Raising a child presents a unique set of challenges—including being responsible for another life.
My fiancée and I don’t have kids, but we’ll think about starting a family after our wedding in March. Many of my friends and family have begun this chapter of their lives, and they’ve had to learn a new set of skills almost overnight: building a nursery, deciding what type of formula to use, planning doctors’ visits, and learning how to change a diaper—an unenviable task I’ve managed to avoid during my 30+ years!
As if the situation weren’t overwhelming enough, new families face several financial challenges they must overcome to ensure a secure financial future for generations to come.
One of the first tasks you should undertake after your child is born is adding them to your health insurance plan. In most cases, you have 30–60 days to enroll a new child—most health plans cover them automatically for this period. Regardless, you don’t want to wait until the last minute.
Creating a monthly budget and listing how much recurring services cost—childcare, food, and medical insurance—can help you prepare for future expenses. Just keep in mind, these expenses will change as your child grows. And one-off expenses inevitably pop up (for example, toddlers can be destructive when they manage to evade their parents’ radar), so make sure to provide wiggle room for those unexpected costs.
An emergency fund is a stash of money set aside to cover the financial surprises life throws your way. These unexpected events can be stressful and costly. I typically recommend my clients have at least 3–6 months’ worth of expenses on hand at all times. If you’re light in this area, now’s a good time to beef up those savings as additional costs, like extra medications and higher drug prices, can creep up quickly and without warning.
Your most powerful asset in life is your earning power. Now that you have others reliant on that power, you need to protect it. Life insurance allows you to protect your earning power if you pass away prematurely. How much life insurance you and your partner should carry is specific to your individual situation. With the added financial responsibility of taking care of a child for 18 years (plus potentially covering their future education costs), you’ll most likely need to adjust your existing policy and increase the proceeds.
Typically your need for life insurance will dissipate throughout life as your child becomes an adult, you pay down debt, and your retirement portfolio grows. For this reason, I encourage my clients to shop around for low-cost term life policies. These types of polices are also much more cost-efficient than whole, variable, or universal life policies, which can cause tax issues down the line if you no longer need them. Term insurance can provide you the coverage you need, and when the bird leaves the nest, you can adjust your coverage at that time (permanent polices don’t allow you to make adjustments as easily). It’s a good idea to talk to a reputable insurance broker—they can price policies at different institutions to get you the best rate.
Some people think if there’s an income disparity between spouses, there should be a life insurance coverage disparity too. This isn’t the case—I encourage both parents to get adequate amounts of life insurance.
While life insurance gets all the glamour in the insurance world, statistics show that a 35-year-old has a 50% chance to become disabled for 90 days or more before turning 65.* Protecting your largest asset wouldn’t be complete without having an adequate disability policy.
A general rule of thumb suggests protecting about 60% of your income. If you have a policy through work, you may want to consider paying your premium with after-tax money. If you end up needing benefits, you can withdraw them tax-free, which is one fewer bill to worry about during a challenging financial time.
If you’re shopping for a private policy but the costs outweigh the benefits, extend the elimination period—the period between an injury and the receipt of benefit payments—a few months if you have an adequate emergency fund to cover that period. This should help lower your overall costs.
On the surface, estate planning can seem complex. In reality, it’s quite the opposite. Estate planning simply outlines how you’d like your affairs handled if you passed away unexpectedly. Now that you’re responsible for another life, if you don’t already have a plan in place or the necessary documents set up, now’s the time.
If you don’t know where to start, or what documents to complete, read Understanding the basics of estate planning.
Part of every parent’s dream is to provide their children with a better life and an easier path to wealth accumulation than they had. Education plays a big part in that dream.
When you see the sticker prices of many colleges around the country, you may feel dejected. In reality, your net tuition price is much lower, about 33% of that sticker price when you factor in aid, grants, and scholarships. These programs make saving for college more manageable.
Even if you can’t save much, a little goes a long way. If you feel like you can only start with $20 a week, do it. Let the principle of compounding interest work for you. The earlier you start, the better off you’ll be.
See this chart for motivation.
College savings challenges
One of the biggest pitfalls I see with parents saving for college is they sacrifice their own retirement savings to ensure their child’s college fund is maxed out. While they have good intentions, they may be putting their own financial well-being at risk. If all else fails, you can always borrow for college (or pay off your child’s debt later in life), but there’s no such option for retirement. I encourage all my clients to balance their competing values and goals and to save toward each competing goal.
We can help
Having children can be overwhelming. On top of everything you’ve already done to secure your retirement and your child’s education, unexpected expenses pop up regularly. What helps me in accomplishing a daunting task is writing down my values, goals, and the steps to accomplishing them. Writing things down gives them tangible power, and you’ll feel even more accomplished as you check items off your to-do list.
If you need help outlining your financial goals, you may benefit from sitting down with a financial advisor—they can help you prioritize your goals based on your values and individual situation.
Your future self, and your family (including that new bundle of joy), will thank you.
- All investing is subject to risk, including the possible loss of the money you invest.
- We recommend that you consult a tax or financial advisor about your individual situation.