Nine Financial Questions to Discuss When Your First Child Is on the Way

In February 2005, Sarah and I were handed a completely unexpected piece of information. Sarah was pregnant and our first child was going to arrive late in the year.

It was a life-changing moment. Sarah and I had several months to prepare, of course. Unfortunately, since we weren’t in the best financial shape at the time, we didn’t really focus on the financial implications very hard. Instead, we spent our time on learning how to be parents on a day-to-day basis. How were we going to take care of this baby?

While I’m glad we did so much reading and research and thinking about caring for that baby, I really wish we had spent more time preparing for the financial implications. Many of those issues came up in the first year or two of our child’s life during a period where we were frazzled by the huge life changes that parenting brings about. We didn’t always make the best choices given our exhausted states of mind.

Here are nine questions that I wish Sarah and I had discussed before our first child arrived on the scene. As I said, we did address these questions after our child was born, but I genuinely wish we had considered them beforehand and planned appropriately rather than trying to make these decisions with our new parent sleep-deprived minds.

It is worth nothing that these questions merely scratch the surface. Each one of these questions will likely lead to many more questions. Each one can be the foundation of a really good discussion.

Of course, as with any spousal discussion about money, active listening and a calm demeanor are incredibly valuable. Listen to what your partner is saying. If you feel emotions bubbling up, take a break and come back to the topic in a day or two and spend that time trying to dig through the emotions.

Let’s get started.

1. What is our child care plan?

A baby needs someone to take care of him or her all of the time. Most of the time, a parent will be taking care of that duty, of course, but will there be times where a parent can’t handle the duty?

If you’re both planning on returning to the workplace, unless you have a very unusual work schedule, there will be significant patches of the week where you’ll need someone else to take care of your child. Who will provide that child care? You need to figure out that solution as quickly as possible.

Some parents might decide that a stay-at-home situation will work best for them. It’s likely that such situations will result in a loss of household income – that’s effectively the “cost” of that type of child care.

Things you should specifically discuss:
+ Is one of us going to be a stay-at-home parent? In that case, how much income will be lost to your household.
+ Who will take care of our child if/when both of us are working? This involves figuring out what child care options are available to you – daycare, family members, and so on – and what their respective costs will be.
+ What do each of us expect from child care? Sarah and I both agreed that we were going to use some form of daycare for our child during the day, but our visions of what that would entail were very different. Some parents may want to stay at home. Others may want in-home daycare. You should examine child care options together so that you both understand what’s provided and what the costs will be.
+ How will we afford it? No matter what, you’re going to have a significant shift in your expenses or your income. What will that change really look like in your life? (We’ll touch on this in more detail later on.)

2. What are the maternity/paternity leave options in our workplaces?

Both parents are going to want to take some time off when the child is born. The family is adding a new member and new mother is facing a serious medical challenge to boot. It’s going to be a challenging time and you’re ideally going to want some time away from work to handle these situations whether you’re a new mother or a new father.

The Family and Medical Leave Act allows both parents to have twelve weeks of unpaid leave from their jobs to care for a new baby without any worry of losing that job. This is an incredibly useful guarantee for new parents, but it doesn’t solve all of the potential financial problems.

For example, Sarah ended up mixing together paid leave and unpaid leave after the birth of our first child. This caused a pretty healthy dip in short-term income for our family at about the two month mark in our baby’s life, which coincided with the start of paid child care. We had to dig into some additional credit card debt at that point because we weren’t prepared for it (the Christmas season happened in that timeframe as well, which didn’t help).

Things you should specifically discuss:
+ What do our employers offer for maternity/paternity leave beyond the basics mandated by the Family and Medical Leave Act? Both of our employers allowed us to take the twelve weeks of unpaid leave allowed by FMLA and we could use as much of our sick leave as we wanted during that period, turning that unpaid leave into paid leave but draining our sick leave at work. Some employers are more friendly than that; others less so. You need to know what your employers offer so that you can make a smart financial decision.
+ Will our specific choices for leave cause us to lose any household income? If you choose
+ How will we handle these expenses? Are we going to save for this financial bump in the road? The correct time to start saving for these kinds of expenses that you see coming is right now.

3. Do we have an adequate emergency fund?

When our first child arrived, we faced a big surge of visitors and little purchases that we didn’t expect, all of which added up to a big pile of unexpected expenses. We didn’t have an emergency fund at the time, so our credit card just got a little more bloated.

With our second child, we had a big unexpected expense right after her birth. She had severe jaundice that popped up within a few days of her birth, requiring an emergency hospital stay and some serious alterations to our plans and expenses for the first week or so of her existence. There were meals unexpectedly eaten out, child care expenses (for our older child) that we didn’t expect, some medical expenses, and so on. We had to tap our emergency fund here, unsurprisingly.

