Financial Planning for New Parents
Submitted by David Dixon
(Contributions are guest opinions only and don’t reflect the opinion or endorsement of Money Fit by DRS, our staff, client or other interested parties.)
Having a baby is exciting and life-changing, but it can also cause a lot of financial stress. The financial needs of your child will change over time, so make sure your family is ready to handle it. Financial planning can prepare you for anything that comes up along your child's life from unexpected illness to acceptance into a pricey college. This preparedness will protect your family from disaster and support your child as they grow and develop into a responsible adult of their own.
1. Determine Your Overall Financial Health
It’s important to have an idea of your current financial health so you can track it over time and ensure your financials are moving in the right direction. The measure of your financial health is known as your net worth, which is the value of all of your assets minus your liabilities. Your assets include items such as your house, car, savings and investments. Your liabilities are your debts, such as your mortgage and student loans.
While calculating your net worth, you'll have to figure out the value of your home. To do this, you could talk to a real estate agent, examine similar properties to yours that recently sold, or use an online valuation tool. Knowing your net worth will help you make important financial decisions. For example, you'll discover if paying off debts will benefit you in the long run.
2. Set a Realistic Budget
One of the best ways to make sure you can continue to support your family in the future is to stick to a budget. Before your child is born, take a look at your current income and expenses and determine how much room you have for additional costs. If you're barely scraping by as it is, you'll have to cut back on your current spending. Remember, you have to pay for diapers, baby food, childcare and the one-time costs of various baby equipment.
On the other hand, you won't spend as much on entertainment or dining out once you have a child. If it's realistic for you, childcare is a huge expense that parents can avoid by staying home for several years. Creating a budget will let you know if your family can handle living off of just one salary instead of two.
3. Prioritize Your Emergency Savings
Creating a safety net for your family is one of the most important aspects of financial planning. According to the Huffington Post, you should have at least six months’ worth of living expenses in a savings account specifically for use in emergencies. If one of all of your streams of income is stopped or reduced, this emergency fund can support your family until you have the chance to make up the loss or adjust your lifestyle accordingly.
You will also need to have important documents in place to ensure your children are properly cared for in the event of your death. The most important of these is a will that explains who will take care of your children and how your assets will be passed on. Finally, life insurance and health insurance can save your family from going into extensive debt if something unfortunate happens.
4. Start Planning for Your Child’s Future
While your child is still young, determine approximately how much money you'll need to save for their education. SheKnows.com breaks down your best savings options in this helpful article. Although it’s best to start planning for your child’s education early on, it’s never too late to start putting some money aside. You’ll be able to look for scholarships and apply for financial aid when it comes time for your child to enter college. Importantly, don’t forget to save for your own retirement. In fact, you should prioritize your retirement savings over that of your child’s education. It’s more difficult for you to get financial help in retirement than it is for your kid to find the funds for college.
Being a parent comes with endless responsibilities to care for children and protect their future. Basic financial planning is an essential part of this. Getting your finances in order will ensure peace of mind and keep you from lying awake at night worrying about the future of your family. Instead, financial stability will allow you to fully enjoy and appreciate every moment of parenting to its fullest.