From the second you hold your newborn baby in your arms for the first time, you're hit with a sudden realization — you seriously need to get your act together. Even if you felt like you were handling this whole being an adult thing just fine before, when you know you have your helpless little child depending on you, you have to bring your "A" game. Fine isn't good enough anymore.
If you're wondering what you can do to safeguard your child's future, we'll show you. We can't promise it will be painless, but we'll get you on the right track.
Time to Start Planning for College
Your baby just drew its first breath. Do you really need to think about college already? You sure should. With college costs always on the rise, you need to think long-term when it comes to saving that much money. It's not something you'll likely be able to save up for during your child's senior year of high school.
There are several ways to fund a college education. You don't have to pick one method. It may be best to rely on multiple plans. Here are some of the ways you can save for their secondary education:
- 529 plans:
This vehicle gives you some good tax advantages for your child's college costs, including skipping federal tax.
- Roth IRAs:
This is a great plan for your child's college expenses because if your child decides not to go to college or gets a full scholarship, this money can stay in your retirement account. If they do need it, your contributions can be taken out without penalty at any time. Another benefit to going this route is retirement accounts aren't considered an asset on the FAFSA you'll need to fill out for colleges.
- Money market accounts:
If you want to start saving but want to have easy access to that money in case you need it for hardships before your child enters college, another option is a money market account. If you do some searching, you can find one with a decent interest rate right now.
Your insurance needs expand when you add another member to your family. You'll, of course, need to add your child onto your health insurance plan. That can be a big jump in premiums if you're not already on a family plan.
In addition to health insurance, you need to think about life insurance, as well. You'll want a bigger payout in case something happens to you because your child will need to be supported if you're not around to take care of him or her. If you're worried about how tight money is right now, look at term insurance rather than a whole-life policy.
These are generally more affordable, so you can get the most bang for your buck. Just be aware you won't have a cash-out value with term insurance as you would with whole-life.
You might also want to check into disability insurance if you're the primary or sole breadwinner. While no one likes to pay more for insurance than they have to, disability insurance can cover expenses such as your mortgage, food, and car payments if you find yourself unable to work because of an illness or an accident. That can be crucial to have if something goes wrong.
An Emergency Fund That Grows With Your Family
You may already have an emergency fund, but chances are you'll want to beef it up now that you have a baby.
A good emergency fund for a family should have anywhere from three to six months of expenses set aside. Some people even feel more comfortable with nine months of expenses, but this is typically if they are the sole breadwinner or if both people bringing home paychecks work for the same company. If there is a chance you could both lose your jobs at the same time because of downsizing, opt for six to nine months of savings.
By crunching some numbers—figuring how much you have outgoing every month and how much you contribute to that with your paycheck—you'll be able to come up with a figure that will feel comfortable for you.
It can take a long time to reach this goal, and you may find yourself rebuilding your emergency fund multiple times if you have to take money out for any reason. You can make it a game when your kids get older by finding ways to stash more money in that emergency fund. If raising thrifty kids is a priority, this may be one way to get them started when it comes to thinking about finances.
You should make eliminating your debt a priority. Life is going to be stressful enough as a parent without worrying about how much outstanding debt you have. As a parent, you're going to be paying more for everything.
Update Beneficiaries and Guardians
You'll want to make sure your child is now included in all of your existing financial plans. That means adding them as beneficiaries to things like your life insurance and your 401k.
Here's where things get tricky. With some policies, you aren't allowed to list your underage child as a beneficiary, so you'll have to get creative to include them as such. You'll need to appoint a guardian.
Figure out who you would want to take care of your child if something happened to you. Then you'll need to ask them if they're up to the challenge. It's definitely something you don't want to spring on them after the fact — you don't want them finding out you expect them to take care of your child at the reading of your will.
It's not just enough to ask someone to be a guardian, however. You have to put your plan in writing by drafting a will. If you don't have a will, a local court will get to make decisions about who the guardian will be and what to do with your money and estate.
To begin this process, make a list of all your assets, properties, and accounts. Name beneficiaries for as many of the accounts as possible. Name your child directly if you can. If you can't name your child, you can talk to the guardian about your future wishes for your child and their inheritance.
You'll also have to name an executor for your will. That should be a fiscally-responsible friend or family member.
Saving for a Down Payment
If you're not already a homeowner, it's something you may be thinking about for your family's long-term security once a baby enters the picture. There are many reasons why homeownership is a good thing for parents. It can be a sound financial investment. With every payment you make, you're building equity. And when that home is someday paid off, it's a freeing feeling knowing you own it.
Plus, a home can provide stability and comfort for a child. While that's not to say they can't get that same feeling by living in an apartment, a home can provide a greater sense of security.
So, if you don't already own a home, you may want to start saving up a down payment for one. A good rule of thumb to shoot for is having a down payment of 20 percent saved up. That doesn't mean you can't find a mortgage if you don't have that much saved up — you can qualify for a mortgage in some cases without putting any money down.
But having 20 percent will save you money in the long run. You'll lock in the best interest rates and avoid paying unnecessary private mortgage insurance.
Tackle Debt for Family Financial Health
To feel like you're on top of things and decrease the stress, you should make eliminating your debt a priority. Life is going to be stressful enough as a parent without worrying about how much outstanding debt you have. As a parent, you're going to be paying more for things like groceries, child gear, and babysitting.
With so many items needing your money, it can be easy to feel overwhelmed about where to start. The first thing you should do is make a list of everyone you owe money to and how much. Concentrate on wiping out your own debt before going too crazy with the college savings, unless you're funneling that money into a Roth IRA that doubles as a retirement account.
When paying off your debt, you can either start with the high-interest debt you owe, which will likely be credit card debt, or you can start with your smallest debt. Either way, keep chipping at it until you have your own student loan debt and credit cards paid off. That will help you sleep better at night and free up more of your funds for your family's future.
Keep Moving Forward
It may seem like you are treading water financially, and your steps toward progress might feel small at first. With every dollar you stash in that emergency fund and every cent you store away for your child's college education, you'll feel like you are getting the hang of this parenting thing.
Pretty soon, you might have your act together so much that other parents will come to you for advice. Even if you have slip-ups along the way, you'll get much further with a plan in place than you would by winging it.