Being a husband and father, I know that raising a family is a wonderful time in life. The joy of a couple having their first child is incredible, but there are financial planning implications that accompany this decision.
Here are the top three discussions I have with clients who are about to have a child.
1. Understand the impact a child will have on your money flow
It is obvious that having a child will increase costs in any home. I encourage clients to take time and calculate these financial responsibilities, which will provide guidance on whether any of their current goals need review.
Examples include childcare (if both parents continue to work); higher health care costs (for example, increased premium for medical expense insurance); additional living expenses (for example, food, clothing, activities, etc.), and of course education.
Focusing on cash flow management is the first building block of any financial plan. Knowing where the money is spent each month and your ability to save remains an important key to success.
Budgeting may not be the most exciting task, but it can bring a lot of clarity to a couple who is now responsible for raising a son.
Also, I recommend that clients adjust the amount of their savings from emergency funds to account for higher expenses. Maintaining an adequate cash reserve is now even more important with the addition of a child.
2. Update your estate planning documents
Depending on the financial situation, estate planning needs may vary. When starting a family, I recommend that clients at least complete (or upgrade) the basic documentation of the estate plan and review your beneficiary designations. These documents include wills, advanced health care directives, insurance, and durable powers of attorney.
Wills determine how assets are distributed to heirs after the death of an individual. Advanced health care directives provide instructions on what steps to take for someone’s health if the disability prevents them from making their own decision. Durable powers of attorney give a person authority to act on behalf of another person (for example, financial transactions) if they cannot do it themselves.
Some elements clients should particularly consider in their estate planning when they have a child are adding a trust / trustee and a guardian (given the scenario of the death of both parents) to the wills. Also, couples can add to their son (or trust for the benefit of the child) as a contingent beneficiary in your accounts (for example, in life insurance policies).
3. Check your insurance coverage
If one or both parents die, then it is essential that their children maintain financial stability. My suggestion for those starting a family is to check their life insurance policies current (or get it if no one has coverage). In situations where a couple already has life insurance, there should be an assessment of the current amount and whether it is enough now that they are raising a child.
Many times, clients will have life insurance coverage through their work for an amount of a few months of their salary. I think these types of plans are a great tool for clients, but I think families with children should get more coverage outside of their employment plan.
The only downside to employer plans is that they generally depend on someone being employed by a specific company. Life insurance is a key element for the protection of assets within the financial plan of any family, so it is important that at least part of the coverage is independent of the employment situation. Our economy is always changing, and there are times when people lose job due to factors that were beyond your own control.
Martin A. Scott, CFP, is the founder and financial planner of Lasting Wealth Principles, a comprehensive payment financial planning firm.
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