Oct 13, 2022

Steps to Financially Prepare for a Baby

This little bundle of joy will cost you. You won't have another event in your life that changes your finances as much as this one. We've given you some good tips to help you prepare for this amazing life changing moment! Congrats!

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Steps to Financially Prepare for a Baby

The USDA published a report using 2015 data, It was predicted that raising two children in a middle-class family would cost $233,610 from birth to age 17 on average. With inflation, that number translates to almost $286,000 in 2022. And that doesn’t even include the costs of college. For the 2021-2022 academic year, the average price of tuition and fees came to $38,070 at private colleges. $10,740 at public colleges (in-state residents) $27,560 at public colleges (out-of-state residents).

Source: College Board, Trends in College Pricing and Student Aid, 2021.

So how do you prepare financially for one of the most rewarding times of your life?

First things first, it helps to think early on about how you'll need to adjust your finances in order to fit a kid (or kids!) into the picture. And come up with a financial plan for getting your own "Full House." To begin with, it's good to consider your finances in advance in order to support a child (or children!). But believe me — ticking these checkboxes will be well worth it.

1. Create A Thorough And Realistic Penalty

Why it's important: You might not have thought about some of the costs of having a baby, like the fact that you'll need more space once the baby is born. For example, what kind of home can you afford (a slightly bigger apartment, townhouse, bigger house?), and what kind of baby gear you'll need (top-of-the-line designer clothes or your sister's hand-me-downs?) and how much care you'll need for your kids.

Here’s an idea of some baby gear items and their costs you want to take a look at:

1. Bassinet/Crib – $150-$1,600+

If you want your baby to sleep in your room, a bassinet is a terrific option. They are more portable and more compact than cribs. Because you can change the crib as your child develops, convertible cribs are a fantastic option. The majority of cribs are "4 in 1," or convert to toddler beds, daybeds, and full-size beds with headboards. Check out this one on Amazon.

2. Car Seat – $160-$300+

These things each sell for about $160 at retail. With it, you can purchase one base or car seat. If you choose the carrier option, you may get a second base for roughly $80 if you want something in each car. Otherwise, you would need to invest $300 in a car seat for each car. This Graco car seat is a great option.

3. Baby Monitor -$70-$400+

There are a couple of things to consider about monitors. Nowadays, wifi monitors allow you to use your phone/tablet as the screen. This is a great concept because now you don’t have to worry about losing your monitor. Here are some ideas for the best baby monitors out there.

4. Stroller – $120-$500+

If one parent is alone with the child, having a stroller that is compatible with your carrier will save you a lot of hassle. The Graco FastAction Fold (Amazon) is one that is highly recommended. If you're really monitoring your money, this stroller (Amazon) is far less expensive and has outstanding reviews, all for about $120. It does not, however, offer the capacity to attach a carrier. So those are some ideas of some of the baby gear you want to take a look at. If you don't already have a budget, you should either analyze your present one or create one from scratch. You'll need to set aside money for recurring costs like diapers and child care. Sticking to the necessities can make it easier to save money for fun purchases like that mom-and-baby class you've been coveting.

What to consider: If you live in a two-income household and you or your partner plan to reduce your working hours, your revised budget must take this into account. We recommend setting up an emergency fund that is three to six months' worth of your monthly income and is held in a separate, easy-to-access, secure bank account. If you're expecting a baby sooner, you may want to increase your liquid funds to help pay for some of the shorter-term expenses, such as diapers or new clothing for a newborn who is constantly growing. Also, if you suddenly lose your job or experience some unexpected financial setback, you'll want to make sure you can take care of both your needs and those of the baby/ies.

Snag your FREE budget template here.

2. Prepare an Estate Plan

Why it's important: Your parents may believe that in order to designate who inherits grandma's antique silverware, a will or trust should be utilized. However! It is essential when you have a child as well. If something terrible occurs to both parents, God forbid, you can designate in your will who will get custody of your child and how any money you leave to them is managed. Without one, each of those decisions will be made by a judge. If you already have one, make any necessary updates.

