Preparing Financially to Start a Family

So you would like to start a family, but in the back of your mind you are uncertain and a bit overwhelmed by the financial obligations you may be shouldering for the next 18+ years of your life. These are legitimate concerns. According to the 2015 USDA report Expenditures on Children by Families, a middle-income married-couple should expect to spend between $12,350 and $13,900 annually on child-rearing expenses.

Understanding the costs of raising a child and planning for anticipated and unexpected life events is an important part of securing your financial health. Planning and saving early can go a long way in helping you meet the growing expenses of raising a child. Being aware of looming expenses and understanding your cash flow from the time you start your family can help you tackle these financial hurdles head on and ensure your own financial stability. Of course there are the obvious expenses such as diapers, formula/food, clothing and more living space.  But here are a few other items to consider in your planning:

Budget for some time off work

The Family and Medical Leave Act allows eligible workers to take up to twelve weeks of unpaid leave following a birth or adoption. Some companies will still offer employees pay during their leave, but many do not. Going without a paycheck for up to three months with many large expenses on the horizon should be carefully planned.

Review your health insurance

Prenatal care and childbirth can be very expensive. Most health plans are required to cover these benefits, but some may have more out of pocket costs than others. You will also need to plan for the baby’s care after birth.  Review your prenatal, childbirth and pediatric care coverage ahead of time.

Weigh the costs of childcare vs. cutting back at work

Will you need to pay for childcare when you return to work?  Or will one or both parents cut back on work, or leave the workforce entirely, to care for the baby?  In some situations, given the cost of child care and job expenses, it may actually be more cost effective for one parent to provide the childcare.  The current and future costs and benefits of each scenario should be considered.  It all depends on the cost of child care, your cost of living and your income.

If you do go with paid child care, some employers offer flexible spending accounts for dependent care.  These accounts allow you to save money on a pre-tax basis directly from your paycheck. As costs are incurred, you submit your eligible child care expenses for reimbursement. In some cases, you may also be able to claim the child and dependent care tax credit.

Life and disability insurance

When a child or spouse is depending on your income, there’s generally a need for life insurance.  The amount of coverage needed will vary depending on your situation. Term life insurance, which you buy for a fixed period of time, may be something to consider. It’s generally inexpensive, depending on your health, and may provide some peace of mind. It’s also important to consider what would happen to your family if you couldn’t work. Review your disability insurance at work, or consider purchasing it on your own if you do not have adequate coverage through work. This protection could be vital if anything prevents you from working and earning a paycheck for an extended period of time.  Don’t forget to insure the life of a stay at home parent as well.  This would allow the working parent to cover the costs of replacing the responsibilities previously assumed by the stay at home parent.

Estate planning

Parents will need to do some estate planning once the child is born, so plan to pay some legal fees in the beginning.  Parents will need to designate a guardian in the event of their death before children turn 18.  The decision can always be changed in the future, but it is better to decide while parents are alive and well, rather than have the choice made by the courts after the death of the parents.

Start saving for college immediately

Put time on your side to prepare for the growing expense of college. If you start soon after your child is born, even saving small amounts each month could help you build a sizable college fund over 18 years. There are a variety of ways to save for college.  A 529 college savings plan could help boost your savings with tax benefits.  529 plans offer a real value because withdrawals made for tuition, room and board and other qualified expenses are free from federal and state income tax.  Additionally, some states offer tax benefits for contributing to their own state plan, or, in some cases, any 529 plan.  For more information please reference our blog on saving for college:   http://www.thorinvestment.com/saving-for-college/

Prepare for new and unexpected expenses each step of the way

 The cost of raising a child changes through each stage of childhood. Everything from childcare and toys, to new shoes, club soccer and car insurance all cost a great deal of money.  To cope with the inevitable unexpected bills, one should plan to have 3 to 6 months’ worth of expenses set aside for the “just in case” scenario.

Planning for the future is one of the best gifts you can provide for your family. Proper planning Increases the likelihood that your financial needs, and wants, will be