What a beautiful time! You’re expecting your first baby and you spend your days thinking of names, wondering what color eyes he or she will have and which cool new stroller you should put on your baby shower list. You also need to think about how your new baby will affect your finances. I’d like to list the top three financial items you need to think about when you’re expecting:
- How will you fit childcare into your monthly budget?
- Do you have enough life insurance to make sure your child is protected?
- How will your discretionary spending change with a baby?
Let’s start with #1. You have to think about what kind of childcare you’re comfortable with and how much it will cost. In an urban area, good daycare could cost $2k/month or more. Nannies are much more. You should know your monthly expenses and your income and figure out if you have $2k/month to devote to childcare. If you don’t, you will have to start cutting expenses until you do or figure out some other strategy for childcare. You do not want to use savings for childcare, since it will be ongoing for years especially if you live in a place where children cannot start public school until kindergarten.
For #2, you HAVE TO HAVE LIFE INSURANCE IF YOU HAVE A CHILD. You may never think about life insurance, but as soon as you hear that very first scream, there is a human dependent on your income. If that income goes away, that human will be impoverished. You need to protect your income for your child’s welfare. The best way to do that is to have adequate TERM life Insurance. Term life insurance has the word TERM in the title and pays the beneficiary if the insured should pass IN THE TERM of the policy. You need it until your child is financially launched (25 years if you believe the child will attend college, 20 years if not).
As a basic guideline, each parent should have about $1m of death benefit. This is a basic guideline only and your situation may differ greatly, but $1m should insure that the remaining spouse does not need to move right away and can afford college and to replace retirement savings that will not be saved if you are gone.
Number 3 is a challenge for all new parents. You may be used to going out and buying whatever you want before your baby comes along, but what about after the baby arrives. You should expect to spend several hundred dollars more per month in the first few months of life (think take-out, glider rockers, bouncy seats, etc.). Make sure your monthly cash flow is ready and you’ve increased your discretionary spending, if possible, or cut other expenses to make sure you have a few hundred dollars per month for the first few months. Thereafter, hopefully, your spending becomes more consistent.