Congratulations! You’re Having a Baby! What about the Finances?

You have a great job. You are making a high income. Then you come home one day and your wife sits you down on the couch. She says I have some news for you.  You are about to be a father.

(This is written to the mothers as well. Both of you need to think about your finances and how a new-born will affect them.)

Okay. So after dad picks himself up off the floor, or mom picks him up, what do you do next? Since this is the  whole reason we are here, let’s look at the financial aspect of being a high earner and having a child.

There will be a thousand things to do, but if you sit down and think through everything, eventually, your thoughts and actions will fall into place. Some things you will be able to control, others you won’t. The nice part about the finances is you DO have some control and the ability to implement a plan. As the time approaches, and you eventually start raising this little bundle of joy, you WILL feel out of control. When you feel overwhelmed and dead tired, you can at least look back at your financial plan and take comfort in that.

I hope that helps you a little.

 

What do you need to do?

You might have been putting off some important decisions, but now you have a very small human being about to be completely dependent on you for several years into the future. Some major decisions and obstacles will appear. Most, you won’t even see coming.

By following the advice of this article, you will have more piece of mind, and make sure that your new infant is cared for in the event of a major life change.

Emergency Fund

If you don’t have an emergency fund at this point in your life, this is the time to prioritize it. With pregnancy there are plenty of opportunities to have unexpected expenses.  Whether it is unexpected medical visits, nausea medication, antacids, increased parking expenses, quick trip to the store for pickles and ice cream or other bathroom supplies, having some surplus funds for unexpected expenses will help buffer the budget.

We should all build up to 3-6 months worth of expenses before we start investing and saving.  If you haven’t started before now, it will be difficult to start over the next nine months, but the best time to start besides last year, is now. At least get a few thousand dollars together if you have had a habit of living paycheck to paycheck. A major change in you life (namely a newborn!) is a great opportunity to put in place some financial goal that you have been putting off.

Draw Up a Will

If something happens to you or your spouse/partner and you are unable to care for your child, how do you want to decide who cares for her?

Without a will and if both parents are gone, a judge will most likely decide.  If you are separated from the other parent, try your best to agree on who will care for the child. If there is disagreement, the court will decide this as well.

Some of you may be young parents and still have parents of your own (grandma/grandpa) that are in good health and could assume responsibility for your kiddo. That is fine, but keep this in mind if down the road, your parents health or living situation change, they may not be ideal candidates for guardianship.  We initially named my wife’s parents as guardians in our first will, but have since changed it to my wife’s sister because we are 15 years into the future. Just make sure you keep tabs on this.

When you do choose guardians, make sure he/she/they know. Hopefully it is someone close to you that has the capacity to care for your kids. Getting the information that they just inherited some more mouths to feed from the court isn’t going to help them any.

This is a good discussion to have with your potential guardians. See if there are any major concerns that they have in the event they become your children’s caregivers.  Things like educational preferences and religious affiliation are good topics to discuss.

Where to Start

When just starting, drawing up your will through a pay for legal forms site like LegalZoom.com can be better than nothing. As high income professionals, I would advise against it. I’m all for being cost conscious, but I think this comes down to a cheap verses frugal argument.

The amount of time that we have to write an effective will would be much better spent concentrating on our own specialties.  I’ve read that even several lawyers that don’t specialize in estate planning have another lawyer that draws up their wills. If you want to tackle the process yourself, make sure you have read up on all the legal requirements. If you don’t draw up the will correctly, it can be challenged and your wishes go unfulfilled.

With significant assets, a revocable trust may be a better alternative. This will be more expensive than a will, but a trust doesn’t have to go through probate like a will does.  If you are early in your career and don’t have any assets but life insurance, then a will would probably suffice. If you have some specific ideas about when your child or children get specific assets and the requirement for obtaining them, then a trust will help with that.

Examples of this could be requiring college graduation or reaching a certain age before funds are distributed to your heirs. Regardless, I am not an estate planning attorney and you should investigate the process yourself. Find an attorney that can fulfill the requirement that are specific to your situation.

Disability Insurance

When you have a family depending on your income, disability insurance will replace that when you are unable to work and still need the money.  You should get enough disability insurance to cover your daily expenses and enough to save for retirement. Most disability insurance policies run out at age 65.  A portion of the payment from the disability company should be set aside to save for retirement.  There are several caveats to look into regarding the types of policies and specific riders attached to those policies. Here is a list of agents that can sell you the type of disability insurance you need.

Life Insurance

If you have people dependant on your income, and you are suddenly gone, this will be a major lifestyle adjustment for them if you don’t have adequate life insurance.  Aside from the devastating psychological component of their loss, they would potentially have to adjust their lifestyle without your earning potential.  In the vast majority of circumstances, term life insurance is the way to go.

I’ve tried to find a justification for permanent life insurance policies. Even if you are saving and maxing out your other tax deferred options for investing (401K, IRA, RothIRA) and still have money left over, I think you should put the left over money in a taxable account and buy tax advantaged index funds. With the expenses of investing through permanent life insurance products, this will give you better returns, and much greater flexibility in the future.  Check out How to Approach Term Life Insurance for information on deciding how much insurance to get and how to buy it.

