5 Financial Tips for New Parents
Welcoming a child into your family is a major event that can bring changes in many areas of your life, including your finances. Child-rearing can be costly, with expenses that include food, housing, childcare, education and more. And becoming a parent can spark conversations about financial topics such as insurance plans, wills and saving for college.
Whether you're expecting your first child, are the parent of a newborn or are starting to think about conceiving or adopting, it's never too soon to think about getting your financial house in order. Here are five steps to get you started.
1. Create a Budget
Start by comparing your monthly income with your monthly expenses. Now, you’ll need to adjust your expenses to account for the additional costs of having and raising a child. For example, before your child arrives, you might need to make purchases such as furniture, a car seat and stroller, and major expenses when children are young can include childcare, formula and diapers.
As children get older, your costs will likely expand to include items like school supplies and extracurricular activities. In addition, you might be surprised by other unexpected costs of having children, such as higher utility bills, increased healthcare, food and clothing expenses, as well as the potential need for a larger vehicle.
If you see that your income is falling short, look for places where you can cut back or opportunities to bring in additional funds. You can also set spending limits and do your best to stick to them.
2. Set Up an Emergency Fund
Experts recommend setting aside an emergency fund of savings equivalent to three to six months of living expenses. This fund should be accessed only if you find yourself facing a major unexpected expense, become unemployed or fall ill.
The best place for your emergency fund is in a liquid, easily accessible account, such as a standard savings account at a bank or credit union, or other interest-bearing bank account. This kind of account provides some return on your deposit while you save but also allows you to withdraw your funds at any time without triggering a penalty.
3. Save for Your Future—and Your Child’s
In an ideal world, new parents would be able to save at their desired rate for their retirement and their child's college education simultaneously, but that isn’t always possible. As you evaluate how to allocate your savings, consider your timeline and goals for each account. And remember that while college can be very expensive, there are financial aid options available. That’s less true for retirement.
Explore opening a retirement account such as an individual retirement arrangement (IRA), and be sure to take advantage of retirement savings plans that might be offered through your employer. Even small contributions to these plans can add up long-term.
Similarly, if you’re able to invest small amounts early for your child’s education, compound interest can help increase your savings. Over time, your financial situation might change, and you might then be able to contribute more to this goal. Consider using a tax-advantaged college savings account where the earnings can be withdrawn tax-free as long as the money is used to pay for qualified educational expenses.
4. Consider Life Insurance
Dealing with the loss of a spouse is hard, particularly if that also means learning how to be a single parent while you mourn. One way to mitigate the financial impact of such a loss is by purchasing a life insurance plan.
Because life insurance is meant to replace the lost earnings of a person who dies, be sure to consider how much your household will be affected financially by the loss of either parent. That can help you determine how much insurance to purchase.
A common rule of thumb: Your benefit should equal seven to 10 times your annual salary. If you or your spouse is a stay-at-home parent, think about the cost of replacing that labor when selecting insurance coverage.
5. Plan for the Unforeseen—Have a Will
Think about what might happen if you and your partner were to die before your child becomes a legal adult. If you want to have a say, you need to create a will.
A will allows you to name a preferred guardian for your child, and someone to manage their money, until they become a legal adult. If you don't name a guardian for your child, a court will choose one without your input. Having a will can also make for an easier disposition of assets. In conjunction with this, be sure to keep your beneficiaries current for your financial accounts, making updates as needed over time.
While you can't always control your own financial situation or your child's, taking these steps is a great way to set contingency plans for a variety of financial obligations that may affect you in the future. Creating long-term financial plans and goals can help achieve financial stability for your family, especially during the years that your child depends on you most.
