Many changes to a financial strategy occur with the arrival of a child, which can be very costly. Here's a starting point for a financial strategy checklist when you are expecting.
Many changes to a financial strategy occur with the arrival of a child, which can be very costly and can be better or worse depending on what state you live in. This article is meant to serve as a starting point for a financial strategy checklist when you are expecting.
One of the first items I would recommend to do is visit with an attorney to set up the appropriate legal documents for your situation. Typically, you will be counseled to draft wills and/or a trust. Be sure to make sure guardianship and distribution of inheritance is addressed. You will also want to work with your financial advisor and human resources department to make sure your beneficiaries and contingent beneficiaries are in good order.
The next item to start thinking about is adjusting your budget ahead of time to factor in any new daycare and child care costs. The mean out-flow for professional child care in the United States is $11,666 per year ($972 a month), with a range from $3,582 to $18,773 a year ($300 to $1,564 monthly, according to the National Association of Child Care Resource & Referral Agencies).
Budget wise, we have found that a decent amount of this increase in outflow is balanced by the decrease in outflow in the “entertainment, dining out and travel” categories, for the obvious reasons.
You will also want to make sure that the you are utilizing the your “Dependent Care Flexible Savings Accounts” (FSA) at your employer. These accounts allow you to route a combined $5,000 a year pre-tax for folks who are married filing jointly to be used to pay for the first $5,000 a year of child care expenses for children 12 years of age and under. Note that the limit for the other type of FSA (health care) has been lowered to $2,500 a year starting in 2013. This does not currently affect the dependent care FSA limits and they are slated to remain at $5,000 a year.
Cash flow wise, remember that you are able to add in another exemption per kid when calculating your taxable income as well, so this at least helps keep some dollars from Uncle Sam as well.
Another large risk is the loss of one spouse to a death or disability. As budgets get tighter and future expenses are certain for child care, college, etc., it is crucial that you have the appropriate risk management in force. I would work with an independent insurance agent or financial advisor that can get you a life insurance needs analysis and disability insurance needs analysis as well.
The details of these types of coverage are beyond this article, but I would recommend reviewing this past article on disability insurance and to get the most bang for your buck with term life insurance to cover you for the 20-year period that you will be financially responsible for the child.
I would also recommend determining your desire to help with a college education fund for your kid(s). This is a cost that is continually getting more and more expensive over and above inflation and a cost that quite a bit of parents would like to help with if they are able to.
Running an analysis with realistic hypothetical assumptions and scenarios will help you setup a reasonable game plan from birth to make this less of a burden down the road when the tuition bill comes in the mail roughly 18 years from now.
Lack of planning and action for your changes in your financial strategy will only add stress to a time with many other changes which is supposed to be filled with excitement. Take the necessary steps to adjust your financial strategy during a pregnancy.
This should not be considered as tax or legal advice. Please consult a tax or legal professional for information regarding your specific situation.
Jon C. Ylinen is a Financial Advisor with North Star Resource Group and offers securities and investment advisory services through CRI Securities, LLC. and Securian Financial Services, Inc., Members FINRA/SIPC. CRI Securities, LLC. is affiliated with Securian Financial Services, Inc. and North Star Resource Group. North Star Resource group is not affiliated with Securian Financial Services, Inc. The answers provided are general in nature and are not intended to be specific recommendations. Please consult a financial professional for specific advice in relation to your individual circumstances. 570255/ DOFU 10-2012