If you get a term policy that covers the cost of living of your heirs, that will be the best value in the event of your death. This gives your family the piece of mind to achieve their goals without your income.

Retirement Plan

Assuring the security of your own retirement is one of the best things you can do for your children.  We all want the best for our kids and it is difficult to withhold spending when our children want something. We have to approach the money we spend on our kids just like we would any other aspect of our budgets.  If we don’t establish a retirement plan for ourselves when we are first starting our families, we can hurt them in the long run.

High income earners pay a lot of taxes.  Anything we can do to defer those taxes will most likely help us in the future. When the kids are out of the house and your mortgage and car expenses are gone, we tend to spend less. Without the expenses of a daily commute and work related expenses, we can divert a lot of those funds to other interests after retirement.

We might spend more money initially after retirement. Over the long haul of our golden years, we are likely to spend less. We can pay very little in taxes from our savings and investments, if we set up our retirement plan intelligently. In this post, a physician demonstrates how to pay ZERO taxes on $100,000 during retirement. You can live very comfortably and pay very little in taxes if you set up your withdrawal schedule and investment accounts right.

Where to Invest

If your job offers a 401k, 403(b), and or 457 then max these out first.  Look into doing a Backdoor RothIRA if you are above the income limit allowed to contribute directly and can’t deduct a regular IRA contribution.

If you have anything left over, you need to decide your risk tolerance and exposure to other investment vehicles. You might put money toward a mortgage if you own a home. You might contribute to a taxable account and buy tax advantaged index funds.

Once your child has a social security number you could invest in a 529 plan.  Investment gains are tax-free, if the funds are used for education. Look into these options and decide what your risk tolerance is to loss of principle and invest accordingly.

Plan to Teach Your Child About Finance

This isn’t essential right from day one, but eventually, sit down and map out how you want to teach your child about money over the next 20 years. If you haven’t done this with your partner/spouse, this would be a great time to map out your financial picture with him/her. Some questions to ask yourself are:

  • Are you going to give an allowance?
  • How will you fund wants and needs of your child?
  • Do you want the child to do chores or other work to earn money?
  • Where do you place the child’s monetary gifts? (529, savings accounts, piggy bank, combo of each)
  • How much will the child be able to give, save and spend of the money she earns/gets?
  • What kind of activities will you fund?

These are obviously not questions you are going to ask your newborn, but getting an idea of a financial map for raising your child can never start too early.  Becoming your child’s financial mentor should start early and the first step is thinking about how you will mentor in your own mind.  As the child grows you can involve her more and more in the financial decision-making.

Arrange Child Care

Stay at Home

If one of you is planning to stay home with the child, arrange for leave from work for the time that you are planning to stay home.  Start living on the new adjusted income as soon as possible if you are making a permanent transition. Juggling the transition to a lower-income and learning to care for an infant is difficult.  Adjust your lifestyle to only live on one income as early as possible. Set aside funds to cover costs associated with delivery, pediatric care, baby items and possibly getting the home ready for a new member of the family.

Nanny

If you are planning to use a nanny you can never start interviewing too early.  Start spreading the word that you are looking for a nanny. Tell your friends, co-workers and relatives. You may find the perfect person ready to transition to your family.

You can advertise, or see if your location has a nanny training program.

When you find candidates, interview them with quality questions. See how the nanny will response in various situations. Ask about administering medical care. As about emergency preparedness.  As about day-to-day tasks and what the nanny plans to do with the child.

Look for a Nanny that will not only meet the needs of your newborn and infant, but also as your child grows.  The needs of a 3 month old are very different to those of a 3-year-old. The nanny should be ready to adjust. You should find another caregiver if the child has outgrown the nanny’s expertise.

Child Care

If you plan to use a child care facility, get on the waitlist early. If possible, find two to three places you are comfortable sending your baby.  Most quality care centers will charge a waitlist fee. This is used to make sure that the parents are serious about sending the child there. Unfortunately, this doesn’t always guarantee that you will get a spot at the ideal time that you need it.

For example, you deliver at the end of September and decide to take the full 12 weeks of FMLA leave and enroll the child in January.  The child care center may or may not have a spot available then.  You may have to make other arrangements until a spot becomes available. Being interactive with the directors and staff at your preferred child care center can go a long way in assuring that you get a spot close to when you need it. Don’t pushy or overbearing.  Tell the directors you want your baby at their center. Ask about the activities and programs. This lets them know you are engaged. Asking if there is any way you can help them will help your cause. Just don’t be the crazy parent that never leaves them alone.

 

Providing a Safe Home 

There will be several items and several new reoccurring costs that come with a newborn. You need a place to put all this stuff.

Starting with the baby in your room makes nightly feeding and changing easier. It also makes it harder for you to sleep, especially if you are a light sleeper and will be constantly worrying that any sound or movement from the newborn is a state emergency.

Eventually the kiddo is going to need his own room and it is a lot easier to get it ready before he arrives. When we started, I spent 3-4 months worth of weekends making our office into a nursery. Ask friends what setup has worked well for them.

