If you and your partner are expecting a baby or thinking about starting a family, you probably have a lot on your minds. Besides the logistical decisions—like how to decorate the nursery, what gear to buy, and which pediatrician to use—there are financial considerations, too.
- Will we both return to work after the baby arrives? If so, how much will child care cost? If not, can we cover our expenses on just one salary for a while?
- How much will college or other higher education options cost 18 years from now?
- How can we stay on track to retire comfortably when our expenses are about to go up?
Starting a family is a happy time of life, but it also can bring on feelings of uncertainty and concern, especially when it comes to money. These four strategies can help ensure you stay financially sound even after you welcome your new bundle of joy.
1. Plan for Your Parental Leave
The Family and Medical Leave Act (FMLA) requires any company with more than 50 employees to provide up to 12 weeks of unpaid maternity leave for mothers. The law also allows fathers to take FMLA leave as long as they’re considered eligible employees. But each state also has its own maternity leave laws, some requiring at least a portion of your leave to be paid. Some companies go beyond those legal requirements to offer more generous paid leave.
Regardless of where you work, it’s likely your company’s paid leave allowance won’t cover you for the entire time you’d like to take before heading back to work. Most new moms end up using a combination of short-term disability (which you may have to contribute toward), sick leave, vacation time, personal days, and unpaid leave.
To ensure you’re prepared for the financial implications of your parental leave, it’s best to check the specifics with your HR department ahead of baby’s arrival. Here are a few key questions to ask:
- How much time does the company allow a new mother or father to take?
- Is any of my parental leave on a paid basis?
- If so, how is my pay calculated during that time?
- How many vacation, sick, and personal days will I have accrued at the point I want to take leave?
- Am I covered by short-term disability insurance? If so, what percentage of my salary will I receive?
Whether you’re already expecting or just in the planning phase, consider when it’s best to consult with HR. While HR representatives are required to maintain the privacy and confidentiality of employee discussions, if you’re not ready for your workplace to know your plans, it may be better not to approach HR until you’re prepared to share the news. Or consider checking on maternity-related benefits during a scheduled meeting like an open enrollment session or benefits review.
2. Beef Up Your Life Insurance
If you’re adding a new member to the family, you probably will need more life insurance than you did before. The added coverage can provide peace of mind that your children will be provided for, no matter what happens to you or your partner.
Many people assume the life insurance their employer provides is enough to cover their needs, but that’s rarely the case—especially for families with children.
Most companies only offer life insurance in the amount of one or two times your annual salary, which is typically much less than you need. Your employer may offer the option of purchasing higher amounts of life insurance coverage. Before doing so, it is advisable to compare the cost of coverage purchased through an independent agent. The cost of the employer provided coverage typically increases over time based on your age.
You may be wondering which type of policy is best and how much coverage you should buy. While there are many options available, financial advisors usually recommend that new parents consider purchasing a 20-year or 30-year term life insurance policy, with the specific term dependent on factors like your current age and how many children you plan to have.
3. Start Planning for Your Child’s Future Education
For a child born this year, college could cost over $200,000 for a four-year degree. Before you panic over that figure, remember that time is on your side when it comes to planning for a child’s education.
Thanks to the power of compound growth, the earlier you start investing for your baby’s future educational expenses, the less you’ll have to save to reach your goal. Your child might also qualify for a scholarship or financial aid or could take a student loan to cover a portion of the costs.
No matter how much you expect to pay toward your child’s education, consider setting up a 529 plan. This tax-advantaged account allows you make after-tax contributions, then take tax-free withdrawals to cover qualified educational expenses, such as tuition and books. You can even use the funds for K-12 tuition (up to $10,000 annually) or change the beneficiary if your child doesn’t use the full amount. The earlier you open an education savings account, the larger your balance will grow.
4. Go Beyond a Will
If you already have a will, you’re off to a great start in terms of designating how your assets should be distributed after you die. But once you have children, a will isn’t always enough. If you and your partner were to die simultaneously, you certainly wouldn’t want to leave your estate directly to a young child! That’s one of many reasons you need to go beyond a will and establish a more comprehensive estate plan.
An estate plan typically consists of a will, living will, durable power of attorney, health care power of attorney, guardian designation, and possibly trusts established in your children’s names. While that may sound complex, an experienced estate planning attorney and financial advisor can make the process relatively easy. And the result will be well worth it, ensuring your assets pass to your children or other heirs seamlessly and without unnecessary delays.
Financial planning becomes even more important and more complex when a child enters the picture. You’ll likely have many questions, even beyond the topics covered here. And the CERTIFIED FINANCIAL PLANNER™ professionals at Marshall Financial can provide answers!
Our team has extensive experience helping new and soon-to-be parents plan for this exciting time of life. Contact us to schedule a consultation.