By Ryan Repko
Being a new parent is an exciting time. It can feel like every day is a completely unique, overwhelming and emotional rollercoaster ride. One thing that you’re bound to notice is that your new bundle of joy, as amazing as they are, has caused an unexpected shortage of two things: time and money.
It’s completely normal to be a bit surprised at how tight your budget suddenly feels or how much you suddenly value every spare minute you have. During this new chapter in your life, it’s tough to make time to focus on your finances - especially when both seem to be in such short supply. However, there are a few things you can start doing now to automate, simplify and plan for the future. None of them take more than a few hours and some you can do in just a few minutes. (For more, see: Things to Do Before You Have Kids.)
1. Automate Retirement Savings
With your new budget, it’s tough to come up with extra money at the end of each month. It feels like every extra penny gets used up in the blink of an eye. That’s why it’s easier to automate your retirement savings ahead of time. If funds are getting pulled from your paycheck on the front end, you’re forced to budget using the money that’s left over. Typically, it’s more than enough to lead a comfortable life with your new baby. Anything you can save is beneficial, but realistically you should be saving enough to help you to meet your retirement savings goals.
Not sure what those are? Set the bar higher than you normally would. You want to be able to retire with dignity. Even though the decision to save more for yourself now might feel selfish, it’s actually contributing to your child’s well-being in the long run. You don’t want to eventually become dependent on them just because you couldn’t go without the many “extras” now.
When you board a plane, they tell you to put your oxygen mask on before assisting your child. The same rule applies here. Having an automated savings plan in place keeps you financially protected, which opens you up to freely help your child with their own finances should they need it going into adulthood.
2. Have an Emergency Fund
An emergency fund is a must for new parents. Kids add a new level of unpredictability to your financial life. Whether you’re worried about a medical emergency or you run into unexpected costs, your new baby has the potential to be unexpectedly expensive - no matter how carefully you’ve budgeted.
Your increased living expenses will also warrant a larger emergency fund than you’ve had before. If you find yourself in a situation where you’ve lost a stream of income, you’ll have more costs to cover while you get back on your feet. The vast majority of financial professionals will tell you that having three to six months of living expenses in cash is critical.
These living expenses are expected to be bare bones - they don’t include dinners out with friends, or trips to the movies with the family. However, when you have a baby, this number may change. While you might feel comfortable with only three to six months of expenses in your emergency savings, you may find that saving a bit more provides you with more peace of mind. This is especially true if you or your spouse are the sole income earner, or if you worry that your job will be particularly difficult to replace if you’re let go. (For more, see: Budgeting for a New Baby.)
3. Check Your Insurance
Health insurance for a young family is fairly straightforward - you simply have to contact your insurance company and add your child to your policy. Don’t delay on this, because depending on your insurance, you only have 30-60 days to do so. With the loss of sleep you will inevitably experience, you don’t want to forget to add your child to your policy. It is also worth noting that your child is a fully independent person from you and your spouse, which means they will have their own insurance deductibles and out-of-pocket maximums, just like you do. It would be wise to ensure that your emergency fund has enough to cover these expenses.
Beyond health insurance, having a baby should also prompt you to begin thinking about life insurance. Life insurance can be confusing and it’s often wise to discuss your options with a financial planner. The goal of your life insurance coverage should be to replace your income and provide for your family in any additional ways that your future income might have allowed. For example, if you think your spouse might like to stay home with your kids if something should happen to you, you may want life insurance to replace both of your incomes.
Alternatively, you might want your insurance to cover full or part-time child care if your spouse chooses to continue working. If paying for your child's college is an important goal, it will also be necessary to obtain enough life insurance that would cover these costs as well. Finally, you don’t want your surviving spouse to inherit large debt that would pose a significant burden on the family.
For example, providing enough insurance to pay off either of the spouses’ college debts or a home mortgage should be strongly considered. The last thing a grieving spouse with children needs is to have to move out of the family home because they can no longer afford it. Obtaining adequate life insurance can be just as important from an emotional and psychological standpoint, as it is from a purely financial one.
Speaking with a professional who doesn’t sell life insurance will give you an unbiased view on how much coverage you should consider. Just make sure the unbiased professional providing the advice is not being compensated in any way by an insurance company. Ultimately, most people should only consider term life insurance and stay away from whole life insurance.
4. Create an Estate Plan and Will
As a new parent, you need to have a will, which can be done rather inexpensively. Your will should define your wishes for your assets in case you and your spouse pass away. In addition to your will, you should also have a property and healthcare power of attorney in the event that you become incapacitated. In such an event, your spouse (or whomever you’ve selected) can make decisions on your behalf.
When your children are young, you’ll need to think about who will care for them if both you and your spouse pass away. This includes who they’ll live with, what their education will be (public or private), and whether or not they need ongoing medical care. You can also think about how you’d like your assets to be held for them until they’re old enough to manage the money themselves.
I know this is a very difficult subject to think about, but you will probably find a great sense of calm after you have clearly defined your children’s succession plan in your will. Your will should be updated when you have significant life changes, like the birth (or death) of child, and as your children age to reflect any shifts in your wishes for who should care for them, or when they can access inheritance money.
5. Start Saving for College
College may seem like a long time away for your newborn baby, but the price of secondary education has grown at 5% annually over the past decade, so you need as much time as possible to let the magic of compounding work. Establish a 529 plan in your child’s name as soon as possible after they’re born. 529 plans are investment savings vehicles that are intended specifically for educational purposes. They grow tax deferred, provide tax-free withdrawals for qualified education expenses and, depending on your state, can also provide a tax deduction for the contributions.
Under current law they can be used to pay for qualified expenses for K-12 private school education costs, as well as college education costs. This includes textbooks, room and board, the cost of classes and other education-related expenses. Anyone can contribute to a 529 plan in your child’s name, which is often a welcome relief to aunts uncles, and grandparents who want to help your children get a leg up and save for their continuing education.
With a new child in the picture, you have a lot more moving parts in your financial life, and far less time to think about how you are spending your money. Taking the above steps can help you simplify and plan for the future. (For more, see: Top 4 (Financial) Life-Changing Events.)
This article was originally published on Investopedia.