Planning for parenthood is a busy -- if joyful -- affair. There are cribs to pick out, names to select, books to read and classes to take. Amid the whirlwind of baby showers and ultrasounds, however, moms- and dads-to-be often overlook one of the most important steps of parenthood -- getting their legal and financial house in order.
"Finances tend to take a back seat, but the truth is that's a great time to step back and take a look at the big picture," says David Yeske, a certified financial planner with Yeske Buie in San Francisco. “Children aren’t just expensive for a year or two. They’re expensive for many decades. You need to plan for that.”
The U.S. Department of Agriculture estimates it will cost middle-income families with a baby born last year (2007) $204,060 to raise their child through age 18 – in clothes, food, shelter, childcare, and other necessities.
So, here are 10 steps that will benefit your family.
1. Review jobs and income
Before you make a decision to quit or continue working after the baby arrives, calculate the cost of childcare and weigh that against your income. Don’t forget to factor in the intangible cost of one spouse quitting a job -- the loss of future promotions, loss of retirement contributions and the probability that they may reenter the workforce down the road at a lesser position. You may be able to arrange a more flexible schedule, or accept a part-time position instead, that would allow you to be home more with your child, continue earning a paycheck and keep your career intact.
2. Review insurance
Now more than ever, you need to be sure your family has adequate insurance protection, covering life, disability and health.
As a rule of thumb, many financial planners recommend parents have at least five times their earnings in life insurance, plus enough to cover college costs. But Yeske says it’s best to establish your own financial goals and crunch the numbers accordingly. For example, do you want your policy to provide living expenses for your spouse for life – or only until your kids graduate college, at which time he or she could return to work? Do you want it to cover your kid’s education?
If you have health insurance already, make sure it’s still the one that best meets your family’s needs and register early in the pregnancy to take full advantage of maternity benefits including prenatal vitamins, ultrasounds and regular check ups.
3. Plan your estate
This means establishing or updating your will, naming a legal guardian to care for your child should anything happen to you and updating beneficiaries on your retirement plans. If your assets are significant, you may also wish to create a trust for college education or living expenses that spells out how much your child should receive and when. You would also have to name a trustee to distribute the money. An attorney can advise you on all of these fronts.
4. Tell Uncle Sam
Be sure to apply for a Social Security number as soon as your child is born. You’ll need it to claim exemptions and tax credits on your return and open savings and investment accounts on your child’s behalf.
5. Revisit your budget
It’s time to build extra expenses into your monthly budget. This step is particularly important if you’re going from a two-income family to just one. According to Yeske, you should factor in the cost of childcare (if relevant), food and diapers, projected medical expenses (higher insurance premiums and deductibles for well-baby check-ups), clothes, higher utility bills (if the baby is home all day with a parent or nanny) and any savings for college you’re able to set aside.
6. Save for college
As with retirement savings, the sooner you sock away money for higher education the better. Through the power of compounded interest, even small contributions can grow substantially. Assuming a 7-percent annual return, for example, you would be able to fully cover costs at a four-year public university (in-state) in 18 years by contributing just $328 a month to a tax-favorable account like a 529 savings plan. If there’s no money to spare at the end of each month, consider using any windfalls you receive (bonuses, raises, inheritance checks or tax refunds) for an education account.
These are not only tax-free gifts to your children, but the the earnings grow tax free (as long as the money is used for qualified education expenses.)
7. Explore FSAs
Ask your employer about any flexible spending accounts available through the standard benefits package. Many companies these days, particularly large ones , allow parents to set aside pre-tax dollars to cover childcare or healthcare expenses. It lowers your tax bill.
8. Maximize tax breaks
You should consult your accountant on this. At the very least, however, you’ll need to update your W-4 tax exemptions to reflect your new dependent. That reduces tax withholding and puts more money in your pocket to pay for diapers and formula. If your income is below certain limits, you may also qualify for a child tax credit of up to $1,000 per child. The benefit phases out as income rises. The IRS posts the most current info on its Website.
Lastly, if you and your spouse both work, your child is under age 13 and you pay for childcare, you may qualify for the child-care tax credit.
9. Continue financial planning
Just because you’re a parent now, doesn’t mean you should stop planning for your own short- and long-term financial goals. Sit down with a planner who can help you develop a strategy for saving and investing for the future. That may include a larger house down the road, a new car every five years or an annual vacation (without the kids!).
10. Teach money management
If you want your children to grow up with a healthy respect for saving, spending and investing you’ll have to tackle that job yourself. By modeling good financial behavior and giving your kids opportunities to develop money management skills (and learn from small mistakes while they’re young), you will arm them with the tools they need to become financially disciplined adults. And that’s one of the best gifts you can give.
There’s no doubt about it, bringing a child into the world is one of life’s greatest joys. But with the staggering expense involved, you’ll sleep better at night -- a feat of its own where newborns are concerned -- knowing you’ve laid the groundwork for a lifetime of financial security for your family.