As part of my live well series, I wanted to address the financial implications of having children, or more specifically, having your first child. While becoming a parent is very exciting and fulfilling, it's also significantly life changing in many ways... but here, let me focus on the financial aspects of becoming a parent.
Well, if you're a two-income couple, one of the first changes you might face is a straight reduction in your wife's income should she go on short-term or extended maternity leave. This, of course, also depends on her employment status and the pregnancy-related benefits she receives... but for the most part, young expecting couples are faced with a sudden loss of income of the mother. So make sure, as soon as you find out you're going to become parents, you use the remaining seven or eight months before the baby's birth to set your finances in order and rejig your lifestyle to accommodate a new person in your household and a drop in take-home pay. In instances where the mother is not working, adjust your lifestyle for the added expenses of a new born.
And, ideally, plan ahead as soon as you are married or in a relationship where the two of you would want children.
Also speak with your employer to see if you're covered by short-term disability insurance that could pay up to 70% of your gross income for about six weeks typically; also check with HR on your maternity benefits and make full use of them on things like your insurance co-pays... treat a pregnancy like any other medical condition and plan ahead for necessary out-of-pocket expenses.
In addition to loss of income, a baby comes with multiple expenses such as an added healthcare deduction from your salary, out-of-pocket hospital expenses for the mother and child, temporary periods of absence for the father that could also result in reduced pay close to the time of delivery and, of course, money for the baby's clothes, toys, crib, formula, diapers, car seat and more. You're sort of hit by a mini tsunami of expenses when a baby is born so it's best that you be prepared.
Now, I don't want to be Debbie Downer here, a new baby is magnificent experience but I do want to help you avoid some common mistakes. A lot of excited parents tend to get carried away and buy expensive cribs, expensive clothes and so on... driven by a noble thought where they want to give their child the best that they can afford... but, frankly, the child knows no better - a $1 toy from the Dollar Store is often as exciting and challenging as a $50 gift from your favorite baby store... and a fancy crib made of solid wood can easily be substituted by something that's way less expensive... just focus on the basics and then some; give your child a comfortable mattress and a warm blanket and you'll be fine.
This is also a good time to look for used items - you can get excellent quality children's items that other kids have simply outgrown and are going for a song.
Likewise, use events such as the Baby Shower to ask for practical gifts so you get two or three really useful things that you know the baby is really indifferent to... and in so doing, reduce your expenses by getting necessary and basic items. Of course, we all want our kids to look cute and all, so go ahead and buy a few pretty clothes, but stick to thriftier stores if you can - they too have plenty good options that will not reduce your baby's cute quotient!
Instead, invest in things that matter - such as good quality diapers, good quality and healthy baby food and formula, a good car seat. You get the picture.
As soon as you have a baby, you can also start socking away for baby's education - with tax free contributions to Coverdell Education Savings Accounts (Coverdell ESA) and 529 Plans that let you invest today so the money grows tax-free and can be withdrawn tax-free provided funds are used for qualified educational expenses such as tuition, educational supplies, computers and Internet access, room and board, etc. Of course by the time your baby in 18, we'll all be flying around in our own personal clouds wearing clothes that are internet connected. But seriously, as I have repeatedly said, use the power of compounding, start with small but regular contributions, invest this money in higher yielding securities such as stocks at first, then gradually shift the allocation to bonds or CDs as your child reaches an age where funds need to be withdrawn. You'll be amazed at how effective these plans are in reducing future education-related expenses.
Don't Ignore Your Own Retirement
And Finally, Don't Ignore Your Own Retirement. And through it all, make sure you don't ignore contributions to your own retirement savings. If circumstances or financial constraints make money tight, reduce your contributions down to $100 or even $50 a month but keep the continuity and the discipline, and actively streamline your lifestyle preferences to your new circumstances, to the point where you still manage to save enough for your retirement. See, if your household income drops from $100K to $50K suddenly, it may seem like there's no way you can save but I've come across enough individuals who make less than $50K a year, have children and yet manage to steadily build their financial nest eggs... it may seem hard at first but if you have the will to save, you will find a way.
Steve Pomeranz is a Managing Director for United Capital Financial Advisers, LLC, "United Capital", and owner of On The Money. On The Money is not affiliated with United Capital.