Estate Planning

Making Cents of Having Children

Having a child brings huge financial changes to your life. I’ve got two children of my own — a one-year-old and a three-year-old — so I can speak from experience. It’s not just suddenly spending a lot more disposable income on things like diapers, clothes, and baby monitors, but you may also find a change in perspective. The focus of your life is now on your child, and you will do anything to keep him or her safe and protected.

No one is ever truly ready for children. Raising children is a trial by fire, and becoming a parent is more an emotional decision than a financial one. Still, it’s important to get your financial house in order to protect your growing family.

Protect Your Human Economic Life Value

First and foremost, you and your spouse or partner should have an open and honest discussion about contingency plans should either of you pass away prematurely. The worst case scenario is for one of you to not come home one day. Life Insurance, regardless of how you feel about it, is by far the most cost effective and economical way to prepare for this type of tragic event. As I tell all of my clients, each of you should seek out coverage for as close to your human economic life value as possible. Get the most you can get, as soon as you can get it. Becoming uninsurable overnight happens all the time, so don’t put this off. Even stay-at-home parents need life insurance because it costs a lot to replace the work they do at home. In fact, estimates that the value of a stay-at-home mom is well over $160,000/year. The moment you find you are expecting another child, take some time to evaluate and shore up your coverage. The peace of mind it will bring you and your spouse can make the money spent well worth it.

Disability insurance is another essential part of income protection. You are far more likely to be out of work on disability than you are to die prematurely. Employers often offer disability coverage for employees, but it’s worth investigating the details of the coverage. Ideally, you want a disability insurance policy that covers your ability to work in your current profession. For example, let’s say you are a doctor and you develop excruciating back pain which interferes with you being able to work. Some policies will stipulate that as long as you can do anything else (e.g. work as a minimum-wage greeter at a grocery store), you are not disabled. Make sure that the policy you purchase contains language that protects you if you can’t perform your occupation.

Build Up an Emergency Savings Account

Kids are like walking accidents. Fortunately, most accidents are minor, but some can be costly. Have a source of cash readily available to you in an emergency. There are a lot of different rules of thumb out there for how much you should save — between three to six months of living expenses is often considered the right amount. It might take a bit of effort to build up this savings account, but it can give you tremendous peace of mind. Note, that doesn’t have to be in a savings account at a bank. It just has to be readily accessible, without the need to liquidate investments or other assets.

Plan for Parental Leave

Many companies provide paid time off (PTO) for new mothers. It’s often part of short-term disability, covering the period just before the birth to a handful of weeks after. If a new mother wants to take more time beyond that before coming back, or if the father wants to be at home with the child too, then it may not be paid. It’s worth having a strategy for this, either by saving up vacation time and other PTO at work, or by actually setting aside money in a savings account to cover the unpaid time off.

Anticipate a Shift from Working Full-time to Part-time

If one parent decides to not return to work full-time after they have children, then that would have a huge impact on the household income. For my wife and I, we made the decision when we got married to live as if we only had one income because we knew we wanted to have children. Not only did that give us the “breathing room” in our household cash flow to build up our emergency savings, it also allowed my wife to cut back on her work as a dental hygienist once we had kids. She continues to work one day a week to keep her licenses in order, but we don’t depend on that money in our finances.

Think about Where You Want to Live

We moved six months ago because we were running out of space. If you think you have a lot of “stuff,” just wait until you have children. Ever seen an episode of hoarders? It’s like that. Ok, not really, but you get the idea. Everyone is different when it comes to how much space you need with and away from each other. I’ve had friends that have made it work with five people (two adults, three kids) in a 1,200 ft. house, and other friends who feel they are running out of room after having one kid in a 1,500 sq. ft. house. It will be a transition period, so, if you do decide to move, I recommend waiting through the early stages of having children to see how your finances change. Wherever you decide to move, research the school systems because that can sometimes help you decide if you should move to the area.

Save for College

Speaking of school, the sooner you start saving for college, the better. This allows the power of compounding interest to work in your favor. There are multiple tools out there to help you fund your children’s education. Talk to a trusted financial professional to discuss your situation and what you are trying to accomplish, and make sure they show you more than just one tool to use.

Plan for Childcare Expenses

This is a big expense that few people plan for. If both parents work, even part-time, you will need to arrange childcare to cover the time you are at work. This can be very expensive. Luckily, the IRS allows tax credits for a portion of the childcare expenses when the care is needed so a parent can earn an income. Many employers also offer flexible spending accounts (FSAs) for childcare expenses; the money is deducted from an employee’s paycheck and any childcare expenses are submitted for reimbursement. Do not be afraid to ask for help from grandparents and other relatives. They might be willing to provide free or low-cost childcare, though that might not work for everyone.

Don’t Forget about Healthcare

Children see doctors a lot, between the well-child visits, the colds and infections, and the bumps and bruises. It might pay to reevaluate your healthcare plan, as what worked for you pre-children might not be the best choice for your growing family. This is another place where a flexible spending account and/or Health Savings Account (HSA) might be useful. If your household income is below a certain threshold, your child might qualify for the state’s health insurance program. A lot of times, you can enroll the child for little to no cost. This can be useful if you find yourself having a child in the middle of a job transition where there is little or no income.

Communicate with Your Spouse

Communication is the number one thing that can make the transition from not having kids to having them. You’re going to be busy, you’re going to be stressed, and it becomes so easy to get consumed by the day-to-day. It takes extra effort to talk to one another about what the other person needs in the relationship to feel the most supported. Communicate as often as you can about what you need from one another through this process.

On a final note, give yourself a little bit of grace. Have patience with yourself, knowing that you can prepare all you want and still never feel truly ready. Remember, you haven’t done this before, and you just need to take it a day at a time. You’re going to mess up from time to time, and you’re going to be frustrated. However, you will soon discover that with some forethought and planning, the joy and happiness that a child can bring into a home is well worth it.

This information is for educational purposes only and should not be considered specific tax advice. Always consult a qualified financial professional regarding your personal situation.

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