Becoming a parent for the first time is thrilling – an experience unlike any other. As many have likely told you, your life will change dramatically. You also probably know that your financial life will have to change as well. This is usually a hectic time, so here are five quick tips to keep in mind if you’re expecting a new arrival or have recently welcomed one into your home:
Examine your Spending Habits
You may need to examine your discretionary spending once you begin to feel the financial pressures of parenthood. You’ll face a lot of one-time purchases (crib, stroller, car seat) as well as ongoing expenses (diapers, food, healthcare, shelter). The U.S. Department of Agriculture estimated in 2015 – the last year it made such calculations – that a baby costs on average between $12,300 and $13,900 for the first year of its life. With inflation since then, that figure is likely over $17,000 now. But yeah – you’re going to need a budget, if you don’t have one already. Want to learn how? Watch our video on breaking down your spending into Past, Present and Future Expenses!
Take a Close Look at Daycare Options vs. Staying at Home
This is a tough one in 2021. Daycare options are more limited and costs are higher due to the pandemic. Previously, financial advisors noted that it could be costly in the long run for a spouse to be out of the workforce for years due to the effect on that spouse’s career trajectory. The argument for daycare is tougher if there’s none available! But with the shift to remote work, you may find new ways to stay on the job without leaving your child. Get creative. Can your spouse and you take turns handling the baby? Perhaps you could team up with other working parents and rotate daycare duties.
Get the Right Level of Life Insurance
This tip is even less fun to think about than a budget, but one you should consider sooner than later. Let’s be clear: Life insurance should only be used to ensure adequate funds are available if you or your spouse dies and their financial contribution vanishes with them. The insurance would serve as a plug for any outstanding liabilities and provide short-term income replacement. It is for this reason we believe term life insurance is generally a preferable option to whole life for younger couples. Lastly, don’t forget that the labor provided by a stay-at-home spouse has a cost, too, so don’t think it’s only important for the wage earner to have life insurance.
Review your Emergency Fund
Life throws us curveballs from time to time. That great job you have can vanish with market crash. A car wreck can leave you incapacitated for months. The rule of thumb is to have three months of expenditures saved in case you’re sidelined by such an event. But now that a baby is part of those expenditures, the emergency fund may have to be larger than before.
Start Saving for College
A 529 plan is a great way to set aside money for your child’s college education. It may seem that the day will never come, but those 18 years from birth to a student’s first year as an undergraduate will go by before you know it. So you’ll benefit from leveraging the advantages that time provides ASAP. Every dollar you set aside today will likely add up to a far greater sum than if you delay your savings for a few years or more. These accounts grow tax-free until needed to support tuition and other expenses. There are some complexities among the 529 plans offered by different states. For example, in New York, a 529 is tax-deductible up to $10,000 a year. California doesn’t offer any tax deduction.
These are just some of the steps you can take as parents to improve your finances. If you are looking for a more thorough and long term plan, please reach out and set up a call today!
Lake Road Advisors, a Fee-Only, independent financial planning firm with offices in Corning, NY, Ithaca, NY and Portland, OR works with clients virtually all across the country. Paul Sydlansky, the founder of Lake Road Advisors LLC, has worked in the financial services industry for 20+ years. Prior to founding Lake Road Advisors, Paul worked at Morgan Stanley in Manhattan for 13 years. While at Morgan Stanley, Paul was a senior-level manager within the Institutional Equities Department. In 2018 he was named to Investopedia’s Top 100 Financial Advisors list. Paul received a Bachelor’s degree in Economics from Marist College and holds an MBA from New York University Leonard N. Stern School of Business. Paul is a CERTIFIED FINANCIAL PLANNER™ and a member of the National Association of Personal Financial Advisors (NAPFA) and the XY Planning Network (XYPN).
