Adding a child to your family is arguably one of the most momentous milestones in life. After months of preparation, a little one arrives and stirs up overwhelming emotions and a great sense of responsibility. But even if you had everything organized and prepared to bring your baby into your life and your home, there are some practical steps that you need to take now that your family has grown. From hospital bills to education, a child can cost half a million dollars, so your financial strategy needs to change to keep up! (1)
Whether you have a baby in the family or your kids are older now, make sure you’ve covered your bases and taken care of these important financial steps:
Update Your Health Insurance
When your child is first born, they are typically covered under the mother’s comprehensive health insurance. But within the next 30 days, you will need to add them to your health plan separately. Contact your insurance company or human resources department to let them know of the change in your family and fill out the proper paperwork to start the process.
Review Your Life Insurance Coverage
Your life insurance needs may change now that you’re adding another member to your family and, potentially, losing an income if one of you chooses to stay home instead of working, either temporarily or permanently.
To ensure that your life insurance coverage is appropriate for your new situation, you’ll want to examine your finances and determine how much coverage you need to protect your growing family adequately. Make sure all paperwork is up to date and that you DO NOT add your new child as a beneficiary. This is a common mistake that parents often make with the best of intentions in mind. However, naming a minor child as a beneficiary is a huge no-no in the world of estate planning because that child cannot access their inheritance without the approval of the probate courts - making for a very clunky process. A better strategy is to name a family trust as a contingent beneficiary, whereby the trust specifies how assets are divided upon your passing what, and appoints a guardian to oversee the disbursement of your child's inheritance.
Update Your Will
If you already have a will, update the information to include your new addition. If you don’t already have a will, take the time to make one. Wills go beyond the matter of who gets what amount of money after you pass; they also address guardianship, something you don’t want to ignore. Make sure your primary and contingent beneficiaries are up to date, and determine who will be your child’s legal guardian in the event of an untimely death.
Consider A Trust
The last thing you want to do when welcoming a child into your home is plan for the day you aren’t around for them. But instituting a trust now will provide you with peace of mind, giving you more control of the what, when, and how of the distribution of your money. Here are a few options:
Revocable trust: This type of trust allows families to keep control of assets during their lives and avoid probate court. You have the right to revoke the trust at any time.
Irrevocable trust: This type of trust does not allow you to take back the property once it’s placed in the trust. The general purpose of this trust is to remove assets from your estate in order to avoid estate taxes.
Special needs trust: This trust is generally put in place for a child with special needs and provisions and is designed to ensure that the family’s assets do not interfere with or decrease the governmental benefits the child is due to receive.
Crummey trust: This trust is useful for families who intend to transfer ample amounts of assets to their children as gifts.
Set Up An Emergency Fund
If one thing is guaranteed, it’s that your new baby will cost you a lot of money. You may need to rework your budget to make room for all the basics, such as diapers and childcare, but you would also be wise to have a bit of money set aside for unexpected costs, like trips to the ER or additional babysitting. You don’t want to dig into your savings to take care of these expenses.
Start Saving For Your Child’s Education
When a college education in the U.S. can cost upwards of $334,000, it’s a good idea to start saving for your child’s education as early as possible. (2) Take advantage of time to reap the benefits of compound interest. If you put $100 a month toward your child’s college education, after 17 years’ time, you would have saved $20,400. But that same $100 a month would be worth over $32,000 if it had generated a 5% annual rate of return.*
You have options when it comes to college savings, such as a 529 plan or an education savings account. Whatever you choose, start early. Every little bit helps.
While your new bundle of joy will be your priority in almost every area of life, don’t let college savings take precedence over retirement goals. Building up your retirement account ensures that your child won’t have to take care of you financially in the future.
*The rate of return on investments will vary over time, particularly for longer-term investments. Investments that offer the potential for higher returns also carry a higher degree of risk. Actual results will fluctuate. Past performance does not guarantee future results.
Discuss College Funding
Just as with most things in life, clear communication and expectations will make the college planning experience more enjoyable. If your child is young, have this conversation with your spouse and financial planner. If your child is older, include them in the discussion. Here are some questions to ask to set clear expectations for everyone involved:
Who is going to pay for college? Will we, as the parents, pay for everything, or do we want our kids to contribute as well?
What is the budget for college?
Does it have to be a 4-year college or are we prepared to look at other options?
Can the degree be completed in 3½ years instead of 4-6 years?
How does college for my first child affect college for my second child?
How does this plan affect our retirement goals?
Consult With A Professional
If you’re feeling overwhelmed or unprepared for the financial challenges of parenthood, chatting with a financial advisor to review your financial strategies may help you feel more confident. At Mellen Money Management, we specialize in walking our clients through the many milestones and transitions they face in life. If you’d like to make sure your bases are covered and your finances are optimized for parenthood, set up your free introductory phone call online today!
Scott Snider is the founder of Mellen Money Management, an independent, fee-only financial planning firm specializing in college-specific consulting and student loan repayment advice. Scott has more than ten years of industry experience and is an FPA Northeast Florida board member, member of XY Planning Network and NAPFA, and is part of the Finance Advisory Council at University of North Florida. He graduated with a Bachelor of Science in Finance from Miami University and holds both the CERTIFIED FINANCIAL PLANNER™ (CFP®) and Chartered Retirement Planning Counselor (CRPC) designations. He lives in Nocatee with his wife, Emily, their daughter, and their two dogs. He loves animals, spending time outside, and anything sports related! Learn more about Scott by connecting with him on LinkedIn.