Five years ago, my wife and I found out we were having our first baby. This thrilling moment in our marriage was quickly followed by the sobering realization of the costs involved in raising a child.
Many people receive help from family, friends and baby showers in accumulating the big one-time expenses such as furniture, baby equipment and newborn clothes. This eases some of the immediate financial burden, but the ongoing cost of diapers, food, toys and childcare is staggering.
What you may not realize is that your non-child-related expenses could fall, too. You’ll be at home taking care of the baby, which means less time to get out and spend on restaurants, bars, entertainment and travel.
The biggest thing to expect? Your budget will adapt to accommodate new needs that replace old ways of spending. Here’s how you can take action now to prepare your financial life for something completely different.
Set Up Automatic Savings
The best way to prepare for increased expenses is to start making monthly contributions to a savings account dedicated to baby-related costs. Open an online savings account and set up a monthly transfer from your primary checking account.
Putting aside a few hundred dollars each month benefits you in two ways. It gives you a chance to get used to the bigger cash outflows from your checking account. It also provides you with a nice cash cushion for baby-related expenses you overlooked.
(See Put Your Finances on Autopilot for additional ideas.)
Create A Reverse Budget
Finances have a way of getting more complicated once you have children. Making matters worse is the fact that there is less time to keep track of everything.
New parents should consider creating a reverse budget to keep their finances on track. Reverse budgeting emphasizes automated savings instead of manual expense tracking, which means less of an ongoing time commitment and greater flexibility in day-to-day spending (a big plus when unexpected baby expenses arise).
From a financial planner’s perspective, I also like that a reverse budget forces you to write out your short- and long-term goals, which may be different now that a little one on the way.
Get Basic Estate Documents
Estate planning is frequently overlooked, but very important for new parents. There are five estate planning documents you should consider regardless of your age, health and wealth:
- Will
- Durable power of attorney
- Advanced medical directives
- Letter of instruction
- Living trust (or a revocable trust)
The crux of any estate plan is your will because it distributes your property and assets as you wish after death. Even more importantly, a will names legal guardians for your children in the case both spouses pass.
Without a will that names guardians for your children, the state in which you reside determines the guardian of your children, which may not align with your wishes.
Figure Out Childcare Now
Whether you want to send your kids to daycare, hire a nanny, utilize grandparents or stay at home yourself, you need to get a plan in place soon.
For parents planning on daycare, make a deposit at your daycare of choice as soon as possible. Most daycare centers require a non-refundable deposit between $50 and $250.
Don’t balk at this fee: daycare classes fill up quickly and registering for daycare just a few months before your due date can leave you on a waiting list. If you’re still on the waiting list when it’s time to return to work, then you may incur higher expenses, less desirable care or a loss of income as you apply stop-gap options.
Hiring a nanny is no cake walk either. Finding someone you can trust, afford and fit to your schedule isn’t always easy. It is a little more difficult to secure a nanny as far in advance as a daycare center, but it is never too soon to begin looking so you can familiarize yourself with important qualities and nuances of these relationships.
Consider Hiring A Financial Advisor
If you’re feeling concerned, know that you’re going to do great. You’re planning ahead and getting prepared now, which will go a long way once your baby arrives.
But if you’re still worried, now may be the time to hire a financial advisor that will always act as a fiduciary. Hiring a professional frees up time to do other things you love most in life – including focusing on your growing family.
It can also help alleviate any stress your finances may cause because a really good financial advisor will get your entire financial house in order and keep it that way forever.
