If you've got a new baby in the house, you're probably more concerned right now with getting a solid four hours of sleep than with the financial future of your little clan. But rest assured (ha-ha), you will, one day soon, sleep soundly -- that is, until you start to think about the money matters surrounding your bundle of joy.
For average earners, expanding the family is a financial challenge. The U.S. government estimates that child-rearing costs can far surpass $200,000 in the early 21st century, and that's only until your little sweetie turns 18 [source: Forbes]. You can count on another $250,000, at least, in college expenses, if higher education is in your plans [source: New].
Though it may seem scary, securing the financial future of your new family needn't be an obsessive pursuit. All it really takes, starting out, are a few small steps and some relatively minor alterations to your pre-baby fiscal behavior to get on the right track. In these early months, you need only lay some good, solid groundwork for meeting your family's monetary needs for years to come.
Here, five tips to get you on the path to financial confidence. The first step, of course, is to have a good, realistic grip on what your new monetary needs are ...
You know that budget you've carefully planned for your life together as a couple? The one with the nice bit of disposable income for extras like movies and dinners out? You'll be pretty much scrapping that.
The good news is, you'll probably be too tired for that stuff in the near future anyway.
And if you haven't been all that great about budgeting to this point, good news! You now have the incentive.
It's not rocket science. The first step toward financial planning for your new family is to sit down, and, well, plan. It's important to know what you can count on spending on your child for the next couple of years so you can fit that thoughtfully into your overall financial situation.
So set aside some time during what is hopefully your baby's good, long nap and figure out what your new expenses are. The most common ones include:
- Diapers, wipes and ointment
- Bottles and formula (if you go that route)
- Breast pump (if you go that route)
- Clothing (and new clothing when your baby outgrows it)
- Regular doctor visits
- Gear such as crib, car seat, high chair, stroller and safety locks
- Day care, if both parents go back to work
There will be others, and you'll figure them out as you go. For now, just work out the new costs you know you can count on, and rework your budget to include them. You may find you need to spend less on entertainment (again, likely not a big problem right now) and possibly forego upgrading to the bigger flat-screen for the living room. Go watch your baby sleep peacefully for a few minutes and you'll be fine with the smaller TV.
Next, once you've factored in the basics ...
One of the biggest concerns for new parents is one that's decidedly long-term: college. It's smart to start thinking about it early, since the costs of higher education are only going up, and even people who start saving in their child's infancy may find themselves looking for loans, grants and scholarships to help out.
There are countless routes to building up a good chunk of the expenditure without too much pain, including investments, bonds and savings plans (like 529s) designed specifically for tuition. It's this latter option that many experts recommend for the new parents, since they tend to be tax-free and easy to set up.
In these college-savings plans, flexibility varies, so be sure to find out what you can and can't spend the savings on and what happens if you need to take the money out early for a different expense. Then, set up an automatic, monthly withdrawal of whatever you can afford, and pay into the account for the next 17 years or so, building this expense into your overall budget.
You'll probably find this to be one of the smartest long-term goals to invest in, but there's another one that you might need to prioritize over it: retirement. Tempting as it is to save for your child instead of yourself, money experts warn against putting money aside for tuition at the expense of retirement savings. Retirement loans are hard to come by.
As a general rule of thumb, don't start putting money away for college until you're putting the safe minimum -- 10 percent of your income -- toward your post-work security [source: Ameriprise].
Next, there's more to save for ...
There are expenses you can count on: diapers, food, retirement, your baby outgrowing his or her car seat. These are easy to plan for, if not to pay for.
And then there are the expenses that sneak up behind you, smack you in the head and laugh at your well-laid plans.
Hopefully, you are already in the practice of putting money aside for a rainy day. If you have a cushion, focus now on making it deeper. Your expenses have grown, and your emergency fund should grow accordingly. Experts recommend having six-to-nine months of living expenses set aside in case of job loss, which becomes even more of a hardship if one spouse is at home now on childcare duty [source: New]. This also serves as a safety net in the case of other unexpected expenses such as major medical bills or a sudden need for a new car, water heater or roof repair.
