5 Financial Action Steps You Need to Take with a Baby on the Way
I haven’t yet had the experience of bringing a child into the world, but I serve people who have. Through some of these relationships with clients, I’ve been able to learn about some of the hurdles they’ve had to overcome when waiting to prioritize some areas in their financial lives.
Here are a few ideas I would consider if you have a baby on the way that could optimize your financial position. Though this is not an exhaustive list, proactively making steps to plan in these areas could alleviate some pressure down the road. If you leave these thoughts unaddressed, it could put you in a much more difficult position later!
Think Cash Flow, Not Savings
Many times, I hear people preparing for baby by only focusing on those immediate expenses: the hospital bill, the crib, the strollers, the 67923 diapers, the car seats, etc. Though there are definitely high initial costs, the more silent killer is the decrease in cash flow.
I’ve asked a few of my clients, who already have young children before we began working together, what they would have changed in their financial preparation. Many of them say that they didn’t anticipate how much their family’s living expenses would adjust month to month.
“Cash flow” in its simplest form represents any inflows of money minus outflows of money. Simple arithmetic tells us that an increase in outflows means less cash flow.
In addition, many families want one spouse to stay at home while children are in their younger ages. If that spouse was previously working, then inflows decrease—another strike against cash flow.
Suggestion: Discuss with your spouse what changes you expect in your financial lifestyle. Will one of you stop working temporarily? What expenses do you expect in clothes, food, and other childcare items for which you weren’t responsible before children? If you don’t have a written budget, it may be time to talk to a financial professional.
Protect Your Income!
Your income drives your financial possibilities. If something were to change in your health unexpectedly and cause you to miss work, that could damage the financial situation, especially with tighter cash flow.
Let’s say that you transition to becoming a single-income household. If you only have one income supporting the family lifestyle, losing that income could be devastating.
Even if you stay a dual-income household, outflows will still increase, so your income won’t go as far as it used to.
Suggestion: Consider reevaluating your personal & employer-provided long-term disability insurance policies.
18 Years Is Not That Long
Everyone has different goals for their kids' futures. However you decide to support them, one thing that will always help is to have time on your side.
Let's say you wanted to set aside $50,000 in 18 years after your child is born. Could be Junior's education, a vehicle, a wedding, etc.
If you wanted to put money away monthly...
Starting at age 0, it would take you $104.14 per month
Starting at age 8, it would take you $273.30 per month
(Both assume 8% rate of return)
Arguably, both situations are doable. However, it's likely that you have more than one child, which could make saving a harder task.
With 3 kids, it's $312.42 vs. $819.90 per month!
Start sooner rather than later!
Suggestion: Talk to your spouse about goals for your kids in the future. Do you want to support them financially? If so, what are some of the things you’d like to provide for them?
This hypothetical example is for illustrative purposes only. Not based on any particular investment. Assumes 8% annual return. Investments will fluctuate and when redeemed, may be worth more or less than originally invested.
What Happens Financially If You Die?
You have 2 children who are 4 & 2 years old.
Your spouse stays at home.
You're currently saving for the kids' college.
If you pass away prematurely, do you...
...still want your kids to attend college?
...want your spouse to continue his/her life as homemaker?
...want your survivors to be left with the same debts?
...want your family to maintain their same lifestyle?
Some people who pass away early have already built enough assets to cover every wish for their survivors. However, many people don’t have this luxury.
Suggestion: Picture what would happen if you were to die tomorrow. Aside from the obvious emotional response, what would your surviving family do next? What do they want to do? Are you in a position where everything you mentioned could happen?
Life insurance products contain fees, such as mortality and expense charges (which may increase over time), and may contain restrictions, such as surrender periods.
What Happens Legally If You Die?
Remember that 401(k) meeting you had 7 years ago with the HR guy, and he asked you to name a beneficiary for your $72 account balance, on which you named your dad?
Do you know if that's still the case?
Maybe make sure your spouse is named as the primary beneficiary?
Do a double-check on any assets to ensure that your money is being left to whom you desire.
What about childcare?
If something happens to you AND your spouse...who's taking care of the kids?
A verbal agreement and a handshake could be sufficient in your eyes, but probate court may have a different opinion.
Suggestion: Review all of your accounts and assets to make sure that if you were to pass, they are being left to your desired beneficiary. If you do not yet have a will, DPOA, HPOA, etc., talk to an estate attorney about organizing/drafting these documents.
This is not a comprehensive list, but hopefully it’s enough to help you become proactive rather than reactive.
If you feel like there’s a gap in a few of the areas mentioned, don’t wait to schedule a conversation with me. I'd be happy to walk you through what financial considerations may be important for your unique situation.
Schedule a phone call with Matt
Financial professionals do not provide specific legal advice and this information should not be treated as such. You should always consult your own legal advisor regarding your own legal situation.
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