8 Financial Things to Do After Your Baby is Born
Are you planning to have a baby? Did you already have a baby? Below are 8 essential things you must do after your baby is born – do them and set yourself up for financial success and tranquility.
1. Pick a Guardian in Case of Death
This isn’t pleasant to think about, but you should think about it once so you don’t have to think about it again and so things are properly in place. Many people don’t do this, but you’re a responsible adult, and that means you sometimes have to think of unpleasant possibilities and plan for them. You should plan on who will take care of your child or children should you and your spouse both pass away. Obviously, you will want to screen your potential choices according to criteria that are important to you. It’s hard to give advice on this – you have to do what feels right for you. You will obviously want to speak to the person or family that you choose about your decision to make sure everything is ok.2. Write/Update Your Will
You and your spouse should already have a will. If that’s the case, it’s time to update it. If you don’t have a will, now is the time to create one.
In your will, you’ll want to include information about who you choose to look after your child or children in the tragic event that you and your spouse both pass away. You’ll want to include other important things that belong in a will. We won’t go into detail here on what to include in your will, but make sure to include what you want to happen to your assets in case of death and how things will proceed if your child or children are minors when you and your spouse pass away.
Wills are governed by state law generally (as opposed to national law), so you’ll want to look into your state laws on this. There are resources online for easy and affordable will creation. For more complicated matters, it might be a good idea to speak to a licensed attorney in your state.
Note: A will might not be sufficient for your situation – a living trust or something more sophisticated might be required. If you believe this to be the case, you might want to consult with an estate planning attorney.
3. Make Sure Health Insurance is in Place for the Baby
You will want to make sure or double-check that proper health insurance is in place for your new baby. If you have a regular “W2” job, your child is likely covered by your health insurance – but you should obviously double-check anyway. If you and your spouse don’t have health insurance from work, check to make sure that your new baby is covered under your insurance policy and for how long. In situations where you don’t have health insurance yourself, you will want to make sure that your baby is covered – either purchase health insurance immediately on your own or seek some sort of governmental assistance (eg. subsidies or government-provided health insurance)
4. Put Proper Life Insurance in Place
For the vast majority of people, life insurance is an important part of financial planning, especially after the arrival of a new child. We won’t go into the “whole life vs. term life” debate or discussion here (although that is an important discussion worth having), but it suffices to say that you should have proper life insurance in place so that your baby and your spouse are taken care of financially should you die.
If both you and your spouse earn an income, both of you should have life insurance in place. Even if your spouse doesn’t earn an income, however, you should still very likely get life insurance for your spouse because if one of you dies, there will be upheaval in the family if a caretaker at home is no longer there – that caretaker will have to be replaced, or the income earner will have to stop working and stay at home (at least for a period of time). Therefore, even stay-at-home wives and husbands should very likely have life insurance in place. In the tragic event of untimely death, the income-earner will know that he or she can comfortably stay at home with the kids during a very difficult time without having to worry about earning an income. Don’t neglect to understand how important this can be.
How much life insurance should you purchase? The typical advice is 10 times to 20 times your annual income. I would err on the side of caution and purchase more rather than less. This is a decision you should think about in light of your net worth, family situation, lifestyle, etc. If you cannot comfortably make this decision on your own, consult with someone (such as a financial advisor) who has a responsibility to you as a fiduciary.
There might be situations where you don’t need life insurance of any kind, however. If you have a lot of assets that can provide for your family in case of death, life insurance might not be required. I would recommend being conservative here: make sure you have enough assets for a 4% drawdown rate to fully replace the combined family income. For example, if the household income is $100,000, you will want to have at least $2.5 million in assets before you totally avoid life insurance – this will allow the beneficiaries to withdraw $100,000 a year (pre-tax) without touching the principal. A 4% drawdown rate would be considered on the conservative side by many, but we don’t want to fool around with your family’s and your children’s well-being in the case of your untimely death (especially when term life insurance is generally not very expensive).
5. Set up a 529 Account for College Savings
Who knows what will happen in 18 years, but I would bet that colleges will still be around and that a college education will still be a useful thing both for a person’s career and for their self-development. I do believe that online learning, self-learning, and other non-traditional forms of learning will grow in use and will compete with traditional expensive college educations, but I don’t think colleges will be eliminated by any means within the next few decades.
You’ll want to prepare for your child’s college education as best as you can so that you can give your progeny the gift of a debt-free undergraduate degree, something that many former students (especially millennials) in the US wish they received.
A 529 college savings account is a tax-advantaged savings account that can only be used for educational purposes. Of course, if you think that your child is very unlikely to attend college (eg. mental or physical disabilities, lifestyle choices, fatal illness, etc.), you might want to skip this step and save money in a place that you can access for any expense even though that place might not be tax-advantaged.
6. Begin Saving for Other (non-college) Expenses
Beyond college, here are other potential expenses that your child might incur throughout his or her life:
- First Car
- House Purchase
- Graduate School/Professional School
Wouldn’t it be great if you could have enough money to cover some or all of those things? What kind of legacy would you leave behind? It would be an excellent idea to start saving specifically for your child’s future – think of it as a “future fund” so that your child can get a head start on things when they are an adult. This will most likely happen in an account that is not tax-advantaged, but that’s ok because you want flexibility in terms of what you can do with the money and when you can use it.
I recommend keeping this account in your name until you are ready to bestow the gift. You don’t want this money to harm your child – you only want it to benefit them. If your child becomes a cruel adult or a spoiled adult or a drug-abusing adult or an alcoholic adult or an uneducated and lazy adult, you might decide that it’s better to hold on to this pile of money for a little bit longer (or for a lot longer). Make sure you retain this flexibility by only keeping it in your name (or your and your spouse’s name).
7. Consult With Your Accountant to See About a Tax Deduction
Now that there’s another dependent in your household, you will likely save on taxes. Consult with your tax professional (or TurboTax) to see how your new baby will affect your tax situation and to get the best possible tax advantage from it.
8. Begin Thinking About Elementary School
You’ll want to start thinking about elementary school for your child. This is especially important if this is your first child, as schooling decisions have likely not been made yet. You’ll want to ask yourself whether you’re satisfied with the schools in your current area or whether you would like to move in the future in order to get access to better schools. You’ll also want to think about whether you want to send your child to a private school or some sort of religious or cultural after-school program. These are important lifestyle and educational decisions that also have financial complications attached to them – plan ahead so that you can do what’s best for your child without sacrificing all of your other financial goals.
If you can do all of the above quickly, confidently, and well, you’ll set up a very strong foundation for your family’s financial future. When your little baby (or babies) grows up, they’ll thank you for being such a mature and proactive parent or guardian.
What if you’re adopting?
The above does apply to adoptive parents as well. It was simply written from the perspective of a biological parent because that’s what occurs in the vast majority of cases. If you’re adopting a child, you likely have a good financial base (most adoptive parents do because there are often financial requirements for adopting a child), but you might find it slightly more difficult to accomplish certain savings goals (specifically items 5 & 6) because your time frame is likely going to be shorter – the older your adopted child is, the closer they are to college and the less time you have for the magic of compounding to work. Keep this important item in mind and plan accordingly.