4 financial steps to consider before you start a family
As a financial advisor, the new parents I advise often want to start planning by discussing their investment portfolios. However, this is only part of the financial landscape that needs to be considered.
#1 – Get Wills and Related Documents
As a new parent, it can be difficult to consider a future where you are not around to provide for your children, but addressing estate matters is very important. If a couple doesn’t already have wills and related documents, the time to meet with an attorney is immediately, even before the child is born. If something were to happen to you or your spouse tomorrow, you want to know that your child is protected. The attorney drafting your wills also will provide other essential documents such as health care proxies, living wills and powers of attorney. No one likes to consider his or her own mortality, but doing so is one of the many responsibilities of parenthood.
#2 – Create a New Budget
Saying that every aspect of life will change for new parents is an understatement! A new family often can bring changes in employment status, medical expenses, childcare, possibly housing and certainly ongoing living expenses. A thoughtful budget will help you approximate your cash flows incorporating these likely changes. As daunting and uncertain as this exercise is, it will create some level of certainty (or more aptly, less uncertainty) as to the affordability of your family’s future lifestyle. Although fraught with uncertainty, a budget is the starting point for many future revisions.
#3 — Find the Right Life Insurance
Life insurance is another major decision young parents often get wrong. Unfortunately, people often underestimate just how much money their family will need to maintain its lifestyle without an income provider.
Most young parents have not accumulated significant assets, and may be far from their peak earning years. Life insurance can help replace the income needed to maintain a family’s lifestyle, pre-fund a child’s education, and pay down debts and mortgages. The decision as to what type of insurance to purchase — term or some form of permanent coverage — can be vexing, as can be the ability to afford permanent insurance under what surely will be a new and more stretched family budget. Now is a good time to sit down with a highly recommended insurance professional to discuss the types of policies that is the right balance of your required death benefit and budget constraints.
Additionally, I advise my clients to make sure that both parents have appropriate life insurance coverage, even if the plan is for one to be a stay-at-home parent. Should tragedy befall that parent, the working spouse will need to pay for full-time childcare, may want to scale back hours at work, or even find a new job that allows him or her to spend more time with his or her children.
#4 — Re-Evaluate Your Savings Plan
If saving and investing haven’t become part of your ongoing priorities, you need to start now. Of course, the arrival of the baby will alter your spending and savings priorities, but here’s some bad news: your family budget will never flatten out to your pre-children life; parenthood only gets more costly.
There are an array of funding vehicles for children’s education – UGMA accounts, trusts, 529 Plans, etc. – but regardless of the vehicle, my principle message is to contribute regularly, even if only small amounts. My view is that forming the habit of investing is more important than the vehicle.
Another aspect of parenthood is the adequacy of one’s “emergency fund.” The universe of potential emergencies grows exponentially with the number of family members. Although professionals may differ on the required size of a family’s emergency fund, we all agree that your first savings dollars should be highly liquid.
While being a new parent can be stressful, it is ultimately the most rewarding job you will ever have. With a little bit of planning on your part, you can at least reduce the stress that comes from not planning for your future finances.