Every other Sunday, The Simple Dollar reviews a personal finance book.
In 2005, my son was born. To say we were unprepared for it is an understatement. We bungled through the entire thing, not saving appropriately for expenses and not really understanding how much this little child would change our lives, financially or otherwise. With a little bit of preparedness, we could have rolled through this, but his emergence sent us into a financial tailspin.
Financial preparation for having a new child isn’t really that hard, but there are a handful of key things that you really need to think about and take action on. The middle and late stages of pregnancy give you six months to get ready for that new arrival, after all, and there are several important things to do shortly after birth, as well.
Stacy Bradford’s The Wall Street Journal Financial Guidebook for New Parents was pretty much written for the exact place we were at in mid-2005. I think it makes a perfect complement for parents who read What to Expect When You’re Expecting and make a genuine effort to understand what’s going on with their pregnancy and early parenthood needs.
I truly wish we had a guide like this during Sarah’s pregnancy. It would have been incredibly useful. Let’s take a peek at what’s inside.
Your Maternity (or Paternity) Leave
Quite often, the impression of maternity (or paternity) leave is far out of line with the reality of it. A couple gets pregnant, then believes they’ll have all the time in the world off to bond with their child. After all, they have plenty of sick leave… right?
Not so fast. Many businesses and organizations have really draconian policies about time off for a new baby. They’re required to allow you to have twelve weeks off, but they don’t have to pay you for it. For example, when our first child was on the way, we believed for a while that my wife would have three months off to take care of the child with pay, and I’d have six weeks off.
Not true. Sure, we could take that time, no questions asked. But much of that time was actually without pay, even if you have enough sick leave to cover it.
What’s the solution? Find out now what the maternity and paternity leave policies are for your organization and, if you’re expecting to take time that’s unpaid, start building up your emergency fund to a nice, fat level so you can blow right through that unpaid period.
Kissing That Cubicle Good-Bye
The stay-at-home question can also weigh heavy on newly-expectant parents. Should one of the parents walk away from the workplace and stay at home with the child? It can be easy to do a very simple run of the numbers and conclude it’ll work – sure, you lose $X of take-home pay, but you’ll be eating at home more and your tax burden will be less and you can drop a vehicle and so on.
But that back-of-the-envelope calculation can be really dangerous. There are a ton of things to consider. What about health insurance? Will there be a cost increase if one partner puts his or her spouse and new child on their insurance? What about the missing retirement savings? Can the employed partner bump up their retirement savings a bit to account for the lost savings? It’s vital to sit down and write a realistic, detailed post-baby budget and see whether or not it can really work.
Returning to the Grind
Child care is pricey no matter where you live, so if both partners do return to work, you will be dealing with a whole new financial world. Our daycare fees were shocking once we started getting into the routine.
Be creative with this situation. Talk to your employer and see if you can adopt a different work schedule. Perhaps you could move your “weekends” to Thursdays and Fridays and, with your partner covering Saturdays and Sundays, you only need to pay for three days of child care. Maybe you could work an alternate shift, or telecommute a few days a week. Have both partners look into these options – if you’re a good employee, an employer will work with you on this.
Who Says Uncle Sam Doesn’t Care?
The federal government offers tons and tons of tax benefits for the parents of children. You can deduct child care, education costs, health care costs, even the value of any outgrown clothes that you donate to Goodwill.
But there’s a trick (isn’t there always?). You have to be aware of these tax benefits, plus you have to keep track of your spending on them. If you donate clothes, you have to keep receipts. If you have an education expense, you have to keep track of it. Then you have to remember all of this at tax time and figure out how to claim all of these things. An accountant helps – we’ve had great success with TurboTax.
Where Should You Nest?
Having a baby in a tiny urban apartment can be very difficult. There’s not enough space, the costs for everything are high, and getting the baby around can be a real challenge. When a couple has children, they often seriously consider moving to a better location, one more suitable to the challenge of raising a child.
But to where? The suburbs? Costs can be cheaper there on some things, but commuting can be expensive and suburban life (in its own way) can be more challenging than living in a city. I’m pretty partial to living in rural areas, myself: plenty of room for children to explore, lots of free stuff to do, and tons of fresh air.
Don’t just go for the simple answer. Do some research and also do some thinking about your real needs and the needs of your child.
