Recently, a beaming young couple came into my office and shared their wonderful news: “We’re pregnant. What should we do?”
Perhaps the most joyful life event and game-changer for a couple's financial plan is the birth of their first child. In that spirit, we shared with this couple our top five baby steps for new parents.
Saving and Budgeting
As you start to prepare for those inevitable baby expenses, you’ll want to first evaluate what your monthly budget looks like today. By performing a cash flow analysis that breaks down your take-home income, monthly savings, and your fixed and variable expenses, you can identify areas where you can cut costs and bolster your savings. We recommend a baby savings fund where you set aside money for one-time expenses such as a crib and stroller, as well as ongoing expenses such as daycare and diapers.
529 College Savings Plan
Our clients said that having a college fund to put their baby through college "and hopefully medical school" was extremely important to them. Consequently, we recommended they start saving into a 529 college savings plan. If you open up a 529 account for your child, you retain complete control of the money. Any growth is always federal tax-free and typically state tax-free for college when used for higher education. And should your child be fortunate enough to receive a scholarship, you can transfer the funds to assist another child. Higher education costs are one of life’s biggest expenses. Establishing a savings plan early on can help keep parents from dipping into their own retirement funds down the road.
The first time you are separated from your new bundle of joy, whether it’s for a few minutes, hours, or days, you may begin to wonder what would happen if you were no longer around to protect him or her. There are many life insurance options available varying from term life to cash value policies. While each individual situation is different, young parents on a budget may consider an affordable term life insurance policy that offers a set death benefit amount sufficient to cover their family’s financial needs. Remember, one of the most important aspects of life insurance is to make sure that if an unexpected event befalls you, your spouse and children can maintain their economic quality of life.
We set up a meeting for our clients with our estate planning attorney so they could nominate guardians to care for their child in the event they both passed away. We also established a living trust, wills, and health care powers of attorney, which also made sense for their specific needs. Our clients didn’t like the idea of their child potentially receiving all of their assets in a lump sum at age 18 if they pass away prematurely. Their living trust allowed them to control the timing of distributions. They elected for one-third of its assets to be transferred at age 25, one-third at age 30, and one-third at age 35. They felt spreading it out this way would reduce the chances that their child would spend an inheritance all at once.
Your Own Retirement
With all of the new baby expenses adding up, it can be challenging to stay the course with your current financial and investment plan. It’s a common misstep for parents to focus their finances around their children at the expense of their own retirement savings. We advise that the best way to take care of your child is to take care of yourself. Your children are counting on you to be there for the long run. Show your kids how you prepare and save for the future.
We encourage our clients to be great financial role models for their kids. The sooner you start, the sooner you and your family may achieve retirement readiness.
Read next: How to Raise a Child Star
Joe O’Boyle is a financial adviser and retirement coach with Voya Financial Advisors, which is offering a $500 mutual fund investment to every baby born in the U.S. on October 19, 2015. Parents or legal guardians of eligible babies must register their child by Dec. 18, 2015.
Based in Beverly Hills, Calif., O’Boyle provides personalized, full service financial and retirement planning to individual and corporate clients. O’Boyle focuses on the entertainment, legal and medical industries, with a particular interest in educating Gen Xers and Millennials about the benefits of early retirement planning.