Planning for a Baby Financially: Strategies to Prepare
When you start to plan for a baby in the home, it’s natural to focus on the immediate – and more exciting – preparations, like setting up the nursery and shopping for those first miniature clothes. However, a focus strictly on short-term preparations delays essential long-term ones that are important to put in place before the birth of your baby, specifically the financial arrangements critical to the responsibility – and the expense -- of raising a child.
According to the U.S. Department of Agriculture, that expense is considerable. With inflation, raising a child from birth through high school is estimated to cost approximately $12,980 a year, with housing, food, and childcare costs typically being the largest expenses.
Creating a financial plan before you bring a child into your family helps ensure that you are prepared for the sizable monetary implications to come. Here, we cover five strategies for preparing financially for a baby to help you get ready to welcome the new addition.
Strategy #1: Update Estate Planning Documents
Before having a baby, make sure all your estate planning documents have been updated to include that child. This is also an opportune time to ensure your current spouse and any children from previous marriages are included.
You will need a will in place: If you do not yet have a will, it’s important that you create one before your child is born. This is critical in establishing guardianship for all minor children. Should an accident or an illness leave you and your spouse incapacitated, your will ensures that your children will be cared for in the way you determine is in their best interest. When choosing a guardian, be sure to select both a first choice and a back-up choice.
You might need a trust: If you’ve been fortunate enough to accumulate a sizable nest egg, you might also want to consider setting up a trust to protect your assets for the benefit of your family. This legal document essentially allows you to put a wide range of valuables –from investments, bank accounts, real estate, and vehicles to personal property like art and jewelry – into a trust fund for your use during your lifetime. It also allows you to designate where those assets go upon your incapacitation or death.
There are many different types of trusts, all of which fall into two major categories:
It is best to consult with an experienced estate planning attorney who can help you create a holistic plan designed to meet your goals.
Strategy #2: Update Power of Attorney Documents
Like your estate planning documents, you want to work with a trusted attorney to ensure that your power of attorney documents are in order. There are 2 power of attorney documents you will need to include:
Healthcare power of attorney: This allows you to specify who will make decisions about your healthcare in your place if you are incapacitated – for instance, in what situation would you want ventilator support or any other life-extending treatments? It also includes who can receive information about you and your healthcare needs.
Financial power of attorney: Another critical step in financial family planning, this allows you to designate your spouse or another individual to act on your behalf in financial matters if you were to become incapacitated. It essentially establishes a safeguard for your children if you are not able to care for them for an extended period of time.
Strategy #3: Consider Marital Agreements
For couples who bring significant assets into a marriage, prenuptial agreements are an essential tool in estate planning because they specify what happens to separate and joint assets in the event of a divorce.
However, post-nuptial agreements (created after marriage) are becoming increasingly popular as couples marry later in life. Like a prenuptial agreement, they stipulate the division of a couple’s property in the advent of a divorce or a spouse’s death. To put this in place, you can either modify an existing prenuptial agreement or create a new agreement involving spousal businesses, inheritances, property, debt and/or spousal support following a divorce.
Whichever marital agreement you choose, you will want to have it updated to align with any changes you make to your will and estate plans.
Strategy #4: Plan for schooling and college
New parents tend to focus largely on college when they think of the costs to educate their child. But there are some big expenses on the way from birth to college, including daycare and after-care before your child even enters school. And, while childcare costs are highly dependent on geography, fifty-five percent of families report spending at least $10,000 a year.
Once your child enters school, there is the high cost of education to consider. If you’re considering private school, fortunately Congress recently expanded the Section 529 Savings Account Plans to include kindergarten through grade 12 private-school tuition.
In addition to Section 529 Plans, Coverdell Savings Accounts, Uniform Gift to Minor Accounts, and even Roth IRAs can be established for educational purposes. Consulting with a financial advisor experienced in educational financial planning can help you decide which savings vehicles are right for you.
Strategy #5: Consider Life Insurance Options
Whole, or permanent, life insurance is an investment, income-preservation and estate planning tool worthy of consideration for parents of growing families. It is critical to protect your children if a parent — especially the breadwinner — passes away unexpectedly.
Term life insurance offers inexpensive protection in this event too, but if you’re looking for a more holistic approach to family financial and estate planning, whole life insurance offers other benefits, including:
Get Prepared Before Baby Arrives
By engaging in family financial planning before your latest addition to the family arrives, you can focus on enjoying and bonding with your baby, free of financial worries. When crafting family financial plans, rely on trusted advisors to help you set up and execute these plans. These professionals can include experienced financial advisors, estate planning attorneys, tax accountants, and insurance agents.
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This is a publication of The Private Bank at MUFG Union Bank, N.A. (the Bank). This publication is for general information only and is not intended to provide specific advice to any individual. Some information provided herein was obtained from third-party sources deemed to be reliable. The Bank makes no representations or warranties with respect to the timeliness, accuracy, or completeness of this publication and bears no liability for any loss arising from its use.