What to think about: As a new mom, finding a guardian to take care of your child in the event of the unthinkable will be your top priority. You can also establish conditions and the beneficiaries of your estate to ensure that your assets are utilized in the manner you choose. While an attorney is not required to draft a will, it is a good idea to consult one to ensure that all of your bases are covered.

3. Consider Opening a 529 Plan

It goes without saying that the staggering $28,000 in student loan debt owed by the current generation of graduates. Not exactly the best circumstances for your soon-to-be 22-year-old to enter adulthood.

Let's face it: depending on a scholarship is a bit of a bet, even though we'd all like to think that our young children will grow up to be academic, athletic, or artistic prodigies. Both private and public institutions will see a 3.7% increase in tuition and fees the next year, and this trend doesn't appear to be slowing down. The fact remains that college is costly. What therefore should a wise parent do? The correct accounts and early investing are generally your best bets.

A great place to begin is with a 529 plan. Your tax payments might be greatly reduced by some state-sponsored schemes. Additionally, if you start saving for college costs as soon as your child is born, you might have 18 years. At graduation, you'll thank yourself, I assure you.

Let's look at this comparison:

Let's imagine you start making $100 monthly contributions to a tax-free 529 plan following the birth of your child. You could have $37,086—$15,486 more than you initially placed and money you wouldn't need to borrow—to pay for college expenses if annual investment returns over the course of 18 years averaged 6%. On the other hand, it might take you ten years to pay off a loan for the same total amount—$37,086—if the interest rate was 6 percent. You would have to pay back a total of $49,408, over $27,808 more than you would have if you had made steady savings with a $411.73 monthly payment.

NOTE: 529 Plans do have disadvantages (though there are potential changes coming) Your child's college preferences, the cost of education in 18 years, or their potential as a student or athlete may be unknown to you. You can open a joint brokerage account or custodial account in the parents' names for the most freedom. Just designate it for college.


Source: Vincere Wealth

Get started with a custodial account today, the team at Vincere Wealth would be happy to help.

If you save even more...

When you raise your saving rate, the distinction is even more obvious. An investment of $200 each month for 18 years may grow to roughly $74,174, or $30,974 more than the beginning sum. Instead, if you took out a loan for $74,174, you could pay it off over ten years with a monthly payment of roughly $823.48. Your payback would be $98,817, or around $55,617 more than if you had saved the same amount. If you spread out the payments over 20 years to minimize your monthly payment, your interest will increase.

Source: Vincere Wealth

As you can see, the more money you save, the more it can work for you and the less money you will need to borrow and pay interest on. Even if your child is already a teenager, it's never too late to start saving because every dollar you set aside prevents you from having to borrow more money. Create a strategy to save money for your child's future. How much money will you set away each month for the future costs of your child? From kindergarten through college? While your baby is still a fetus in your womb, it can be tough to see him or her growing up and finishing high school. However, since college fees are rising twice as fast as inflation, it is important to start saving now (yes, on top of all the pregnancy costs and baby expenses). In 19 years, the expense of sending your miniature self to a public in-state college will exceed $240,000 for four years; a private college would go close to $500,000.

Time is on your side, which is fantastic news

Why it's important: Saving money for college through a tax-advantaged plan, such as a 529 education savings plan (originally codified in Internal Revenue Code Section 529), can be a great idea. It is unique in that it can be used to cover all eligible educational expenses, including K–12 school costs. The sooner you start saving, the longer the money will have to grow because higher education is expensive. Even though it's impossible to predict where or even whether your child will attend college, a 529 account is still worthwhile to start due to its flexibility. If your child's path finally does not go to college, you may, for example, name yourself as the beneficiary of the cash.

To chat with a resident college expert about this account in more detail, click here.

