If you’re thinking about becoming a parent (or are soon to be one), it’s important to make sure you’re adequately prepared financially, just as with any other major life events.
The more focus and time you allocate to planning, the better off you’ll be when your children arrive. Financial infrastructure is incredibly important to accommodate the vagaries of financial life, and parenthood is no exception to this.
With a new child comes a new required cash flow – childcare, healthcare, food, clothing, education, and so on. The more order you have around planning for your child, the better your results and the less disruptive having a child should be to your financial framework.
While kids are expensive and certainly add an extra layer of outlay every month, for most parents the financial elephant in the room is college. In all fairness, it’s a lot. It could be up to half a million dollars that we as parents need to come up with 18 years from now for our kids to enjoy “the best years” of their lives. That’s the financial hurdle. One idea to consider is a 529 plan. This is one of the few “tax gifts” from the IRS.
Since compounding is often referred to as “the eighth wonder of the world”, I started a 529 plan for my son while he was still in utero. This provides me with comfort knowing that our family doesn’t have to worry about a $500k tuition bill in 18 years. He can go to the college of his choice and progress his further education with no debt.
To meet this objective, my wife and I put $720 a month into a 529 plan. Generating an average of 8% growth per year, this is projected to accumulate approximately $345,000 over 18 years and, as long as it is used for qualified education expenses, not only is this a decent sum of money, it’s all tax free. (Of course, this hypothetical example is for illustrative purposes only. This is not a prediction or guarantee of actual results. This example is not intended to represent the value or performance of any specific product.)
Next up is caretaking. My wife and I have built in a budget for a nanny to help support us with our child so that we can continue to work smoothly and enjoy this time together as a family. Just like every baby, every family is different, and there are many variables that impact your cost of care. You may be a one or two income household, you may or may not have a partner, family or friends to help care for your child, your location will also be a significant factor (specifically whether you are in a major city or a suburb). If you need full time help, the national average gross weekly salary for full-time live-out nannies is $766. The national average gross weekly salary for full-time live-in nannies is $670. It’s a cash flow to plan for. 1
And finally, consider having your baby insured! He or she will have their own medical expenses, and therefore should have their own health insurance coverage and will need to be covered under your plan – make sure to add them! This is important for all those regular baby visits to the doctor’s office and especially important for any extended NICU stays, which can otherwise prove to be financially devastating.
To make the most of your life as a parent, you really want to spend as much time as you can with your children and family, not reacting to unplanned financial obstacles. It’s best to look at it from the following perspective: when you become a parent, there are simply extra layers of both fixed costs and accumulation that need to be accounted for. As long as you have an infrastructure built for it, you should be just fine.
The more planning you have in place for your new expenses and future financial obligations, the more you’ll be able to enjoy this time with your bundle of joy.
The Financial Opportunities of Parenthood
If you’re the kind of person who finds yourself worrying about the cost of things generally, all else equal, you’re probably also going to worry about child-related costs.
Handled properly, preparing for parenthood can be the perfect invitation to take your money mindset and your money management to the next level. It’s the opportunity to leverage a major life event into a multi-dimensional plan which now includes their future well being.
Like those who tithe, I’ve actually noticed that many clients improve their financial management after they become parents. In my opinion, the requirement to meet a new fixed cost of your choosing (and beyond your own basic needs) makes you better at managing your money. It’s interesting to notice how once you are prepared to implement something for your child, you become better at implementing protective measures for yourself too.
Said another way, financial planning for your child can be a microcosm of your own financial planning (and vice versa if, like many moms, you put your kids first).
And there’s nothing quite like a solid financial plan and a family to help drive your motivation to earn even more, after all!
Here’s to your wealth,
Michael W. Hanna
This article is educational and is not advice or a recommendation for any specific investment product, strategy, or service. The views and opinions expressed are those of Michael Hanna only. Any examples used are generic, hypothetical and for illustration purposes only. Investing involves risks, and past performance is not indicative of future results.
The state where you reside or pay taxes may offer its own qualified state tuition program under Section 529 of the Internal Revenue Code with state tax advantages or other benefits exclusively for its residents or taxpayers. You should carefully review information about and consider such a plan, if any, as well s any tax advantages and benefits it offers before choosing to contribute to it or another 529 plan program. Depending on your state of residence, a particular 529 savings plan program might not afford you state tax benefits. As with all tax-related decisions, consult your tax advisor, 529 Plans are state-sponsored investment programs.
Michael Hanna is a registered representative of and offers securities, investment advisory and financial planning services through MML Investor Services, LLC. MEMBER SIPC. WWW.SIPC.ORG. 420 LEXINGTON AVE, SUITE 2510, NEW YORK, NY 10170, (212) 578-0300.
Representatives do not provide tax and/or legal advice. Any discussion of taxes is for general purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax or accounting advice. This article is educational and is not advice or a recommendation for any specific investment product, strategy, or service. The views and opinions expressed are those of Michael Hanna only. Any examples used are generic, hypothetical and for illustration purposes only. Investing involves risks, and past performance is not indicative of future results. Clients should confer with their qualified legal, tax and accounting advisors as appropriate.
1 Source www.thirdway.org