25 Aug 5 Financial Tips For New Parents
The addition of a new child to a family is an exciting and life changing time for any young couple. Once the original shock of night time feedings, poopy diapers, and missing sleep wears off, many parents set their sights on the future and dealing with the sticker shock of a new mouth to feed.
There is no getting around it, having a baby is expensive. A recent 2014 Department of Agriculture report estimates the average cost of raising a child until age 18 is $245,340, with the figure much higher in locations like ours here in Southern California. It’s important to understand that this report only figures in the necessities (think food, shelter, and health care). Higher education is not calculated into this total.
While this number can appear to be a bit overwhelming, like any other major life change, there are financial considerations that with a bit of thought and planning will make your transition into parenthood much easier.
We’ve put together five key financial tips for new parents. Use this list as a starting point to keep your financial life in check during these first few crazy months of parenthood.
Tip #1 – Aggressively Pay Off Your Debt
With the arrival of a new child, your expenses will go up, making it hard to pay off remaining student and consumer loans acquired while you were single. Re-examine your current debts and establish a plan for paying them off. While it’s not necessary to pay off every cent of debt before a baby arrives, paying off as much as possible will help relieve stress later. Also, avoid the temptation to upgrade to the new car, or the bigger home until after you have put your financial house in order.
Tip #2 – Designate Guardians
One of the biggest challenges for new parents is playing the what-if game. For most of us with a positive and healthy outlook on life, the thought of dealing with our own mortality is a difficult process. However with a new life that is dependent on you for everything, thinking through who would care for your child in the event of an unfortunate accident or illness that takes your life is crucial.
If you do not designate a guardian for your child the state will do it for you, and it may not be in agreement with your wishes. We recommend that all new parents sit down with an attorney and have a will drafted that not only designates an executor to handle the financial affairs for your child while they are a minor, but also a guardian that will raise your child in your absence. Many times this will be different people.
Tip #3 – Purchase Life Insurance
Young parents typically have not had enough time to build up an estate large enough to care for a young baby to get them to adulthood. This is where life insurance comes into play. Once you become a parent, having life insurance is absolutely critical. For healthy young people, life insurance is obscenely inexpensive, many times less than $1 per day. When coming up with a death benefit, factors that should be considered, include current and future earnings, household debt, future costs of raising your children and enough funds to cover college tuition.
Tip #4 – Start Saving For College Early
A recent survey of 1,200 mothers (both experienced and expecting) by financial website nerdwallet indicates that college costs are the number one concern of mothers of teenagers.
From the survey: “Although pregnant women are more concerned about costs of health care and making a financial checklist before the baby arrives, nearly 44% of mothers with teenagers now wish they’d been advised to start saving for college immediately after their children were born.”
It’s never too early for young families to start saving for college. A popular choice for college savings are state sponsored 529 college plans. 529 plans allow you to set aside money for your child’s education and let it grow tax-free. The federal government won’t tax your money when you take it out of the account, as long as it’s used for higher education. And what’s best is that anyone can contribute to it. The college planning website savingforcollege.com is an excellent resource for research on the different options available.
Tip #5 – Lead By Example
A recent Forbes article discussed the issue of raising financially aware children.
From the article: “I have yet to hear a parent disagree with the statement that the first job of a parent is to prepare children to be self-sufficient, independent and resilient humans – able to make their way in the world.”
Your children will learn their most valuable lessons about money from you. Ensure that you are discussing financial issues with your children and modeling proper financial discipline with your spending and savings habits. It is vital that for your children’s future financial prospects that an open dialogue occurs on a regular basis in your household. These discussions can begin as early as three years old, and have an impact that lasts a lifetime.