Be ready for your (admittedly expensive) little bundle of joy.
Two little lines on a pregnancy test can change your whole perspective on life, triggering a mix of excitement and anxiety as it forces you to rethink your priorities and goals for the future. Welcoming a new baby not only has emotional implications, but also financial ones. Painting the nursery and picking out onesies may be more fun than thinking about life insurance or estate planning, but these financial tasks can offer peace of mind and create greater stability for growing families.
Here's a look at ways to prepare financially for a little bundle of joy.
Before Baby Arrives
Get life insurance: Many people start thinking about life insurance when they get married or start a family, because a death could leave behind a grieving spouse and children who need financial support. According to Bob Gavlak, a financial advisor with Strategic Wealth Partners in Independence, Ohio, most new parents should get a basic term life insurance policy rather than a more complicated and expensive permanent life policy. And while many think about insuring the breadwinner of the house, even stay-at-home parents need life insurance to cover childcare costs in case the unthinkable happens. "There's going to be care expenses if something happens to either spouse and there might still be debts that need to be paid off," Gavlak says.
Check on parental leave policies and health coverage: Check with your employer to find out how much paid or unpaid parental leave you have available and make sure you're getting the minimum time you're entitled to under the Family and Medical Leave Act. Also find out if prenatal and delivery expenses are covered by your health insurance plan and what costs you may be expected to cover out of pocket. "When you have a kid, even if you have good health insurance coverage through your employer, it can still cost five to ten thousand dollars or more depending on the type of delivery and amount of time you're in the hospital," Gavlak says.
Start or add to an emergency fund: Hopefully you already have an emergency fund to cover financial curveballs like medical bills or a layoff. If you don't, now's the time to start one. Kids can bring many unexpected expenses, as Gavlak points out. "Have an emergency fund in place for all the extra food you have to buy and the doctor visits," he says. "You don't want to be living paycheck to paycheck."
Start a 529 college savings plan: If you hope to send off your child to college someday, then a 529 college savings plan could offer tax-advantaged savings for tuition and other educational costs. Other relatives can contribute to a child’s 529 account and help it grow, but the account should be set up in the parents' names so that it won't impact the child's financial aid eligibility. While Gavlak says setting up a 529 account for a child is a smart idea, he urges parents to make sure they're also saving for retirement. "You can take a loan out for school but can’t get a loan to cover your retirement," he says.
Set up estate planning documents: Wills and estate documents aren't just for people nearing the end of their natural lives. The unexpected can happen to young, healthy people too, so it's best to get your wishes in writing. "If there are specific things you want to have happen with your children, get those set up," Gavlak says. If you have special needs children whom you may need to provide for beyond the age of 18, talk to an estate lawyer about creating a special needs trust.
Recheck your budget on a monthly basis: As your baby grows, your expenses will evolve too, so review your spending on a monthly basis to see where you can tweak the budget. "Expenses come up and expenses you thought you had to have, you may end up not needing," Gavlak says. "Make sure you're staying on a good solid budget, which is something to always revisit."
Orginally written by Susan Johnston for Credit Sesame.
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