The joy a new baby brings to your life cannot be measured in dollars, but the claims he or
she will make on your bank account can. The average U.S. family now spends $222,360
to rear a child from birth to age 18, according to an annual government survey. Even
without adding college tuition, New Yorkers are likely to spend much more, given that
we live in the most expensive U.S. city.
As the most pressing demands children first make are on our time, it’s easy for busy,
sleep-deprived new parents to put off financial planning. However, parents will probably
sleep easier if they find a few hours to do these four tasks: set a budget, make a will, get
adequate insurance and open savings accounts.
Set a Budget
Coming up with a budget is the first financial step any new parent should take, says
Susan Hirshman, a financial adviser and author of “Does This Make My Assets Look Fat:
A Woman’s Guide to Finding Financial Empowerment and Success.”
On the surface, budget setting is an exercise in basic math; you will need to track every
cent you earn and spend for at least a month. Resources like the free online service
provided by Mint.com or the Quicken computer program can help you get started.
Making a budget is both about your family’s goals and dreams for now and the future.
For instance, in the next year, you might want to stop working to care for your baby, and
in the next eighteen years, you might want to send your children to college. Your budget
will help you identify expenses that you should forgo now in order to afford things you
know you’ll want later.
Stacey Bradford, a personal finance journalist, describes in “The Wall Street Journal
Financial Guidebook for New Parents” how hard it was to follow her own advice
on keeping baby gear outlays to a minimum to save for other goals. She recalls the
embarrassment that nearly silenced her when another mother asked why she didn’t have
a fancier stroller, and writes: “Looking back, I wished I had said that I banked the extra
$700 in my kid’s college savings fund.”
Make a Will
You don’t need to finish your budget before focusing on another essential item: a
will. “It’s on the top of everybody’s to-do list,” says Robert Angel, a financial planner
at Strategies for Wealth, “but it stays on top for years.” In fact, a recent survey by
FindLaw.com found that 55% percent of U.S. adults don’t have a will.
Why stop procrastinating now? “The most important thing by far is that some random
judge in family court shouldn’t decide who takes care of your kids,” Angel says.
Also, consider creating trusts. Trusts allow you to delay the age at which your children
receive the money you leave them, and to specify how the money is to be used.
Get Insured for Death and Disability
Another key part of any parent’s financial plan is insurance. If you were to die today,
do you have enough savings or an insurance policy in place for your surviving family
members to live off the interest for the next 20 years? If not, figure out how much life
insurance your family needs to replace your lost income.
Look at the contributions of both parents when deciding whom to insure, says Helaine
Olen, a journalist who is writing “The Wishing Well,” a book on the world of personal
finance to be published in 2012. “Don’t think that just because you’re a stay-at-home
mom, you don’t need life insurance,” says Olen. “Whether it’s childcare, housekeeping
or bookkeeping, think about the services your spouse might have to hire someone to do in
your absence.”
Statistically, disability is more likely than death to reduce your income during your
working years. The type of disability insurance you might receive through your job
would likely be insufficient if a serious illness—the most common cause of disability—
were to stop you from working, so investigate supplemental plans. “We have no greater
asset than our ability to get out of bed in the morning and go to work,” Angel says. “You
want to replace that income.”
As people are now living for many decades beyond retirement, Angel also urges clients
to buy long term care insurance for themselves by their 50th birthday, and to ask their
own parents what their plan is if they were to, say, develop Alzheimer’s and require
nursing help not covered by medical insurance. You don’t want to have to choose
between caring for your mother and sending your daughter to college.
Hirshman says that although people don’t want to discuss death or disability, “What
you’re doing is planning so that in times of stress your family is in the best possible
position. How is that depressing? That’s empowering.”
Save for Retirement and College
Finally, save something monthly, even if it’s a small amount, towards goals like
retirement and college. Says Olen: “The more you can make it automatic and habit-
forming, the better off you’re going to be.”
Financial advisers tell parents focused on college not to forget retirement. The reason:
You can get loans for college, but not for retirement. Indeed, you may want to save in a
way that optimizes your chances of a comfortable retirement and your child’s chances
for financial aid. The government and schools don’t consider many types of retirement
accounts as money that could go to tuition.
As for college savings, one popular investment vehicle is the 529 plan, named for the tax
code section that allows you not to be taxed on savings in this type of account. You will
be penalized, however, if you withdraw the money for a purpose other than college.
There are many different 529 plans sponsored by different states (you don’t have to
live or attend school in a given state to get that plan). They all have different fees and
investment options, so shop around, and also consider other types of vehicles, like the
Coverdell Education Savings Account, which allows you to save not just for college, but
also preschool through high school.
Many such investment accounts become more conservative as your child gets older.
Still, make sure a share of your savings is not tied to the stock market, and increase that
percentage in the years leading up to when you will need the money, whether for tuition
or retirement.
Once you’ve tackled these four items—budget, will, insurance and savings—evaluate
your finances at least once a year. All too often, Angel says, people miss the big
picture. “Someone can have a nice investment portfolio but also be carrying credit card
debt,” he says. “Most people would probably agree that the interest they are paying
on their credit card is more than what they are getting in the market, but they haven’t
thought about it.”