Finding (and Paying for) Mary Poppins
If you’ve decided that child care is right for you, how do you select it? What can you afford? What should you look for within your budget?
I would love to have a nanny for my own children, to tell the truth. I’ve nearly begged my sister-in-law, who has many years of child care experience, to consider the position. I’d be happy to pay her at least as much as we currently pay for child care, plus provide room and board for her, but she’s following her own path.
Aside from her, I have trouble imagining myself entrusting my children’s care to just one person. I value a lot of peer review – situations where one adult I don’t know well isn’t giving care without peers.
These are some of the considerations worth investigating – and they’re worth plenty of time to investigate and calculate. Don’t just jump for the first opportunity you find.
Avoiding a Health Scare
Here, Bradford makes a very strong case for health savings accounts which allow you to pay for your child’s health issues with pretax dollars. This is a great idea if you have these accounts available to you – they can make dealing with unexpected medical expenses that much easier.
As with anything, though, there can be tricks. Know exactly how your account works. Does it carry over, or is there some sort of penalty at the end of the year? How exactly do you get at the money, anyway? Make sure that these things are well-understood by you and by your partner so that this isn’t an issue.
Paying for Harvard
Bradford strongly suggests that it’s more important to save for retirement than it is to save for your children’s college savings. It’s a principle that makes a lot of sense – a good retirement means you won’t be a burden on your children late in life.
So how do you pay for top colleges if you aren’t throwing everything but the kitchen sink at college savings? Bradford offers up a few financial moves, but the biggest one is simply letting your child work through it. If you make everything totally easy for your child, how will they handle adversities later in life? Don’t sweat paving your children’s roads with gold – they’ll learn more if you don’t. Instead, focus on not being a burden on them.
Yes, You Need a Will
The big decision that new parents have to face with regards to a will is who exactly you wish to have as guardians of your child (or children) if something were to happen to both parents.
This is a pretty serious consideration, one we struggled with for a long time. The thought of what would happen to our children if we weren’t there was very, very painful to face. This exploration was valuable, though, because we now feel very comfortable with our guardianship choices.
Trusts: They Aren’t Just for the Wealthy
What about a trust? Many parents don’t even consider this – they get a nice life insurance policy and fill out a will when the children are born, but if something happens to them, their life insurance money goes to the child’s guardians free and clear. Ideally, the guardian will do something responsible, but there’s no guarantee – a surge of money might just mean a new car to that person.
The way around this is to set up a trust. Then, whatever assets you have and insurance money that comes in is handled according to your wishes in the rules you set up for the trust. This prevents the guardian from just blowing the money in a way that’s contrary to your wishes.
Life Insurance: Better Safe Than Sorry
What about life insurance? Obviously, each parent should be insured quite well with the partner as primary beneficiary, and the previous chapter obviously alludes to the idea that a trust should be the second beneficiary.
But how much? And what kind? Bradford outlines a lot of options, but I think a term policy clearly comes out on top. It has the lowest cost and it’s not coupled with a suboptimal investment plan. If you want to invest to “recoup” the cost of your insurance, just figure out the difference in cost between the term policy and the whole life/universal policy and put that amount each month into an investment account of some sort.
Accidents Happen: Are You Prepared?
The book closes with an impassioned argument for disability insurance, which handles the situation of debilitating injury that makes it impossible for you to work but doesn’t end your life. This becomes more vital as a parent because you’re responsible for the well-being of an individual who can’t earn an income for themselves – so what happens if you can no longer earn the income?
The advice is short and sweet: make sure you’ve got 80% of your salary covered, and shop around. Good tactics.
Is The Wall Street Journal Financial Guidebook for New Parents Worth Reading?
If you’re in the target audience described in the title, The Wall Street Journal Financial Guidebook for New Parents is a very worthwhile read. I truly wish I had read this book in 2005 during my wife’s pregnancy.
Even better, this book can be an incredibly useful baby shower gift. If you know someone who’s having a baby shower, include The Wall Street Journal Financial Guidebook for New Parents in the gift you give, particularly if they’re a few months away from delivery. The advice this book provides is vital during the run-up to having a child – there are a lot of additional little tips all over the book, from the small (buying baby items) to the big (considering private school).
The Wall Street Journal Financial Guidebook for New Parents isn’t a world-changer, but it’s a great compendium of really useful information for new and expecting parents, perfect because they’re about to embark on a whole new chapter in their life.