A classic money rule is that your financial needs should change only when your life changes. As you begin to raise a family, your financial decisions will focus on protecting and providing for your children, such as building a household budget and saving for college.
Making smart financial decisions during this period of life is crucial. For one, consider that raising a child costs $233,610, according to a report by U.S. Department of Agriculture. Further, children are better able to learn how to become self-sufficient in a financially stable environment. Here are steps to take as your financial life changes with every new addition.
Build a new budget. Your budget will have to adapt to new expenses – diapers, formula, toys, etc. These will likely replace many pre-child expenses, such as bars, travel and entertainment.
Understand the costs of child care and tax breaks. Child care will be one of your biggest expenses, so it helps to be prepared. Fortunately, some of those costs are tax deductible.
Set up an emergency fund. An emergency fund provides greater financial security by acting as a safety net of cash to cover emergency expenses so you don’t have to use valuable assets or take on high-interest debt.
Get life insurance. For anyone who is about to raise a family, life insurance is a must. It will help provide for your family in the event of your untimely death.
PLANNING FOR THE FUTURE
Set up automatic retirement contributions. Although you want to give your family the best, it shouldn’t come at the expense of your future. To help avoid allocating retirement money toward spoiling your children, pay yourself first by saving in a retirement account with automatic contributions.
Start saving in a 529 plan. Parents who want to fund their child’s college education should begin saving in a 529 plan as soon as the child is born. Putting away $100 month will result in more than $43,000 by the time the child turns 18 (assuming a 7% annual rate of return).
Work with a financial adviser. Now is a time to revise your financial plan – or finally get one. Meet with an adviser to determine what steps are best to meet the needs of your family and reach your financial goals. Then regularly revisit your plan to make sure you’re on track, or to adjust when anything further in your life changes.
PLANNING YOUR LEGACY
Develop an estate plan. Work with an estate attorney along with your financial adviser to create a plan for distributing your assets that is appropriate for your situation.
Get a will. A will is important regardless of your age or level of wealth. It not only helps ensure your wishes are fulfilled, but also names legal guardians for your children in the case both spouses pass.
Designate a power of attorney. A power of attorney (POA) is a written document that allows you to designate someone to act on your behalf, such as in financial or medical matters, either immediately or upon your incapacity. A POA can help your family avoid the expensive probate process.
Organize your financial and legal documents. When it comes to managing one’s finances and estate, organization is often overlooked. Having your important documents in one place makes them easier for your spouse and children to retrieve any money bequeathed to them or settle any outstanding financial affairs.
Review and update your beneficiaries. As your life progresses, you may want or need to change your beneficiaries. Remember, beneficiary designations override your will. Naming the wrong people or failing to update your documents can create a mess for your heirs.
Of course, family financial needs differ from household to household. As you raise a family, however, you can’t make financial decisions on the fly. It takes smart preparation and planning. Working with a financial adviser before the stork arrives can get you and your family off to a great start.