By Michael Fuhr, CFP®
Being a parent can be one of the most rewarding and challenging experiences of a lifetime. It can feel easier to provide for the most basic needs of your child—unconditional love, attention, and opportunities to learn and grow—than to prepare for all of their financial needs. As a parent, the financial demands of raising a child include frequent wardrobe updates, stimulation and education through toys, activities and academics, as well as other even larger expenses.
Here are eight things to consider when deciding how you will provide for your children, now and in the future:
1. Childcare Can Be Costly
When children are younger, childcare costs can be substantial, depending upon where you live and the options you pursue. Care by a family member is often the cheapest option, and, if you’re lucky, possibly free. If you’re not so fortunate, other options include center-based and home-based care. When considering these solutions, be sure to evaluate the costs relative to your after-tax earnings. Daycare and shared care are often the most reasonable, but you’ll need to plan ahead, as many have lengthy waiting lists. In-home child care offers many perks, but can also be more expensive, depending upon how many children you have. For live-in positions, consider living space arrangements and household dynamics. (For related reading, see: 5 Ways to Save on Child Care Costs.)
2. Staying Home Can Affect You Financially Too
Staying at home offers an alternative to child care providers and can be a bonding experience for parent and child. You’ll need to evaluate both the benefits and the financial risks honestly, to make sure your family is financially prepared and protected. Things to consider include:
- Job security of the working parent;
- Longer term earnings and career impacts for the stay-at-home parent (e.g. ease of returning to the workforce, time and cost of maintaining or updating professional credentials, reductions in future Social Security benefits);
- Financial resources available should there be an earnings gap;
- Life and disability insurance coverage to protect you and your family if the working parent experiences a medical event; and
- Potential stress on the marriage.
3. Childcare Doesn't End With Kindergarten
You don’t just need to plan for care coverage while your child’s an infant or toddler; the need extends well beyond early childhood. Common care costs include preschool, summer camps, activities, before- and after-school programs and babysitting. All of these expenses need to be factored into your financial planning. (For related reading, see: The Cost of Raising a Child in America.)
4. Educational Costs Include More Than College
Whether you opt for public or private schooling, educational costs vary significantly and entail far more than just saving for college. There are extras to consider throughout your child’s academic career, including field trips, tutoring, study abroad programs and college prep classes. A mixture of savings vehicles can help meet the continuum of your child’s education needs. Section 529 college savings accounts are a great tax-advantaged solution. Additional resources that can help cover your child’s educational costs include personal savings, custodial accounts or Coverdell Educational Savings Accounts (also known as educational IRAs). (For more from this author, see: College Funding Decisions: 529 and Custodial Plans.)
5. Plan Ahead for Medical Costs
Having a child means your medical budget will increase. Be sure to understand the deductibles, co-pays and other amounts you’ll be liable for, including doctor visits, emergency attention and medication costs. If you have a health savings account or flexible spending account, consider increasing contributions on a pre-tax basis. Otherwise, make sure you have ample savings available. It’s also important to have adequate sick and vacation days, or at least the financial resources and job flexibility to sustain some unpaid days along the way.
6. Protect Your Child After You Are Gone
Caring for your children doesn’t just involve the here and now. Being a responsible parent also means protecting your children in the event that you become ill or die. Adequate life insurance will fund your child’s needs in the future if necessary. Term insurance is often very affordable, with shorter term policies being cheaper than longer term policies. Laddering term life insurance policies based on financial needs at varying stages of life can reduce costs. For example, a 10-year term policy can cover younger child care needs, coupled with a longer 20- to 25-year term policy that extends through your child’s college years. You also need to have proper estate plans in place to establish guardianship and trust provisions in the event of your death. The last thing you want is for your child’s future guardian to be determined by a court official who doesn’t know your child or your family. (For related reading, see: 6 Estate Planning Must-Haves.)
7. Be Prepared for the Unexpected
When it comes to parenting, there’s a long list of things you need to prepare for, including the unknown. Routine schedules and budgets will frequently be disrupted, requiring contingency plans. While family, friends and caregivers might be able to intervene on occasion, you’ll need to be prepared to change your daily schedule on a dime, take time off of work for medical visits and sick days, accumulate emergency savings for unforeseen expenses, and more.
8. Don't Wait Too Long for the Perfect Time
Being a financially responsible parent is important for both you and your child. However, it’s important to know that few parents are 100% financially secure when their children are born. Waiting to have children later in life, when you think you will be more financially prepared, can be expensive. You may need to pursue fertility treatment or adoption. Strike a healthy balance, and start your family at the right time for your finances, your lifestyle and your body.
Plan Ahead So You Can Enjoy the Journey
Parenting is a journey for both you and your child, and it will require you to make many important decisions along the way. Planning ahead financially is a wise choice for you and your family that will help you be prepared for your family's future.
(For more from this author, see: 6 Steps to Financial Success for Couples to Follow.)
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This article was originally published on Investopedia.