Do you remember how you felt upon finding out you were having a baby?
Our journey began 5 years ago.
We were filled with the excitement of all new parents.
My wife even recorded my reaction when she told me she was pregnant. We were both thrilled to see what was to come.
We began nesting soon after, otherwise known as purging all the items that had been thrown in to the “home office.”
She would also send me cute little emails about the baby’s growth compared to the size of a fruit along with long lists of name ideas.
A few weeks later, now with a clean (and bare) nursery ready to be decorated, we began discussing cribs, paint colors and gliders.
At this point, we realized our new addition was going to be an expensive adventure.
Even though we begin the journey as new parents with incredible excitement and anticipation, our list of questions for how best to prepare grows quickly. Particularly how to best structure our financial lives for our new bundles of joy.
I recently participated in an online conversation dealing with the question “What to Expect (Financially) When You’re Expecting?” during the weekly Experian #CreditChat twitter conversation.
Now that I’ve been through it twice (I have 2 daughters – 4 years old and 14 months), I’ve learned a few lessons that I discussed in my conversation which you can watch here.
I summarized some of the tips we discussed below:
Child Care vs. Staying at Home
Regardless of which way you go, you’ll be faced with changes in the way you spend. If both parents are working, childcare becomes a major expense with the national average now around $12,000 a year per child (with many much higher than this amount).
On the other hand, if staying at home is most important for one spouse, sacrificing that income could drastically change the day to day family finances.
There are always exceptions especially when one spouse has more control over their income. This is where walking through a financial plan helps you think through realistic numbers to create the life you desire. But remember, this is often an emotionally charged decision, so the monetary sacrifice may hold little weight compared to what you feel is best for you child’s development.
Things to Do Before Baby Arrives
While the cribs, strollers and car seat choices are important, there are bigger things to consider.
This includes your life insurance amounts and estate planning items.
It’s not a bad idea to apply for life insurance once you decide to have a baby. Premium rates are more attractive the younger you are, so begin getting a few quotes. Rules of thumb quote 8-10 times your annual income but working with a fee-only financial planner will give you the best judge of the amount you need.
It’s equally important to begin discussing a guardian and beneficiaries for your accounts.
Look to update your will prior to the birth. It’s most important to start discussing now, as these conversations can take years to get on the same page. Even financial planners can have trouble making decisions about estate planning topics.
Don’t forget to take a look at your health insurance policy as well. If you have a high deductible policy then make sure you max out your HSA contribution as it will be a nice tax benefit.
Knowing what potential out of pocket costs to expect, can prevent a potential nervous breakdown when multiple bills begin showing up in the first few weeks after your hospital visit.
From a tax perspective, investigate your ability to save in pre-tax savings opportunities through your employer.
Flexible Spending Accounts and a Dependent Care FSA can help avoid taxation on up to $10,600 (in 2015) for joint tax filers if elected during open enrollment periods. But if you have two children, and both work, taking the child and dependent care credit could be better than the Dependent Care FSA. Another question to run by your tax advisor.
Spend Time Together
One of the more important but least conventional tips is to be intentional about spending time together.
New parents are generally so wrapped up in the excitement and anticipation of the little one, they forget to treasure the time they have together. So we encourage expectant couples to plan some spending for themselves in the nine months prior to your new family member arriving.
This is when incredible conversations can happen about how you want to raise your baby. Taking a trip together to enjoy spending time with each other can be an incredible memory, especially once the baby is with you 24/7.
I speak from experience. But it’s important to plan for this ahead of time as you are formulating your new spending plan post baby.
After the Baby Arrives
Many of our first instincts when having a baby is to begin saving for college.
But most people don’t realize there are multiple avenues to accomplish this goal.
The right strategy for you depends on your tax bracket and spending desires. Many people want to save in 529 accounts immediately regardless of other saving strategies they may be avoiding.
When we first meet with clients, we often see balances in a 529 account but little to no savings in Roth IRA accounts. Because you have the option to withdraw your contributions tax-free and penalty free from a Roth IRA, saving in these accounts first could be the better bet.
This is where personal attention and analysis helps to avoid missed opportunities that occur without guidance.
Priorities can change very quickly for new parents.
After the baby arrives, stuff (and house guests) tends to accumulate quickly in your house. So moving to a bigger house moves up the priority list quickly. This demands more liquidity potentially and quicker access to cash.
Other parents decide to work less to spend more time with their kids.
Some want to move from city locales to be closer to their own parents to have help. These choices all have varying financial impacts. But your decision-making is not always the most rational when your sleep-deprived. So building flexibility in to a financial plan can help you set up your life the way you really desire it to be with Junior now in the family.
There are many other tips to consider during the first year which we explore during our YouTube conversation.
Enjoy the Ride
Along with checking off all the responsible new parent items, one of the more special things my wife and I did was record our feelings of what life would be like when the baby arrived.
Everything, from how excited, scared, or clueless we were to how we thought life would be after she was here. It’s one of the more special memories we have together that can’t be measured with money.
As the cliché goes, the time has flown by. My oldest daughter turned 4 this month.
In other words, she’s now an energy-filled, professional pretender, question asking machine. Just this week, she performed a puppet show, played her “guitar” brush, and asked about the emotions of a triceratops within 10 minutes. In the moment, it can be an overload of action.
But upon reflection, makes me envy her capacity for enthusiasm, creativity and curiosity all at once. Maybe you’ve experienced something similar with your children.
With that, I would encourage you to be sure and enjoy the journey. Having a baby changes your life in so many ways that can’t be quantified. But for the ways that can, do your best to plan for it!