What Financial Steps Should I Take After Having a Baby?
The U.S. Census reports a new baby is born in the United States every eight seconds. My wife and I added three to those statistics and are finally done (hooray sleep, boo childcare costs)! As a number of friends have recently had a child, I thought I would outline the important financial steps parents should take in the days and months immediately following a birth. A new dependent brings immense responsibilities, so please take note!
What Insurance Do I Need to Buy or Update?
Health insurance – when you have a life event (i.e. have a baby, get divorced, lose a job, etc.), you usually have 30 days to modify your existing coverage. To add a new dependent, you will need a birth certificate or a letter from the hospital noting the birth of a child. As the former takes a few weeks to issue, the latter is provided within a few days and can be used to gain coverage. Work with your employer or healthcare insurer to ensure additional coverage is approved.
Life insurance – Now that another person relies on you and your income, you likely need more life insurance. If you suddenly die, who is going to pay the mortgage? What about childcare costs, lost retirement savings, and future college costs? If you spouse is working in the home, will she be forced back into the workplace? An unexpected death is the quickest way to derail a well thought out plan, so make sure you have sufficient coverage. Term insurance is likely the way to go, as it is inexpensive yet provides a great death benefit. With each of my three children, I bought another policy to supplement the other policies.
Disability insurance – Did you know that you are four times more likely to require disability insurance than life insurance (I’ve heard the number to be as high as 10x)? This will provide income to you and your family should you get into an accident and cannot work. Look for long-term disability insurance within your employer, an association, club, or other alliance where you can get favorable group rates. Look for “own occ” coverage vs. “any occ” coverage. The former is more pricey but often times the only answer.
Do I Need an Estate Plan?
Last Will & Testament – This important document defines and dictates how your assets are allocated when you die. Most importantly, however, it outlines a legal guardian for your children. This person would care for your children until they are 18 years of age. I prefer you designate this person (with their permission) rather than have the courts pick someone. And it avoids a scenario where a parent or sibling fights with another for custody, and your child is stuck in foster care until that situation is resolved. That situation is NOT good for your child.
One thing to note – the person caring for your children (guardian) does not have to be the same person you’d like to be the financial steward for your children. You can appoint a financial custodian to manage, oversee, and protect their inheritance. There are pros and cons to each that are worth considering.
Should I Update My Retirement Accounts and Insurance Policies?
Beneficiary designations – Be sure to add your new child as a contingent beneficiary. My spouse is the primary beneficiary meaning the money in the account would go to her at my death. If something were to happen to both of us, the contingent beneficiary would get our assets. If you have two or more children, be sure they (or a trust) are all listed to receive equal shares (if that is your wish).
What Is the Best Way to Save for College?
529 account – open a 529 account and start saving for college. If you are a resident in Indiana, the Indiana 529 account is the best in the nation. You get a max tax credit of $1,500 for the first $7,500 you contribute. It’s like putting in $6,000 and getting $1,500 from the state. Or thought of a different way, it’s like getting an instant 25% return on your money.
The earlier you start, the more time your investments have to grow. In 2023 according to the Education Data Initiative, the average cost to attend a four year in-state university across the country is $26,027. The average four-year private cost is $54,501. Those numbers are per year. My goal for many families that want to cover costs for their children is to save half of the projected costs of college in a 529 savings account.
Lastly, 529 accounts are a fantastic way for grandparents to provide for future generations. It’s one of the best legacy planning tools out there as they provide tax-free growth if used for college expenses. And if a child or grandchild doesn’t use the funds, then the beneficiary can be changed to their children and the compounding continues for another twenty years!
Do I Need to Create a Budget?
Yes, budgeting sucks, but children are expensive (i.e. diapers, daycare, babysitters). Retirement is expensive. Living the life you want to live is expensive. Creating a budget helps you prioritize these competing goals. Or if you’re working with me, and are not yet retired, then you follow what I like to call a “reverse budgeting” concept. I don’t care what you spend your money on as long as you hit your annual retirement savings goals. Once those savings goals are hit, spend to your heart’s content.
Having a child is a huge responsibility. The best thing you can do for them is to get your house in order should the absolute worst happen. Call, email, or book a meeting with me to discuss any of the above.
