Editor's Note: This post was originally published in the March 2018 Edition of Odyssey NexGen Newsletter. Curious about Odyssey's NexGen program? Email Anne.Simpson@odysseypfa.com to learn more.
If you're in your 20s, you will, at some point, find yourself on the wedding circuit (20 weddings this year, bridesmaid duties in 8, on an entry level salary? Sure, no problem). Once you've gracefully stepped (or faceplanted) into your 30s, you've now entered the baby circuit. And while it's common knowledge how much a wedding costs (ahem, the national average is between $20,000-$32,000), it's not well known how much a baby costs.
According to the Department of Agriculture's Cost of Raising a Child Calculator, for a two-income household making over $100k in Somewhere, USA, one child will cost you $25k a year. That's a lot of bottles and diapers. Whether you're bouncing between baby showers or 9 months from having a bouncing baby of your own, let's talk about preparing financially for that darling bundle of joy.
Emergency Fund: We've talked about establishing an emergency fund of at least 3-6 months of living expenses in case disaster strikes (e.g., you lost your job, your car dies, you have an unplanned expense - I'm looking at you - $5k A/C unit). Your emergency fund is even more important when you're preparing for a baby, because at least one of you may be out on maternity leave for 2-3 months. And it's possible your maternity leave is unpaid, meaning you'll have an extra mouth to feed without a paycheck for 8-12 weeks. (Not sure if you have paid or unpaid maternity leave? Consult your employee handbook, your HR department, or ask a new mama in the office.)
Childcare: If you're planning to go back to work, you'll need some kind of childcare: enter in daycare, nanny and/or nanny-shares, and au pairs. The National Association of Child Care Resources and Referral Agencies notes that the average cost of center-based daycare is almost $12k a year. If you employ a nanny or an au pair, you'll have to factor in taxes and benefits, like health insurance and paid time off.
Insurance: Pre-baby, review your health insurance coverage to understand what out-of-pocket medical expenses you may incur. If you have a Health Savings Account, you may want to divert extra dollars there. Within the first 30 days of their arrival, you'll need to add baby on you or your spouse's health insurance. If you don't have life and disability insurance, you may want to look into that as well. Your employer may provide group life and disability insurance; check to see if you're enrolled. You may want to consider adding an additional individual life and disability policy for income replacement should something happen to you or your spouse. If you have questions about how much insurance you need, give us a call.
Education: The recent tax reform expanded 529 plans' eligible educational expenses beyond college tuition and fees to also include private and religious K-12 schools' tuition (up to $10k per student per year). 529 plans are great gifting vehicles, as anyone (including you, grandparents, aunts and uncles) can contribute up to the annual gifting exclusion (i.e., $15k per beneficiary per year) tax free. You can open a 529 account pre-baby by naming yourself as the beneficiary. Once your baby arrives, you can change the beneficiary to your little one, giving Junior a head start for college savings.
Estate: If you don't have a will, now is the time to get one. No one wants to talk about death, but it's important that you and your spouse are on the same page about who will be your child's guardian(s) and how your assets will be used to provide for your child, should something happen to both of you. You should also obtain your financial and medical powers of attorney, which allows someone you've named to act on your wishes should you be incapacitated.
Beneficiaries: Once Junior has a Social Security number, you'll want to update your beneficiaries for your accounts (e.g., 401k, IRA) and life insurance to include your baby.
Retirement: Don't forget to save for your retirement - this is priority #1. Many parents get caught up in saving for their child's education at the expense of their retirement. Repeat after me: there are no loans for retirement. Set a reminder for each year on your child's birthday to increase your 401k contribution by 1% - this is an easy way to increase your retirement savings without really noticing it.
Congratulations to those who are expecting, those who have a baby on board, and those of you who have become "aunties" and "uncles." If you have any questions about baby-proofing your personal finances, give us a shout - we're happy to help!
Approved: AC - 3/14/18