When you have your first child, your whole world changes. It’s a beautiful experience, and your natural instinct is to protect your child in every way possible, including financially. If you’re a new parent, or if you’re about to become one, there are several crucial financial steps you should take to ensure your child’s needs are met now and in the future.
4 Financial Moves to Secure Your Child’s Future
Your finances will invariably change once you have a child. Along with planning for expenses like baby clothes, food, and furniture, you’ll need to put financial safety nets in place. Taking steps now to prepare for the unexpected will help keep your family protected in case something happens, and it’ll give you peace of mind. The following smart financial moves are key to your family’s security.
Insure ThemEnroll your child in health insurance coverage within 30 days of their birth. Your plan will retroactively cover medical costs from your baby’s birth date onward, and your child cannot be rejected for preexisting conditions. The insurance provider may be able to access your newborn’s records through their system. In some cases, they’ll ask for more documentation for verification, such as hospital records and the child’s birth certificate.
If you have existing healthcare coverage, such as through your employer or the Health Insurance Marketplace, contact your human resources department or the insurance company to add your newborn to the policy. Since the birth of a child is a qualifying life-changing event, you can change your policy, even if it’s outside the open enrollment period. If you have individual coverage, you’ll need to switch to a family policy.
If you don’t have health insurance – or if adding a newborn to your policy makes it unaffordable – you can enroll your child in their own plan. See if your child qualifies for CHIP (Children’s Health Insurance Program), which offers low-cost healthcare coverage for children through your state’s online health insurance exchange.
Invest in Term Life InsuranceIf you or your partner pass away, life insurance will help protect your family’s finances. This policy delivers a payout to help cover costs like funeral arrangements and lost income. Both you and your partner should be covered, even if one of you doesn’t work. If a stay-at-home parent passes away, the payout will help cover childcare and time off work for the surviving parent, sometimes for years. You can enroll in one joint or two individual policies.
During enrollment, you’ll elect beneficiaries, like your partner, who will receive the policy’s benefits. Avoid naming your child as a beneficiary, as minors can’t receive payouts without lengthy court proceedings. To avoid delayed benefits, consider establishing a life insurance trust as the beneficiary. You can appoint a trustee, like your partner or another adult, to manage the funds until your child reaches maturity.
You’ll also choose your desired payout amount. To do so, you’ll need to:
- Decide how many years of income the payout should replace, and multiply that by your current income. Alternatively, determine how much money your family needs to live comfortably for a year, and multiply that by the number of years the payout should cover. Keep this in mind: the higher the payout, the higher your monthly premiums will be.
- Add your debts and other financial needs, like childcare and tuition costs.
- Subtract any savings or other insurance policy payouts that will cover expenses.
Finally, you’ll choose between whole and term life policies. Term policies cover you for a set period (like 20 years) and are more affordable than whole life policies. Whole life policies cost more because they build cash value over extended periods of time, but the return is often a low percentage of what’s paid into it. Term policies are usually the best life insurance option for adults because they’re financially sustainable while offering the desired protection.
Create a Legal WillA legal will officially establishes your final wishes. In it, you can appoint a trusted guardian for your child. While this isn’t legally binding in all states, it factors into the court’s decision if your child is orphaned. Your will also clarifies how to distribute your assets among your loved ones.
To create a legal will, write a document that:
- Lists all of your assets, including property (houses, land, cars), high-value possessions (antiques, heirlooms, fine jewelry), financial accounts (bank, retirement, brokerage), and life insurance policies.
- Lists all of your liabilities and debts, including student loans, mortgages, and credit card balances
- Names your child’s guardian
- Names an executor, who will be responsible for carrying out the wishes of your will
- Describes your desired asset distribution
You may also want to establish a trust, so assets allocated to your child can be managed by an appointed trustee. Bear in mind that co-owned accounts or property will transfer to the co-owner.
The will should be signed in front of witnesses, but a lawyer should review it first if:
- You have more than $1 million in assets.
- You’re disinheriting someone.
- You want specific items to go to specific people.
- You’re leaving money to someone through a trust.
- You anticipate familial disagreements over your wishes.
The lawyer will help ensure your will can be honored without legal conflicts.
Establish an Emergency FundOnce you’ve arranged insurance and a will, start an emergency fund for your family. Emergency funds are needed in case of income interruptions and unexpected expenses, like medical bills, home and auto repairs, and veterinarian bills. It will help you care for your child until your finances get back on track. Aim to save enough to cover three to nine months of living expenses.
If you start saving now, you could reach your goal sooner than you think. The following tips can help:
- Make regular contributions: Even small contributions add up over time and will get you in the habit of saving. If you save just $10 a week, you’ll have more than $500 by year’s end, and watching your savings grow could motivate you to make larger or more frequent contributions.
- Save large or unexpected funds: When you receive a sizeable or unexpected sum of money – like a tax refund, birthday gift, or work bonus – add it into your emergency savings account.
- Set up automatic deposits: If you struggle to set money aside instead of spending it, set up automatic savings deposits. Your financial institution or employer may allow some of each paycheck to go directly to your savings account. If not, see if you can arrange automatic transfers from your checking to your savings account once or twice a month.
Once you’ve funded your emergency savings, you can start saving toward other goals, like a comfortable and happy retirement. Experts suggest prioritizing your retirement over a college fund. If you want to save for both at the same time, these efforts should be balanced. Consider saving a nest egg for retirement while making small contributions to a 529 plan (tax-advantaged investment account for educational expenses) for your child.
There are a few reasons for this strategy. Your child will have financial aid options for education – like scholarships and loans – but there’s no way to borrow for all of your retirement. Plus, your child may not choose to attend college or may work part-time to offset school costs, but you’ll definitely want to retire at some point and may be unable to work to earn extra income.
Plan, Save, and Then Sleep Like a Baby
As a new parent, you want to plan your finances strategically, and it may feel like one misstep could jeopardize your family’s future. Put your mind at ease by consulting financial experts when you enroll in life insurance, create a will, and establish savings accounts. Working with the right financial institution will help you understand your options – from determining recommended insurance and retirement benefit amounts to establishing trusts and 529 plans – so you’ll feel confident in your financial strategies and your family’s future.