What Issues Should I Consider When Having (Or Adopting) A Child?

Having or adopting a child is a life-changing experience. While there’s amazing joy in watching your child take his or her first step or speak his or her first words, there can also be a lot of stress when it comes to managing your family’s finances.

To help you make sense of it all, here are some things to take into consideration so you can enjoy those special moments a little more.

CASH FLOW AND SPENDING PLAN

With your new responsibilities and schedule, it can be difficult to keep track of your cash flow, remember to pay a bill, or not know how much you have available to spend on groceries for the month.

The best solution in that case is to make a spending plan. This gives you a way to look ahead at what you should be spending, based on your income. It also serves as a checklist. When bills get paid, simply update your spending plan to show you’ve made the payment and you’re done. Recurring costs such as diapers, child care, and extra food will change your overall expenses for years to come, so it’s a good idea to get them added to your spending plan.

Once you know what you’ll be spending on out-of-pocket medical costs, additional food, and other supplies, you’ll adjust your spending plan accordingly. Babies come with plenty of expenses, so set a limit on both necessary and optional buys.

EMERGENCY FUND

Once you’ve updated your spending plan, you’ll surely find that your monthly living expenses have gone up. Now’s the time to check your emergency fund. If you don’t already have a rainy day fund, it’s important to start one. An emergency fund should provide you with 3-6 months of living expenses, so add enough money to your emergency fund to cover you should there be a loss of employment.

As you make your spending plan, keep in mind that childcare is one of the biggest expenses families face. According to the Economic Policy Institute, the average annual cost of infant care in California is $16,954. That’s $1,412 per month. Care for a 4-year old costs on average $11,475 annually, or $956 per month. Infant care actually costs almost $9,000 more than in-state college tuition for a 4-year public college in California, and also 1.5% more than the average rent.

Kids are accident prone, and with the cost of raising a child there’s no telling if you’ll have the disposable income to pay for any unexpected expenses. It’s a good idea to set some extra money aside in your spending plan as well for any of those potential and unexpected extra expenses.

INSURANCE

In regards to health insurance, be sure to check with your human resources department and find out how the new addition to your family will affect your options. You may have the option of adding the baby, upgrading your coverage, or change your health insurance plan altogether. Also note that typically you’ll need to add your child to your health insurance within 30 days or you’ll be stuck without insurance for your baby. Check with the insurance company to find out their specific deadline.

When it comes to life insurance, it may be a good idea to have life insurance policies on both parents. Should either parent die, the insurance benefit would provide the other with the financial ability to pay general living expenses and raise the child, including college education. Term insurance can be a way to gain a fair amount of coverage at a generally reasonable price. These plans typically cost less than permanent life insurance, but they do expire after a period of time.

Disability insurance is another important consideration. The right amount of coverage will allow you to meet your expenses should you be out of work for an extended amount of time.

If you have life insurance it might be a good idea to add your child as a beneficiary or contingent beneficiary. The same goes for your investment account. However, keep in mind that you’ll need to make changes elsewhere to ensure when and how your child will have access to the money and assets. This is where a will and/or trust would come in.

COLLEGE SAVINGS

It’s a good idea to start saving for your child’s college education as early as possible. A 529 plan is a great option. Each parent may contribute up to $15,000 per child’s 529 account, free of any gift tax liability. So if there are two parents and one child, a single annual contribution to the 529 account could be up to $30,000 without paying taxes by using the gift-splitting option. Earnings in the 529 account grow tax free and when they are used for qualifying education expenses they are tax free at withdrawal. 529 plans can go a long way in making it easier to afford paying for the quickly growing cost of college education.

RETIREMENT FUND

One thing that new parents can often forget is the need to save for retirement. If you have a company-sponsored 401(k), your automatic deposits will keep you on track. But if you’ve been relying on an IRA or self-funded savings account with no regular payment system established, now is the time to get serious. The best way to stay on track with your retirement plan is realistically budget what you can contribute each month and set up an auto-pay from your bank account.

WILLS AND TRUSTS

Tragic things happen and you want to ensure your child is taken care of in the event that one or both parents die. Designate a guardian so the courts don’t have to. Your will is only one part of estate planning, but it’s a good place to begin. Once you have a will in place, or even while your working on one, it may also be a good idea to consider establishing a trust. This will ensure certain assets go to who you want them to, outside of probate, and also control when your children receive access to those assets.

THE BOTTOM LINE

These are all important considerations to take when you’re welcoming a new member to your family.

The accompanying checklist offers an easy way for you to evaluate your needs and opportunities, as well as some additional ideas. It’s a free immediate download once you fill out and submit the form below.

If you would like help understanding and navigating your options feel free to...