“Financially Preparing for a Child”

  Having a baby is one of the most exciting times in a couple’s life.  Leading up to the birth, you read books, listen to podcasts, and put up with all of your friends and relatives giving you their random pieces of advice for parenting.  When you finally hold your child for the first time, it really is a life-changing experience.  There are many exciting transitions during this stage of life – but what about your finances?  Having your first child triggers many important decisions in your financial life. Your financial life suddenly becomes more complex. You now have a child who is completely financially dependent on you. You may feel overwhelmed and after a few failed google searches of “what to do financially when you’re a new parent” you become frustrated. In this article, we break down 3 different ways your financial life is impacted when having a child and the key conversations/decisions to make for each.   Discuss the impact on your careers The most consistent value that I have heard from parents is to be present and involved in their children’s life.  With this exciting life change, it’s so important for you and your partner to reevaluate your careers. Are you working 60 hours a week? Do you feel like a slave to your job? Does your job provide lifestyle flexibility?   The first few years of a child’s life are some of the most formative. In fact, it is estimated that 90% of the brain’s capacity has already developed by the age of five. For this reason, it is important to have a discussion about whether one parent will stay home with the child, or whether there is flexibility to “tag-team” the parenting duties. Also, it’s so important for new parents to give themselves some grace during these early years with children.  Sure, do your best to continue saving for retirement and perhaps the child’s education, but also remember that spending time with your family is the ultimately joy.   Adjust Your Cash Flow Having a baby, will certainly change your cash flow. Your monthly spending will go up and your income may change depending on what you decide with your careers. You should be prepared for this transition, so you avoid going into debt.  In order for you to make solid, data-driven financial decisions, I strongly recommend tracking your spending so you know how much it costs to live your lifestyle. There is a massive difference between saying “Our spending will go up” vs. “Our current monthly spending is $8,000/month and we anticipate this increasing to $10,000/month after having a child”. The latter allows you to make smarter, data-driven decisions so you can better understand how much income you need to earn and how to prioritize your savings. Therefore, I reframe “budgeting” as “awareness” – awareness to how much it costs to live your lifestyle and how your spending is aligned with your values. Tracking your spending could give you the confidence that you would be financially okay if you do decrease your income so you can spend more time with your child in some of the most precious years of their life.   Purchase More Life Insurance Before having kids, your life insurance needs are probably relatively low. You may have some coverage to pay off the mortgage or support your spouse if something were to happen to you. However, once you have kids, your life insurance needs significantly increase. You now have someone whose entire life (plus cost of college!) is financially dependent on you.   How much life insurance is enough? A good rule of thumb is to try and obtain 10X your annual salary in life insurance coverage.  So, for someone who is making $75,000 per year they should consider getting $750,000 worth of coverage.  One exception to this, would be a stay at home spouse.  Even if a spouse who stays at home is not bringing in an income, we encourage clients to consider getting coverage for them as well.  The reality is that if something were to happen to the “non-working” spouse, there would still be significant expenses that the working spouse would incur to help look after the children/house etc.  Each family should consider the annual expenses they would incur if a non-working spouse were to pass away and multiply that amount by 25 to come to an estimated coverage amount.  For example, if a family would incur an additional $25,000 per year in expenses if a non-working spouse passed, then that would amount to $625,000 of coverage. As a side note, check out our post on term insurance vs. whole life insurance to better understand the type of insurance to purchase. Having a child is one of the most exciting times in life.  Ensuring you have you have your financial house in order will allow you to focus your time and energy on your family.