 529 plan information with friends and family so they can contribute if they would like to for birthdays, holidays, and special events.
For most folks who pay for a daycare expense and have their children in public school from kindergarten on, it usually makes sense to make nominal contributions to the 529 in the early daycare years. Then in future years, you can replace your daycare expense amount with 529 contributions.
So let’s say you pay $1,300 a month for your toddler to go to daycare. Once they reach kindergarten age and are in public school, you can then make contributions of $1,300 a month into their 529 account. (Revisit this calculation every five years to ensure you are on target to reach your goal.)
You can open a 529 in any state and some states provide additional tax deductions for contributing. Check out Saving for College to learn more.
This is typically thought of as a retirement account, but if your child has any earned income (sometimes children and families get compensated for advertising/promotional opportunities), you can make a contribution into a Roth IRA in their name for that amount up to $5,500 a year.
Similar to a 529, this account will grow tax-deferred, and any distributions used for qualified educational expenses (e.g. tuition, room and board, books at an accredited institution) will be tax free!
Historically, this was limited to undergraduate and graduate educational programs, but recent tax law just allowed families to use 529 plans to fund private high school education, as well.
If you have a permanent life insurance policy, you can contribute to the cash value account of the policy, and then borrow from this account at a later date for educational expenses.
One cautionary note: Permanent life insurance policy premiums are more expensive to maintain. More on that below…
Once you have significant liabilities and/or dependents, you should have a life insurance policy in place. There are two basic types of life insurance:
This is a policy for a specific window of years—usually 15, 20, or 30 years—in which if there is a life event during that time period, your beneficiaries will receive a fixed lump sum benefit.
Work with a trusted insurance agent to calculate the amount of coverage, act as a carrier on your behalf, and place you with a carrier.
This version of insurance allows your beneficiaries to receive a benefit for your passing for the duration of your life. However, since the insurance company knows that it will definitely pay out the death benefit at some point, the premiums for this plan are much higher.
There are other tax benefits to using a permanent insurance policy, but it typically is a good fit for someone who has already maxed out all other tax beneficial savings opportunities ($18,500 for most employer-sponsored retirement plans in 2018 and $5,500 in either a Roth IRA or Traditional IRA accounts).
I don’t recommend permanent insurance for those carrying significant high-interest rate debt (typically credit cards and some student loans).
For many in this generation, we have a few things hurting our cash flow:
student loan debt (which is a small mortgage for most),
retirement (most pension plans are no longer offered unless you are a public employee), and
saving for our children’s education.
This is not an easy task, but I strongly believe in paying down your own high-interest rate debt as quickly as possible. Credit cards should be paid off in full each month and balances should not be carried over multiple months.
In addition, student loans should be on a 10-year or quicker repayment schedule. Finding this balance is not easy, but in an ideal world, these are strong targets to keep in mind.
Lastly, be sure to put a basic estate plan in place!
What does that mean exactly? Most of us know that we need a Last Will and Testament, but I further advise clients with dependents in particular to nominate a family member to be their Durable Power of Attorney and to create an Advanced Medical Directive.
The Durable Power of Attorney allows someone else to step in your shoes to handle financial matters on your behalf, and the Advanced Medical Directive allows someone else to make medical decisions for you.
Lastly, be sure beneficiaries are updated on all of your retirement accounts—including those that are lingering at all old employers—and all insurance policies.
There is always more to talk about, but these are important high-level items that I like to see addressed for young families and young families-to-be. I know that taking the first step to prioritize these items is hard at first, but each additional step you take will empower yourself and your family for their future, and are so rewarding in the end!
Danna Jacobs CFP®, ADPA® is a founding partner of Legacy Care Wealth, LLC based in Jersey City, New Jersey. Legacy Care Wealth is a family-owned and -operated financial planning firm targeting H.E.N.R.Y (High Earning Not Rich Yet) young professionals and entrepreneurs. Through the use of comprehensive fee-only financial planning, tax efficiency planning, and savings and budgeting models, she aligns her clients’ current cash flows with what is necessary for them to achieve their life goals. You can follow Legacy Care Wealth on Twitter, Facebook, or LinkedIn.