4. Get Life Insurance - Pronto

Why it's important: Your baby will depend on you for assistance throughout his or her entire life. Due to the cost of items like housing, clothing, food, and college, this will also require a significant amount of financial support. In the event of your dying, life insurance will guarantee that your family has the resources it needs. Although there are other types of life insurance, term and permanent insurance are the two most common. In a word, permanent life insurance never expires and provides you with protection for the rest of your life, unlike term insurance, which only offers temporary protection. Since term insurance and modest permanent insurance often serve different purposes in a financial plan, many new parents acquire a combination of coverage that combines both.

We advise meeting with a financial expert who can help you choose the best course of action for you and your family if you're unclear of how much life insurance you'll need. Speak with an advisor to get started today.

5. Check In On Your Health Insurance

What's important: As any expectant parent is aware, health insurance is necessary for both prenatal care and hospital delivery costs. In addition, once your child is born, he or she will require coverage for the initial trips to the pediatrician as well as any other future medical problems. What to think about: You should reevaluate your plan before the birth of your child to see if it still makes sense for your growing family. When comparing plans, make sure to check the deductibles, co-pays, and out-of-pocket maximums to keep costs down. Consider in-network medical specialists as well. Normally, only during open enrollment are you able to change your health insurance plan and coverage. Because having a kid qualifies as a qualified life event, modifications made after the birth of your child are exempt from the enrollment period. You typically have 30 to 60 days after your kid is born to name him or her on your insurance coverage; check with your insurance company to be sure you don't miss the deadline.

6. Get A Social Security Number

Why it's important: Getting your child a Social Security number is optional, but it's recommended so you can establish their financial life and claim them as a dependent on your tax returns, which may result in a tax break. What to think about: You can apply for your child's Social Security number as soon as they are born. In fact, when you provide the necessary information for your child's birth certificate at the hospital, you'll likely be asked if you want one.

7. Research the Prices of Prenatal Care/Childcare

Find out if doulas, prenatal vitamins, alternative therapies, screening tests, and labor and delivery options are all covered by your health insurance. If you can, give yourself enough time to switch insurance plans if you need more coverage. Let's not forget that you can require child care and babysitting when the baby is born. Depending on where you are, prices vary. Each week, daycare costs between $200 and $250. A babysitter may cost $565, or around twice as much. Comparable babysitting rates are between $12 and $18 per hour. Although it would be ideal, many of us are unable to find someone to care our children while we are away. Depending on how much money you would have to give up and whether you live in a state that mandates paid parental leave, if you are a couple, one of you could decide to stay at home.

8. Examine the Family Leave Policies at Your Company

Consider taking time off from work to spend more time with your child or children. Then, review the parental leave rules of your employer. If your firm provides one, that's great (although, regrettably, you are in the minority, as the majority of businesses in the U.S. still do not). If you didn't know, American employers are not compelled to pay their staff for parental leave. The Family and Medical Leave Act permits up to 12 weeks of unpaid parental leave (FMLA). You must have worked for a company with more than 50 employees for at least a year in order to qualify. Next, consider the expense of a long career break. Will you be able to take unpaid leave, and how will this influence your financial situation? We have a tendency to greatly underestimate this expense.

Look at this illustration:

Suppose you earn $95,000 a year and want to take a two-year career hiatus. How much would that cost you? The majority will reply with $190,000. The proper response? Over the duration of your career, it might cost you ten times that amount, or $1.9 million. Oof. Because a two-year professional sabbatical can result in a 20% income decrease, the number is so high. As a result, future wage increases will be predicated on lower future earnings levels; also, you won't be contributing to your 401(k) or Social Security while you're not working. One method you might be able to somewhat "pay for" the career break is through investing. Comparatively speaking to keeping your savings in the bank, investing has historically been significantly more effective.

Wrapping Up

The assured lack of sleep they will experience for the next, oh, 18 years isn't even among the top five concerns for new parents. What is the main issue? Money, or more specifically, the cash required to take care of the newborn. (Having a kid is one of life's greatest joys, but it may also be a significant financial change.

To speak with a financial counselor who can explain how your financial plan's various components work together, click here.

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