Article by Sabra Morris, Marine Corps Spouse
The nine months leading up to your baby’s arrival are exciting and busy. From setting up the nursery to preparing for the birth to just wrapping your head around what it means to be a parent, there’s so much to consider. But beyond getting your home and your mind ready for a child lies the task of financial readiness. Your child’s arrival into the family will have financial implications right away, and those implications will continue to grow right along side your little bundle of joy. “Having children is almost guaranteed to decrease a household’s income and increase its expenses,” says Timothy Maurer, certified financial planner (CFP)®, registered advisor with the National Association of Personal Financial Advisors (NAPFA) and author of “The Ultimate Financial Plan.”
In fact, middle-income parents whose children were born just one year ago can expect to spend about $300,000 over the next 17 years (not including the cost of college), according to a report released in 2012 by the U.S. Department of Agriculture.
FIRST STEPS
Maurer’s advice: Start planning now to ensure your financial health and your child’s. “Having children has an interesting way of helping parents bring a certain level of order and purpose to their personal finances,” he says. “A vast number of short-, mid- and long-term objectives come into focus, inspiring couples to do more than just ‘wing it,’ as they may have done to date.”
1) ESTABLISH ESTATE-PLANNING DOCUMENTS
“This is the most important step in the process,” says Maurer. For one, you’ll determine where dollars will be directed in case of the death of both parents. Perhaps more importantly, he says, “your will is the place where your children’s guardianship will be determined. Each new parent should have a will, a durable power of attorney and an advance directive drafted, preferably by an attorney specializing in estate planning.”
2) FUND YOUR ESTATE PLANS WITH LIFE INSURANCE
“Life insurance should help a surviving spouse and children move forward without financial fears,” says Maurer. He also recommends establishing a testamentary trust within your will. “The trust allows you to parent beyond the grave, directing precisely how your estate should be handled for the benefit of your children. Life insurance proceeds should f low into the trust and the trustee you’ve designated would be charged with following the instructions you’ve predetermined.”
DO YOU HAVE ENOUGH LIFE INSURANCE? Most parents underestimate the amount of life insurance they should have,” says Maurer, adding that many fear the cost of a “big” life insurance policy. However, “the vast majority of new parents will only need 20- to 30-year term life plans, and not one of its more expensive cousins: whole, variable or universal life plans. Term life insurance is surprisingly inexpensive for young, healthy adults.”
3) PAY DOWN DEBT
“Before your bundle of joy starts gobbling up your reduced income, muster all of your financial resources to pay your debt (especially consumer debt) down or off,” says Maurer. “Debt is the enemy of a prosperous future and once the baby arrives, it will be difficult to increase your debt payments. So do it now.”
4) SOCK AWAY EXTRA CASH
“Liquid cash is the best financial medicine for uncertainty, and few things invite uncertainty like child-rearing,” says Maurer.
5) DEVELOP A FAMILY EDUCATION POLICY
Decide if you’ll be able to help your child pay for his or her college education and how much you want to contribute. No matter how much you’re able to save for education, you’ll need to start now. “You’ll likely need to save $350 per month, per child, to send them to a state university or $700 per month for an out-of-state university … from the day the child is born,” says Maurer. Think you’re raising an Ivy Leaguer? You’ll need to save an estimated $1,000 per month from that same day.
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