Thankfully, we smartened up between the birth of our first and second child and established an emergency fund. An emergency fund is a simple thing – it’s just cash stowed away in a savings account for truly unexpected expenses. I highly encourage new parents to have one. Your entire life will be on unsteady ground for a while and you’ll be glad to have a financial buffer to fall back on.

Things you should specifically discuss:
+ Do we have an emergency fund at all? More than a third of Americans have no savings whatsoever. That’s just completely unacceptable if you’re a parent. You need to have some money in the bank for the inevitable emergencies that life will throw at you, now more than ever because you have a defenseless baby that’s relying on you.
+ How much should we have? My recommendation is to shoot for $1,000 as a starting goal. If you’re in good financial shape, you should aim for having a month’s worth of household living expenses for each dependent in your home, so if you have a new baby in a household of three, that would be three months of expenses.
+ What do we need to do to get there? How are you going to save up that much money? Focus at first on the smaller goal – $1,000. Try to get to that balance in your savings account. You’ll be glad you did.

4. Are we saving for college? How much?

One of the biggest worries foisted upon new parents is the huge expense of college that they’ll be facing in about twenty years. Yes, right now, college is incredibly expensive, yet it is often seen as the necessary “foot in the door” for educational opportunity.

Sarah and I are saving for our children’s educations. If we were ever in financial trouble, these would be among the first things we would cut back on. While we’re happy to help them with college, it is not a net benefit to them if it means that we’re not going to have adequate retirement savings.

Even if you don’t plan on saving for college yourself right now, it’s not a bad idea to open up a 529 college savings plan regardless. It’s pretty easy and provides a place to stick any money that comes in. Often, relatives will want to contribute to a child’s college savings and it’s far better to have that money go into a 529 than into, say, a savings bond, which doesn’t exactly offer great returns.

Things you should specifically discuss:
+ How are we doing financially in other aspects of our life? Are we saving for retirement? Do we have a healthy emergency fund? Do we have any high interest debts? Taking care of all of those things should be a bigger priority than college savings.
+ Do we expect to play a major role in financing our child’s post-secondary expenses? Do you actually need to pay for all of your child’s college expenses? Some of them? Any of them? There is no right answer here. My parents helped me very little with my college expenses, as I used roughly a 70/30 split between scholarships and loans to pay for my education and I don’t feel that they did the wrong thing in any way. Every situation is different and there is no right or wrong philosophy.
+ Do we expect to support extra educational expenses before high school graduation? For example, is private schooling an option? What about special extracurricular programs? Even if you plan a hands-off approach for college, you can still use educational savings vehicles to save for these items (though you probably won’t need to save at an intense rate).

5. Do we actually need all of the “recommended” child care stuff?

When Sarah and I first realized that a child was on the way, we were stuck. None of our close friends were parents. Our own parents lived a minimum of three and a half hours away. Even our professional mentors were either non-parents or were far, far removed from active parenting.

All of our advice came from books – and most of the books in the child care genre are focused on covering every possible situation, not on covering what you actually need.

It turned out that we needed far less than we thought. Secondhand clothes were perfectly fine. So were flannel wipes (cut up out of a big sheet of flannel from the store) and a spray bottle and cloth diapers. Homemade baby food was perfect. We didn’t need a wipe warmer or a changing table – we just warmed wipes a bit with our hands and used the foot of our bed or a towel on the floor as a “changing table.”

Every parent has different needs, but it’s well worth turning a critical eye to all of the stuff that you supposedly “need” as a new parent. My single biggest piece of advice: find parents in your social network and tap them for ideas.

Things you should specifically discuss:
+ Do we have any parents in our social network? The best advice you’ll get about what you really need and what things are available in your local area will come from other parents in your social network. Evaluate your network and ask those parents for help. Ask them what you actually need. Ask them what the best options in the area are for various things like child care and health care.
+ Are there sources for hand-me-down items? Do you have relatives or friends who might be looking to get rid of their used baby clothes and other items? They might give them to you or sell them to you at a cheap price. Plus, they’ll be able to provide valuable advice for usage.
+ What are our minimum needs? The approach I most strongly suggest is to focus on what you minimally need, then figure out what other items are useful as you experience parenthood. Don’t buy things based on a guess. Just remember the basic needs – food, warmth, clothing, clean pants – and focus on meeting those.
+ Where are the children’s consignment shops and secondhand shops in the area? You should shop there first for clothes. In fact, aside from pure safety equipment, I’d happily buy everything used if I had to do it again.

6. What will we cut out to handle the new costs?

As you discuss the first five questions, you’re going to quickly realize that there’s going to be an enormous change in your family’s expenses in the near future.

