Have you and your partner decided you're ready for the emotional responsibility of becoming parents? Congratulations!
But don't forget that you'll also need to prepare financially for this major lifestyle change.
Whether you're just starting your career or you have already accumulated substantial assets, expanding your family with a child is one of those life milestones that should trigger a complete review of your financial and estate plans.
“The key is to be proactive, not reactive," said Alan Wolberg, senior wealth planner at City National Bank. “Our first baby was born seven weeks early, which happens more often than you might think. As parents, you never know what's going to happen, but proper planning can help ensure financial stability and freedom for you and your children."
American families whose incomes put them in the upper third income bracket, meaning their before-tax household income is over six figures, spend an average of $372,210 raising a child from birth through age 17, according to a report by the U.S. Department of Agriculture. And those estimates don't include college costs or the assistance many parents provide to launch their adult kids into independence.
When planning for their children, Julie Higgins, a relationship manager at City National Bank, and her husband broke down their estimated spending year-by-year.
“We thought about how much kids cost each year and factored in lifestyle choices such as the types of camps we might want to send them to, whether we want to send them to private schools and the colleges we hope they might attend," said Higgins.
Take these steps to increase your financial stability before your family expands.
Realize that your spending patterns are likely to change when you have children and you'll want to shift some money for their future needs, too.
“You should know what you're spending and what you're earning, so you understand how much discretionary income you have," said Wolberg. “Get a good estimate of what your monthly and yearly costs for things like clothes, food, medical visits, infant supplies and car seats will be, so you're prepared."
Everyone should have money earmarked for an emergency, said Higgins. That's especially important after a child joins the family, when both spouses may not be working full-time.
“If you have a larger home, more expenses and a family, you may want to have 12 months of expenses in an emergency fund instead of six months," said Higgins.
Wolberg said his family faced financial challenges when his wife was unable to return to work for five months because of complications from her pregnancy.
“You need to put aside money to handle a curveball," he said. “We thought we had more money than we did, but she didn't get paid for awhile and our real estate taxes doubled at the same time, so we ended up in debt."
Before your child is born, Higgins recommends spending a few months thinking about who would take care of your child if something happens to you and your partner. It could be the grandparents, a sibling or a close friend, she said.
“Most people don't do this, but you should have your will signed before the baby is born," said Wolberg. “Once the baby is born it's much harder to carve out the time to take care of important things like this."
Higgins recommends that parents-to-be have a plan to cope with the possibility of short-term and long-term disability and purchase additional insurance if needed.
“You need to be prepared for anything," said Higgins. “For instance, if someone is a surgeon and gets arthritis in their hands, that could require a complete lifestyle change."
The partner who's not pregnant should consider purchasing term life insurance — a policy that ends after 10, 20 or 30 years - typically when you are no longer supporting dependents, said Wolberg.
“Pregnant women are usually not able to purchase life insurance, but as soon as the baby is born, the mother should also buy life insurance, especially if she's employed and her income is supporting the family," said Wolberg. “Even if Mom is 's not employed, both parents need life insurance so the surviving parent can afford to bring someone in to care for the child and to pay for other expenses should the unexpected happen."
Whether one or both parents plans to take off a few weeks of parental leave or one wants to take years off to focus on the family, you'll need a strong financial plan.
“A career break requires a Mt. Everest-level plan," said Higgins. “You'll need to restructure your expenses to live on one income and develop a plan to compensate, realizing this is a costly decision. You're not only losing the current income, but you're losing retirement benefits and reducing the future Social Security benefit."
If you plan for one partner to take an extended work sabbatical, Higgins recommends saving all of one salary for as long as possible before having a baby so that when that salary goes away, it's easier to adapt.
“It's a budget exercise to see how everything is impacted if one partner makes less money," said Wolberg. Once you understand what the constraints of living on a reduced income are, “you may even want to look at different scenarios such as downsizing, renting or moving to a less expensive area to make it possible for one partner to stay home, if that's a priority."
Whether you're planning a short-term or long-term leave, paying off all your debt before you have a child is smart planning. Higgins recommends paying everything in full and then, if you can get a better interest rate, refinancing your mortgage. The money that previously went to debt repayment can be invested for future needs, Higgins suggested.
If you start saving for college as soon as your baby is born, you can plan to cover as much of their education costs as you want, said Wolberg.
“If grandparents want to contribute, that's great, too," he said. “You may want to open a 529 plan or establish an education trust, anything that's dedicated to paying for your baby's education that has a relatively long timeframe to grow."
Once you name your child and obtain a Social Security number, you can set up a savings account in your child's name and a establish trust with funds that would be available to your child if you and your partner pass away.
“You want to choose a trustee to handle financial issues, such as a family attorney or someone you feel confident will make the right choices in your child's interest," said Higgins. “If something were to happen to you, the trustee would handle financial matters while your designated guardian raises the kids."
An important element of financial planning for high-net-worth families, said Higgins, is deciding how to raise the children to manage the family wealth and avoid the all-too-common “shirt-sleeves-to-shirt-sleeves in three generations" scenario.
“One client we work with created his wealth himself through an extremely strong work ethic," said Higgins. “He instilled that same work ethic in his kids and they have instilled it in their kids."
This client and his spouse established vision and mission statements for the family wealth, guidelines for how the family money would be used for philanthropy and came up with a plan that outlined how family members would earn money.
“They raised their kids to understand that they had to earn money, that they wouldn't just be given money," said Higgins. “They opened small stock accounts and let the kids pick stocks so they could learn the importance of investing and leaving some money to grow."
When a tiny baby is on its way into your life, planning to manage your future while maintaining and growing your wealth is just as important as picking out the right car seat and crib.
City National Bank's relationship managers can help you create a plan for your growing family. To learn more, contact us.
This article is for general information and education only. It is provided as a courtesy to the clients and friends of City National Bank (City National). City National does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors or persons quoted as of the date of the article with no obligation to update or notify of inaccuracy or change.
It is not to be construed as an offer, or solicitation of an offer, to buy or sell any financial instrument. It should not be relied upon as specific investment advice directed to the reader's specific investment objectives. Any financial instrument discussed in this article may not be suitable for the reader. Each reader must make his or her own investment decision, using an independent advisor if prudent, based on his or her own investment objective and financial situation. Prices and availability of financial instruments are subject to change without notice. Financial instruments denominated in a foreign currency are subject to exchange rate risk in addition to the risk of the investment. City National Bank (and its clients or associated persons) may, at times, engage in transactions in a manner inconsistent with this article and, with respect to particular securities and financial instruments discussed, may buy from or sell to clients or others on a principal basis. Past performance is not necessarily an indication of future results. This article may not be reproduced, distributed or further published by any person without the written consent of City National. Please cite source when quoting.
Securities offered through City National Securities, Inc. (member FINRA/SIPC) and a wholly owned subsidiary of City National Bank. An investor should consider the investment objectives, risks, charges and expenses associated with municipal fund securities before investing. More information about municipal fund securities is available in the issuer’s official statement.
Deposits maintained with City National are not SIPC insured. Deposit products and services are provided by City National Bank Member FDIC.