Preparing financially for kids

Parents holding their newborn baby boy in the arms
Parents holding their newborn baby boy in the arms

Preparing financially for kids

by J.J. Montanaro

A new baby is a big deal.

As my family has added two in the last three years, I’m share that blinding flash of the obvious from first-hand experience. Anyone that knows me and read that last sentence immediately thought, “say what?” Okay, it’s not exactly first-hand experience; the latest additions to our family are grandkids. However, as a Papa – I settled on this title after much deliberation – and a financial planner, I haven’t been caught up in the day-to-day grind and can be a bit more objective in assessing the financial aspect of the experience.

What’s the big picture for finances and why is a baby a big deal? Because as you prepare for his or her arrival or settle into your new routine, there’s some important financial work to be done. Let’s look at some relevant tasks:

Review your benefits. Check with your employer to find out what is offered from a paternity and maternity leave standpoint. The Family and Medical Leave Act requires employers with more than 50 employees to offer 12 weeks of unpaid leave. Perhaps your employer offers paid leave? Check it out. Also, investigate the financial implications with respect to health care expenses and insurance. How much will that ultrasound cost, for example?

Reconstruct your budget. A baby could challenge both sides of your budget equation: income and expenses. You or your spouse may take time off from work, and depending on the situation, it could be without pay. Perhaps one of you will opt to quit work for an extended period? The bottom line is that having a baby could affect income — short and long term — so plan for it. And be aware, you’ll face an array of new expenses: diapers, food, clothing for you and the baby, and increased health care costs. Build a budget that accounts for changes to both income and expenses.

Set your shopping parameters. This is along the same line, but as a Papa, I have the luxury of taking a pass on this one – spoil, spoil, spoil – but as a parent you’ll have to decide how you’re going to approach shopping. Will you go with an array of top-of-the-line baby furnishings, fixtures, clothes and gadgets? All of those can come with a hefty price tag and you might be better served to pick up some gently used stuff, borrow and/or exchange with friends and family or “settle” for more moderate choices. Trust me, there’s no statement packed with more truth than, “they grow up fast.” And likely so fast you don’t need to spend a lot of money on – you fill in the blank – that will be outgrown, worn out, tossed, donated or sold to a savvy shopping parent or parent-to-be in a matter of months. 

Stockpile some cash. Whether you’re going to be setting aside money to cushion the impact of lost income or new expenses, having a significant stash of cash makes sense. The normal three to six months’ of expenses in an optimum emergency fund may not be enough, so start saving today.

Stockpile some stuff. With two new grandchildren, we’ve helped – before, during and after their births – on this front. Every shopping trip has included a little something extra. But think about it, if you spread out the purchase of nursery furniture, strollers, car seats and the like, you can reduce their financial sting (not to mention the diapers!). Also get hand-me-downs from friends, shop with coupons and get creative so you can build up what you need without going broke.

Remember, college is just around the corner. Time flies. Given today’s all-in cost of a 4-year in-state public college education is over $21K, you’ll have to save about $500 per month to fully fund a newborn’s education. Consider a 529 college savings plan for this goal, and don’t put it off. After you get it set up, you might have a new home for your family (and extended family’s!) gifts to your kids.

Prepare for Tax Time. I can still remember the disappointment I felt when my son was born on January 2nd. You’ve probably got to be a financial planner or accountant to understand, but his arrival date delayed our ability to take advantage of the tax benefits of having a child. As you may have noticed while doing your taxes, those benefits have increased and become available to more folks with the new tax law. Visit the IRS website and check out the many tax benefits for parents.

Update insurance and legal paperwork. With a new baby, you may need more life insurance. As I discussed earlier, you may want to re-examine your health coverage to ensure it fits the new situation. Taking care of legal paperwork, such as a will, that names a guardian for your child and sets up appropriate financial arrangements is another critical task.

So much joy comes from adding family members (babies and grandchildren), but it has potential to cause a financial strain. With the tips above you can, focus on the excitement of your growing family and not our budget woes.

Share your tactics for preparing financially for children.


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