By John Fales and Marc Shaffer
The concept of a “perfect time” to do things is one that is both not quite realistic yet incredibly understandable. One that is often talked about and pushed off to another, better time is having a baby. Not quite realistic because there will always be something or other standing in your way, yet incredibly understandable because of the myriad tasks that would be helpful to complete before starting a family. There may never be a perfect time to start a family, but no matter where you are in your journey, there are some common considerations for your financial planning.
Pre-Pregnancy Planning Phase
A helpful place to start when working toward any financial goal is to determine your net worth. A net worth statement and detailed budget will give you a clear picture of where you stand currently and help you better plan and account for changes that will arise.
Your budget will help you when answering questions such as: Do you need a bigger house? Is your home in the school district you want to be in? Will you consider private school? Will you or your spouse reduce your working hours or leave the job force? If the answers create a change in budget, you can see if your current situation allows for the changes or if you need to increase your savings or decrease your spending to meet the new needs.
You should have an emergency fund with three to six months of expenses, at a minimum. This is an important number even for those who aren’t parents because long-term disability doesn’t usually kick in for six months. If you need cash during that time period, your emergency fund could be the answer. As a reminder, long term insurance policies do not consider giving birth itself to be worthy of a disability claim, but some complications due to pregnancy may be covered.
Life insurance is another piece of your plan to consider. You want to have enough to cover any new family members and may want to increase the amount before you are expecting. To determine the right amount of coverage, don’t forget new expenses such as:
- Childcare Costs
- Education Costs
- Covering Existing Debts
- Taking Time Off Work for Grieving
If you plan to be with your employer long term, they are a good place to start when looking for life insurance, because it could be heavily subsidized. If not, an individual policy might make better sense.
Pre-Pregnancy or During Pregnancy Phase
Understanding your health insurance can be a big factor in your planning. You will want to find a hospital, doctor and pediatrician in your network. You also want to understand what is and isn’t covered. There could be out-of-pocket costs that are associated with the birth, or things that a mother might be covered for but the new baby wouldn’t be.
To help with health insurance costs, you may want to add or fund a Health Savings Account (HSA). These funds could be used on medical items not covered in your insurance policy.
You will also want to understand your maternity/paternity leave policy, both from a time and monetary perspective. Make sure you understand how long you are covered, at what percentage you will be paid, and if a short-term disability policy would be helpful. If you have a short-term disability policy that doesn’t cover your financial needs during your leave, some plans offer the option to “buy up” so that you receive a higher percentage of wages during your disability term.
In this phase, you want to make sure your child will be taken care of in every aspect. This includes updating your estate planning documents to address guardianship, Powers of Attorney, and potentially a trust to distribute assets to your child in a manageable way. You may also want to include your child as a beneficiary on your life insurance and other accounts, which could be done through a trust.
For education purposes, you might want to set up a 529 Plan and an after-tax account to supplement expenses that aren’t covered by a 529 Plan (and wouldn’t have to be related to college at all). A UTMA is a custodial account owned by one of the parents for the child’s benefit. Any gifts that relatives wanted to make for a child’s future could be gifted directly into these accounts.
Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this content, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for you or your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Searcy Financial Services, Inc.
The content of this letter does not constitute a tax or legal opinion. Always consult with a competent professional service provider for advice on tax or legal matters specific to your situation. To the extent that a reader has any questions regarding the applicability of any specific issue discussed in this content, he/she is encouraged to consult with the professional advisor of his/her choosing.
Published for the blog on February 11, 2021 by Searcy Financial Services, your Overland Park, Kansas Fee-Only Financial Planner and Investment Manager.