New parents and expecting couples undoubtedly have a lot on their mind. In all likelihood, the costs of raising a child and how to financially prepare for a baby are two of them. These financial mistakes can be made by new parents at any income level. If anything on the list applies to you, take steps to prioritize a resolution today. (Yes, it’s that important!)
Not having a will or naming a guardian for your child
Estate planning is not supposed to be fun. But that doesn’t make it any less vital, especially when children are involved. Without exception, if you are raising a child you need to have an updated will. Although many parents find it difficult to identify a person who is able and willing to care for their child in the event that they cannot, the alternative is perhaps worse: the state decides.
Even if you had estate planning documents drawn up before, if you have moved to another state you will need to do it again. Daunting as it may seem, estate planning attorneys do this all day long. The key is to work with an attorney that you’re comfortable with. Most estate planners offer all the forms and documents you’ll need in one standard package.
Not having life insurance, or enough of it
Married couples or single parents with young or dependent children almost always need life insurance. Unless you have substantial wealth which can be liquidated and used by your family in the instance of your death, then consider life insurance coverage a must. In many situations, it may make sense to buy life insurance in anticipation of life events (like having children) instead of waiting until after they arrive.
Exactly how much insurance you may need will depend on your wishes and your family’s needs. If one parent stays at home, consider insurance coverage to pay for child care and other new expenses. Adequate life insurance coverage is especially important for single parent households. Exactly what type of life insurance you need will depend on a number of factors, but many people find term life insurance sufficient.
Starting college planning too late
Many parents have a firm goal to pay for the entire cost of college for their kids. While achievable, it is important not to underestimate the costs. Getting a head start saving each month is critical to making this goal a reality. Let’s take a look at some quick math:
Assumptions: annual total cost (tuition, room and board, etc.) of $40,000 per year in today’s dollars, education costs increase 5% each year, investment returns are 5% annually, the child starts school at age 18, and excluding any tax implications.
Based on the assumptions above, parents would need to save over $1,100 each month from the time the child was born until college to cover 100% of the costs. Waiting until age 5 adds nearly another $300 per month to the required savings. Delaying until age 10 means parents need to save over $2,000 per month for the next 8 years just to fund the college education of one child.
Aside from parents’ saving for college early, there are other ways to fund a college education. For example, instead of annual gifts of toys and other temporary material things, ask relatives and grandparents to contribute to a 529 plan instead. Also, consider having your child pay for a portion of their education through a job or student loans. Sometimes, it can be a good thing to have some “skin in the game.” It is a great thing to want to put your child through college. However, it’s important to be realistic about your situation, means, and what’s feasible – particularly in large families and when private high school is also on the table.
Poor cash management
Advertisers love new parents because they’re excited, scared, and have no idea what to expect. So they tend to buy everything. New parents may find themselves in a tight financial situation if they don’t set a realistic budget when purchasing everything they want and need for the baby. Having a fully funded emergency fund is especially important when you have a baby to care for.
If you haven’t already done so, consider automating your savings. Create multiple sub-accounts for each of your short-term goals or spending buckets (easy to do with an online bank such as Capital One or Ally) and set automatic contributions each month. Common examples of sub-accounts are travel, kids, home down payment, and discretionary spending. Remember, prepping for baby is not the last of the expenses! Day care, nannies, education…it all adds up. So before you buy the top-of-the-line jogger, keep in mind you still need to retire one day.