Financial planning for parents-to-be has many facets
Re-evaluate budget, goals, before baby’s arrivalNovember 9th, 2017
While most people agree the decision to start a family is one of life’s biggest adventures, it also comes with a hefty price tag, one that financial advisers here say parents-to-be should try to be proactive in planning for.
“Whenever you’re facing a major change, it’s a good idea to re-evaluate your budget and your life goals,” says Robert McKinley, president of Spokane-Valley based tax, accounting, and business consulting firm, Robert P. McKinley PC.
“Once the child arrived, priorities change and so do plans,” he says. “So it’s helpful to start looking into things as early as possible.”
While there are many things for potential parents to consider, McKinley says the top two, from a financial planning perspective, should be making sure life insurance policies are up to date for both parents and creating a will.
Because most new parents don’t have many assets yet, he says life insurance is a popular vehicle for providing support to the family should one or both parents die unexpectedly.
“No one likes to plan for the worst, but life insurance and creation of a will are relatively easy for a financial adviser to help you with,” he says. “We often think of a will solely in relation to the dispersal of assets, but it’s important to remember they also designate who’ll raise your children.”
McKinley adds that a will also enables parents to place money in a trust, as well as designate what the funds within it can be used for—and when.
Once parents have life insurance and a will in place, they should start to think about budgeting some of the costs that come with having a child, says McKinley.
“Kids are expensive, so it’s important to start looking at ways to reduce your current spending to accommodate that,” he says.
According to a 2010 U.S. Department of Agriculture report, the average middle-income family will spend roughly $12,000 on child-related expenses in their baby’s first year of life.
Ryan Franklin, a Yakima-based senior financial adviser with Moss Adams LLP, says couples should start researching some of those costs ahead of time.
“It’s important to begin to understand how these costs will impact your lifestyle,” says Franklin. “You’ll likely be spending less on vacations and hobbies, and more on things you’re not used to buying regularly.”
Franklin says would-be parents can use tools like online calculators to start estimating their new expenses, then begin arranging their budget to accommodate them.
He suggests researching the cost of local childcare providers and transportation, as well as the cost of any needed home repairs prior to a baby’s arrival.
“A lot of the questions I get from new or soon-to-be parents are about childcare,” he says. “Many daycares can only accept a certain number of newborns, and most have a waitlist.”
When budgeting for expenses, McKinley advises clients to check with their employer’s human resources department regarding the employer’s policy for family and maternity leave.
“It’s different for every company,” he says. “Some allow for a flexible work schedule or work-from-home options, so let them know that you’re expecting as early as you can.”
“Whether you plan to return to work or stay at home, you might also be reduced to one income at some point,” he adds. “So, it’s best to start adjusting your budget to cover expenses, if, for example, you have to take extended maternity leave.”
McKinley says he also advises parents to try to avoid adding any extra expenses prior to having a baby.
“Be careful not to increase your monthly overhead by purchasing new cars, moving into a new home, or changing jobs,” he says.
Both McKinley and Franklin say many of the costs associated with caring for a newborn will vary depending on a couple’s income and spending habits.
“For some miscellaneous items like diapers and toys, you may decide you’re ok with a basic brand or quality,” Franklin says. “Some choose to go more high end on those items.”
Franklin adds that some choices—such as whether or not a mother will breastfeed and for how long—can impact a couple’s budget, as well as deciding between disposable or cloth diapers.
When planning for costs, McKinley says couples also should keep in mind that babies grow quickly, and will likely outgrow clothing and even some toys within months.
“Many couples like to create registries of needed items for baby showers, so when you do that remember to include items your baby will grow into or need later on,” he says.
While it’s important for prospective parents to begin adjusting their lifestyle and budget to accommodate a newborn, both financial advisers say that the first big expense parents need to plan for is the cost of medical care for mother and baby.
“The question of how much does it actually cost to have a baby will generate a number of different answers depending on the health insurance situation for the couple involved,” says Franklin. “So the first thing to do is revisit your health plan.”
The Washington State Hospital Association estimated the average charge for a vaginal birth without complications at about $14,000 for 2016 at hospitals in Spokane County. The WSHA lists last year’s average charge for Caesarean-section births without complications at Spokane County hospitals at around $23,000, with insurance covering varying amounts of those costs.
The percentage of prenatal and maternity costs that will be covered also depends on the insurance carrier. The Bump, an online resource for couples who’re expecting, estimates employer plans typically cover anywhere from 25 percent to 90 percent of costs.
Franklin recommends that parents looking to estimate health care costs look at their insurance premium, deductible, co-pay, and out-of-pocket maximums as outlined in their health plan, and consider whether it might make sense to switch plans.
McKinley says parents also need to be aware of how the baby will affect their tax return.
“A December baby born in 2017 would still be considered a dependent for the full year, so couples in that scenario might need to adjust their withholding to accommodate that extra dependent,” he says. “Couples should also check whether they might qualify for child tax credits, or child and dependent care expenses.”
While most new parents will probably be overwhelmed with planning just their first years’ worth of baby-related expenses, Franklin says it’s never too soon to start saving for college.
“I’m a big believer in starting to save early for college, as that’s a big expense,” he says. “If that’s something you’d like to do, remember to factor that saving into your overall budget.”
McKinley says it’s common for parents to start with what’s called a 529 plan, a savings plan designed to encourage saving for college.
A 529 plan is operated by a state or educational institution that has tax advantages and potentially other incentives to save for college and other post-secondary training for a designated beneficiary, such as a child or grandchild.
McKinley says as long as the funds are used for qualified educational expenses, the distributions aren’t subject to income tax or penalties.
“The advantage of the 529 college fund is that it’s in the child’s name, but you, the parent, have control over the disbursement of the funds,” he says. “Grandparents or other relatives can also donate to the account, and if your first child doesn’t use all of it, you can transfer those funds to your next child when they’re ready for college.”
For parents who are considering having more than one child, McKinley also recommends revisiting the budgeting process for each, as laws and circumstances are constantly changing.
“That’s where a trusted adviser, who’s familiar with your family’s finances and goals, can help,” he says.
McKinley says it’s also important for new parents to take a break once in a while, and remember to continue saving for retirement.
“It’s easy to put things off when you’re focused on a child’s needs,” he says. “But parents need to make sure they take care of themselves and continue to plan for their future too.”