For us, this change was more of a nebulous thing. We didn’t really think about it in a specific way – we just figured that our responsible future “parent” selves would handle it. That was a big mistake. It only took six months after our child’s birth for us to reach a devastating financial situation.

Like it or not, you’re going to have to cut some costs to make this work. Yes, your tax load will lighten up a little bit thanks to your new dependent, but it’s not going to be nearly enough to offset all of the costs.

Things you should specifically discuss:
+ How will our time use change after the baby is born? You simply won’t be able to go out nearly as often. Your home time will change, too – you simply won’t have the free time you once had. What things will you be giving up due to time?
+ How does that change in time use change our finances? If you’re not going out as often, you’re probably saving money on eating out and other “out on the town” expenses. You might also be giving up a hobby simply because you don’t have the time. What do those spending changes add up to? Are they enough?
+ What stuff do you have that you can sell? These changes in time use might point you toward some items in your closet that you’re no longer going to use. Sell them off, either right now or in the months after the baby is born. Use that money to build your emergency fund.

7. Do we have a valid will and/or durable power of attorney and/or health care proxy?

All right, let’s start by talking about what these things are.

A will is a legal document where you name someone who will handle your affairs upon your death. It also typically includes instructions as to who will receive your property.

A durable power of attorney is a legal document where you assign someone the power to make legal decisions on your behalf should you be incapacitated.

A health care proxy is a legal document where you assign someone the power to make health care decisions on your behalf should you be incapacitated, including end-of-life decisions.

All of these documents are important to have regardless of parenthood, but they become even more important when you do have a child because they will help define what exactly happens to your child should you no longer be able to care for that child. If you don’t have these documents, the state will decide (and there’s a good chance that you would be unhappy with that decision).

Things you should specifically discuss:
+ What do each of you want to happen should you be incapacitated? Most of the time, married couples make these decisions for each other, so it’s good for each of you to know what to do. You should also get a health care proxy so that someone else you trust can make these decisions if needed.
+ What should happen to our possessions if we pass away? Again, if you’re a married couple, your spouse would typically receive all possessions should one of you pass away. If you both pass away, it can be more difficult. Where do you want personal items to go? Many parents want all of their assets to be used to care for their child should they pass away, but that should be legally stated.
+ Who will be our executor? In other words, what person do you trust enough to handle these decisions for you?

8. Who will be the guardians of our child if we can’t do so?

This is perhaps the most important decision that you’ll make regarding your children in the event of your untimely passing. If both of the child’s parents have passed away, who will raise the child?

This is a hard decision. Sarah and I discussed it for a very long time and, at various points, have assigned this role to three different couples.

It’s an important one, though.

People generally don’t like to think of their own mortality, but this isn’t about your mortality. It’s about the life of your child. In this situation, your child lives on, and it’s your job as a parent to take care of that child.

Things you should specifically discuss:
+ Will the guardian(s) care for my child in a way that we would approve of? You’ll want to choose a guardian (or guardians) that will raise your child in a way that’s at least somewhat close to your values and will treat the child with love.
+ Is the guardian willing to take on that role? Not everyone is comfortable with taking on a role like this in a child’s life. Make sure that the person is willing to take on that responsibility if necessary.
+ Are you willing to cement the relationship between the potential guardian and your child? The guardian(s) should know your child and have a positive relationship. Without that, the transition could be a difficult one.

9. Do we have adequate life insurance?

What does your family’s financial situation look like if one of you passes away suddenly? Could the other one make ends meet as a single parent with ease?

If the answer isn’t an emphatic “yes,” then you should strongly consider a term life insurance policy for the members of your family that are financially essential.

Not only that, such a policy can help take care of your child in the event that you both pass away.

Why a term policy? It’s the least expensive option. It takes care of what you actually need, which is cash in the event of death. It’s also not tied into a questionable investment policy.

Things you should specifically discuss:
+ How much life insurance does each of us need? In general, it’s a good idea for parents to have enough individual term life insurance to make up for their take-home salary until their youngest child reaches eighteen years old, minus any savings and investments. That can end up being a very large policy, but that policy provides great security.
+ What if our insurance salesperson recommends policies besides term policies? In simplest terms, I’d ignore that salesperson. If you want to invest, invest separately in a retirement account for yourself.
+ Does our child need a policy? Unless there is an elevated risk in your family of a disease or condition that might make the child uninsurable in the future, infant life insurance generally isn’t worth it. You’re better off investing money into a child’s college savings or securing your own retirement. However, after discussing matters, you and your partner might feel differently.

Final Thoughts

The questions in this article are bound to provide a ton of conversation starters with you and your partner concerning the finances of having a child. It can seem overwhelming at first, but if you take these issues one topic at a time, they’ll break down much easier than you might expect.