In the current economy, this safety net is more important than ever. If you haven't started saving yet, now's the time, and this account should be prioritized. You've got almost two decades before college tuition is due, and perhaps 30 or 40 years to save for retirement. Big, unexpected expenses could pop up tomorrow.
Look at your budget and figure out how much you can afford to put into an emergency account after all the absolute necessities are covered. (Hint: The baby swing with the built-in iPod dock is not strictly necessary if there's a non-iPod swing for half the price.) Then, set up an automatic withdrawal so you won't have to think about your fund again until you need it.
Next, a less-than-pleasant task that is now essential ...
Wills and life insurance policies, while not the most pleasant aspects of long-term financial planning, are nonetheless critical components of your new family's overall security.
You may already have addressed the "if I go early" parts of planning for the future when you found yourself in a long-term, committed relationship. Joint finances make these discussions pretty highly recommended, since one spouse's untimely death can have dire financial consequences on the surviving partner. If so, your new family requires just a few updates in these plans: considerations for your child in the will, and more life insurance.
If you haven't planned at all, these steps should now become one of the top entries on your to-do list. Without a will designating not only the beneficiaries of your estate but also what will happen to your child, someone else -- possibly the government -- will be making these decisions. And without life insurance to address the financial losses that result from your early demise, your family may find itself unable to pay the mortgage or even begin to cover the costs of higher education.
You can go online to buy life insurance and draft a will, or you can make an appointment with a lawyer or financial advisor. If you go the latter route, you'll be able to get customized advice on exactly what you need to include in your will and how much life insurance you need -- but you'll also be paying extra for that advice. The lower-cost (but less-precise) route is to seek advice through reliable online guides. You'll find free tips, guidelines and calculators that can help you decide what you need to do to make sure one devastating loss doesn't trigger a cascade of financial hardship.
Finally, some financial advice new parents can apply to every area of life ...
When you suddenly have this completely helpless creature to care for, securing the financial future can feel like a daunting task. Under any circumstances, who has the money for that, or the comprehensive knowledge? And under current circumstances, who has the time? You've got diapers to change!
Take this tip to heart: Keep it simple. The fact is, few people can think of absolutely everything they need to save for, let alone actually save for it. The goal here, when you're just starting out and you have so many other things to think about, is to get the basics done and paid for and make a reasonable plan for your future needs.
If you can't find the time or extra money to see a financial advisor about your will and all the different types of insurance and savings plans and retirement options, get it done online using a service that walks you through each step. You don't have to set everything up perfectly right now, and the fact is, there is no perfect setup. As you move forward, your family's needs and circumstances will change, so you'll always be making adjustments to your portfolio of budgets, safety nets and instructions. What's most important right now is this:
- Figure out your new budgetary needs.
- Set money aside for an emergency fund, a retirement fund and a college fund.
- Draft a will.
- Buy life insurance for both parents.
With your basic financial needs addressed, you can put your energy into coming up with new and creative ways to get your little sweetie pie to sleep. Those four solid hours are calling. You can figure out who gets your mother's china some other time.
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More Great Links
- Franz, Rhonda. "Making Your Money Work For You: 8 Financial Tips For New Families." ParentingSquad. July 28, 2010. (Dec. 6, 2011) http://parentingsquad.com/making-your-money-work-for-you-8-financial-tips-for-new-families
- New, Catherine. "The Stork Arrived, Now What? 10 Financial-Planning Tips for New Parents." DailyFinance. Aug. 4, 2011. (Dec. 6, 2011) http://www.dailyfinance.com/2011/08/04/the-stork-arrived-now-what-10-financial-planning-tips-for-new/
- Planning for a new baby. Ameriprise Financial. (Dec. 6, 2011) http://retirement.ameriprise.com/investment-advice-life-events/financial-planning-for-new-families.asp
- Kroll, Luisa. "Nine Financial Tips for New Parents." Forbes. July 19, 2004. (Dec. 6, 2011) http://www.forbes.com/2004/07/19/cz_lk_0719parents.html