Dear Carrie: We are expecting our first child soon and trying to get financially prepared. We know college is high on the list, but that’s so far in the future. What about now? What should we focus on first? — A Reader
Dear Reader: Smart question. And smart to be thinking about this now. According to last year’s report from the U.S. Department of Agriculture, raising a child is a costly proposition. The USDA estimated that a child born in 2013 will cost the average family about $245,000 — before college!
Realistically, some of these projected expenses, such as housing and transportation are part of everyone’s budget. But the fact is that kids do up the bill in a variety of ways, so you need to be prepared. Though saving for college is definitely a top concern, the sooner you determine the impact of day-to-day costs — from diapers to day care — the better off you’ll be. Here are some things to consider.
Before the Baby Comes
From everyday budgeting to ongoing expenses, before the baby comes is the time to do some planning. So sit down together and put some things on paper.
–Review your monthly spending. Start with the basics. Estimate ongoing costs for things such as diapers, formula and baby clothes. If both of you plan to work, be realistic about the substantial financial impact of child care, and look into your options in advance. Factor in additional medical costs, both in insurance premiums and out-of-pocket expenses. With the numbers in front of you, look at your current budget and see whether you need to reprioritize expenses. If you can start setting aside money to cover these costs in advance, so much the better.
–Make sure you have the right insurance coverage. Health insurance is crucial. Whether you have an individual policy or insurance through an employer, make sure you have the best combination of deductibles and coverage. You’ll also want to consider life insurance, both for a working spouse and for a nonworking spouse. Get enough to cover your mortgage, your debts, child care, your household expenses and your child’s education. Term life insurance policies can be quite reasonable. Some employers offer life insurance through the company, so check to see what your company offers. You may also want to look into disability insurance to cover your income in case you become ill.
–Create an estate plan to protect your child. An estate plan isn’t only about money. It’s also about making sure you designate someone to care for your children if you’re unable. At the very least, have a will in which you name a guardian for your minor kids. Without it, the state can choose a guardian. Don’t let someone else make this important decision.
Soon After the Baby Is Born
Even though you’ll have your hands full with the new baby, there are some administrative things you should take care of right away. Decide in advance which one of you will handle them.
–Get a Social Security number for your child. You’ll need this to claim your child as a dependent on your income tax return and to obtain medical coverage for your child. You can easily apply for a number when you give the information for your child’s birth certificate. You can also get an application online at http://www.ssa.gov or by calling 800-772-1213, but the process is more complicated.
–Add your child to your health insurance policy. Do this right away to avoid any delay in coverage. Some companies require you to enroll your newborn within 30 days.
–Check the beneficiaries on your 401(k) and individual retirement accounts. Your spouse is usually the primary beneficiary. You can add your child as a secondary beneficiary.
Looking Ahead to College
College may seem way in the future, but it’s never too early to start saving. Consider opening a 529 account and making monthly contributions. Even a small amount contributed regularly will add up. Plus, earnings grow tax-free, and there’s no tax on distributions if used for qualified college expenses. The plan offered by your state may have additional tax advantages. A 529 also makes it easy for grandparents, other relatives and even friends to contribute to this important goal.
Taking Care of Yourself
Your child will soon be a primary focus, but don’t forget about your own financial needs. Keep contributing to your 401(k) or IRA. Prioritize your savings to include other long-term goals, such as buying a house or taking a family vacation. And while you’re at it, remember to put aside a little for some personal R & R. A night out once in a while can be a welcome break — even if you spend most of the time talking about your new bundle of joy!
Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER ™ is president of the Charles Schwab Foundation and author of “It Pays to Talk.” You can e-mail Carrie at email@example.com.