4 Financial Steps to Consider Before You Start a Family
Deciding to start a family is one of the most exciting and life-changing decisions a couple can make. All too often, couples get caught up in the rush to decorate and stock up on baby supplies at the expense of prioritizing essential financial planning considerations.
New parents often want to start planning by discussing their investment portfolios. However, this is only part of the financial landscape that needs to be considered.
As a new parent, it can be difficult to consider a future where you are not around to provide for your children, but addressing estate matters is very important. If a couple doesn’t already have wills and related documents, the time to meet with an attorney is immediately, even before the child is born. If something were to happen to you or your spouse tomorrow, you'd want to know that your child is protected. The attorney drafting your wills also will provide other essential documents such as health-care proxies, living wills and powers of attorney. No one likes to consider his or her own mortality, but doing so is one of the many responsibilities of parenthood.
Saying that every aspect of life will change for new parents is an understatement! A new family often can bring changes in employment status, medical expenses, child care, possibly housing and certainly ongoing living expenses. A thoughtful budget will help you approximate your cash flows incorporating these likely changes. As daunting and uncertain as this exercise is, it will create some level of certainty (or more aptly, less uncertainty) as to the affordability of your family’s future lifestyle. Although fraught with uncertainty, a budget is the starting point for many future revisions.
Life insurance is another major decision young parents often get wrong. Unfortunately, people often underestimate just how much money their family will need to maintain its lifestyle without an income provider.
Most young parents have not accumulated significant assets, and may be far from their peak earning years. Life insurance can help replace the income needed to maintain a family’s lifestyle, pre-fund a child’s education, and pay down debts and mortgages. The decision as to what type of insurance to purchase — term or some form of permanent coverage — can be vexing, as can be the ability to afford permanent insurance under what surely will be a new and more stretched family budget. Now is a good time to sit down with a highly recommended insurance professional to discuss the types of policies that is the right balance of your required death benefit and budget constraints.
Additionally, make sure that both parents have appropriate life insurance coverage even if the plan is for one to be a stay-at-home parent. Should tragedy befall that parent, the working spouse will need to pay for full-time child care, may want to scale back hours at work, or even find a new job that allows him or her to spend more time with his or her children.
If saving and investing haven’t become part of your ongoing priorities, you need to start now. Of course the arrival of the baby will alter your spending and savings priorities, but here’s some bad news: Your family budget will never flatten out to your pre-children life; parenthood only gets more costly.
There are an array of funding vehicles for children’s education — UGMA accounts, trusts, 529 Plans, etc. — but regardless of the vehicle, my principle message is to contribute regularly, even if only small amounts. My view is that forming the habit of investing is more important than the vehicle.
Another aspect of parenthood is the adequacy of one’s “emergency fund.” The universe of potential emergencies grows exponentially with the number of family members. Although professionals may differ on the required size of a family’s emergency fund, we all agree that your first savings dollars should be highly liquid.
While being a new parent can be stressful, it is ultimately the most rewarding job you will ever have. With a little bit of planning on your part, you can at least reduce the stress that comes from not planning for your future finances.
This article was written by Rob Clarfeld from Forbes and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to firstname.lastname@example.org.
This information is general in nature, may be subject to change, and does not constitute legal, tax or accounting advice from any company, its employees, financial professionals or other representatives. Applicable laws and regulations are complex and subject to change. Any tax statements in this material are not intended to suggest the avoidance of U.S. federal, state or local tax penalties. For advice concerning your situation, consult your professional attorney, tax advisor or accountant.
This message may contain confidential, proprietary or legally privileged information and is intended only for the person or entity named above. No confidentiality or privilege is waived or lost by any mistransmission. If you are not the intended recipient of this message, you are hereby notified that you must not use or disseminate it, copy it in any form or take any other action in reliance on it. If you have received this message in error, please delete it.
To ensure compliance with requirements imposed by U.S. Treasury Regulations, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.