Do you want a rocking chair? I Recommend a glider. These are more stable and are less likely to pinch toes or the dog’s tail.

You’ll need a crib. Sometimes you can save some money by getting a combination crib that converts to a toddler bed. Use this after you can trust the child to get in and out of bed at appropriate times. If you are anything like us though, the baby won’t use the bed half the time. We just ended up bringing him to our room. We used a pack and play for ease of feeding and less walking around disturbing the rest of the house.

You also will need to baby proof the house as the little one begins to crawl and walk. Items like electric socket covers, door handle covers, cord keepers, hallway and stair gates, cabinet locks and fireplace protection all cost money. Include these costs and account for them over the next year after delivery.

 

Calculate the first year costs

Finally, you should think ahead to all the new costs associated with the newest member of the family.

Some costs will be initial only. Others will be reoccurring. Devising a new budget will help keep any surprises from happening down the future. Babycenter.com has a very comprehensive calculator.  It will allow you to plug in the values of all your total purchases and your expected expenses on things like diapers and formula.

https://www.babycenter.com/baby-cost-calculator

I have included a calculator screen shot. This can really help you budget for the new family member.

Having a Baby Finances

 

Conclusion

Kids are wonderful! My children have added more to my life than I could ever imagined. They also make you grow up pretty fast when you get that exciting news that he or she will be arriving in a few months. I had to do some appropriate planing and dreaming so that we have a better chance of attaining our goals.

Of course, circumstances will change. You can’t plan for everything, but having the discussions about finances will head off future “intense discussions” (a.k.a. arguments) with your partner and kids.

How did you plan when you found out a child was coming? Do you have other financial worries about having children? Comment below and let me know what you think.

Having a Baby Finances

Tom
Tom is a doctor, husband and father of five with a passion for parenting and finance. When he isn't skateboarding, riding BMX, or jumping on the trampoline with his kids, he is reading and writing about personal finance. He helps high income parents educate and mentor their kids to become financially, emotionally, and intellectually self sufficient.

5 Responses to “Congratulations! You’re Having a Baby! What about the Finances?

  • Interesting post. My kids are 5 and 7. I agree that a lot of what you wrote does have to be considered, eventually. However, I am afraid that most of this doesn’t need to be worried about, at all, the first few months, even year, the child is born.

    Take a will for example, if most of your assets are in retirement accounts (I hope they are for your sake), the law dictates distribution. No will or probate court necessary. if you have a spouse and one of you dies, the law dictates the other gets the assets, if they are in a retirement account, they will go to your spouse first.

    I would skip the disability insurance. SS provides a very generous disability policy that will provide a decent income for almost, if not all, any reasonable needs.

    We way over spent on furniture for our first child, and we regret it. We bought a convertible bed, only to find out later that we didn’t like how the full bed worked. A friend of mine bought a cheap crib from Target to start out, and I think that’s the more reasonable way to go.

    • hanks for reading!
      I agree that you don’t need to go out and get all these things the week you find out you are pregnant. The main purpose I was hoping to convey was we should think about all the things and get ready to implement them over time.
      The main reason for the will is if both parents pass away suddenly. I know this scenarios is less likely than one parent passing but depending on family dynamics, and agendas this could be important.
      Delaying furniture purchase is a good idea until you are sure of how you will run your family. Asking for advice from others can help avoid unneeded pieces that will go unused. Asking for advice might also get you some free slightly used items if you ask the right person at the right time, but we should think about how we will make the home a safer place for a newborn.

  • Lots of great content here! This topic is very fresh on my mind as I have two under the age of two. I think you hit almost everything on the head in terms of preparation. The only thing I see missing, which was honestly the biggest “cost” of having children for us, was the medical costs. Even before the baby comes, mommy is going to see her doctor very frequently; by the end it’s on a weekly basis. We were extremely fortunate that my wife never had any medical problems, but this could add even more visits towards the end. I guess I should also mention that we have a pretty decent benefits package from our company, however we still paid a lot out of pocket. Once the baby is born, you’re still not done as you’ll know need to take your child to the pediatrician for wellness checks and vaccines throughout the first 18 months. The one advice I would give to people planning on having children is to take these costs into account and also take advantage of a Health Savings Account (HSA) or Flexible Spending Account (FSA). These are both tax-deferred accounts that help with lowering your taxable income, however they can only be used for certain expenses. The FSA is less desirable because it’s a “use it or lose it” type setup, but for us it was our only option. Unfortunately, timing does come into play with these, especially the FSA. For example, we were able to fund an FSA for our first because our open enrollment landed right in the middle of my wife’s pregnancy. For our second, we didn’t know we had one on the way until a quarter of the way through the year so we couldn’t fund an FSA at that time. The medical costs associated with having a child are ones that are unavoidable so it really makes since to plan for these if at all possible.

    • Definitely. You can be assured you are going to hit your deductible for the year if you have a baby during that time, if your health plan even covers maternity.
      Thankfully a lot of the costs can be known ahead of time and you could pick an OB and facility that is the best value for your particular situation. It is still a big bite out of the pocket book though.

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