5 Financial Steps I Took After Becoming a Parent

It has now been over a year since my wife and I welcomed our first child into the world. All the cliches have proven true. “Wow, we get tired a lot! Wow, so much joy! My world has gotten so much smaller! Sorry, we have to be home around 7pm.” You get the picture.

While there were several changes we had to adapt to, here are the 5 financial steps we took in the year after our son was born:

1.    Consider second-hand Baby Stuff

The number one complaint about having kids or caring for kids is the cost, but sometimes I wonder how much of that pain is self-inflicted. I know firsthand it would be easy to spend several thousand dollars getting all of the “stuff” to deck out your house for when the baby comes and especially after, but I have also seen how much free or cheap baby stuff there is on places like Facebook Marketplace or “Buy Nothing” groups.

There are around 10,000 babies born every day in the US, which also means there are that many kids growing out of the stuff they no longer need that has barely been used. Thoughtful parents recognize the fact that they have things they don’t need anymore and are constantly cleaning house. It helps to start early if you are picky. Patience and acting fast can win. Personally, we scored things like a $500 crib for $100 and a $1,400 stroller combo for under $700 and I kid you not (pun intended) probably over 100 other free things from diapers to bottles, to wipe warmers, etc.

2.    Purchase (or increase) life insurance

As soon as we knew baby #1 was on the way, both my wife and I purchased 30-year term policies. Once we realized there were going to be more lives dependent on us, we wanted to make sure we protected each other and our growing family against the worst-case scenario.

While we don’t know what the future holds, we hope to continue to grow our family, so in anticipation, I purchased a $1.5M policy for myself, much more than what I needed, to lock in lower prices due to a younger age. This way, if we do have more kids, I likely won’t need to get additional coverage in the future.

If you already had life insurance before kids came along, make sure the coverage still makes sense for your family. It might be time to increase your coverage depending on what you are trying to protect (future income, college expenses, etc.).

3.    Establish a Basic Estate Plan

Having an official estate plan with the aid of an attorney is on most people’s “to-do” list for most of their lives. I have noticed my most successful clients are the ones likely to have this piece taken care of. If both my wife and I passed away, our son would inherit significant assets just from life insurance proceeds alone. We wanted to get everything in place for him in addition to outlining who we would want to care for him (guardians) and getting a trust in place that would administer assets later in his life while still providing for his needs.

Anyone who has had a loved one pass away knows that the absence of estate planning typically adds more pain to an already difficult season. Give your family the gift of taking care of this.

4.    Start saving for college – Setting up a 529 Plan Account

We don’t know if our son will go to college, but we are currently planning on him doing so, and we want to take advantage of the tax-free saving vehicle known as a “529 Plan” in the event that he does. We set up a 529 Plan for our son in the first few months after he was born. We also benefit from the fact that our state provides an income tax deduction for contributions, which isn’t true for all states.

It is important to recognize that 529 Plans are a great strategy when they will be used for qualified education expenses, but you will be taxed and penalized if they are not. This makes them relatively inflexible.

As our son grows up, we’ll likely have a clearer picture of the college landscape and whether it continues to be a part of his plan, but if doubts start to creep in, we could also contribute to a taxable brokerage account (think general investing) earmarked for his future. What we lose in tax benefits in this type of account, we gain in flexibility because we can use the money for whatever we want.

5.    Build up your Emergency Fund

When children enter the picture, your monthly costs DO go up, which means it is likely a good time to beef up that emergency fund. The best practice on how much to have in an emergency fund is usually between 3-6 months of expenses. It also depends on your job and the likelihood that you could find a replacement quickly. The higher up the chain you go, I encourage you to get closer to the 6-month number, because you’ll want to be pickier about the right fit if you do end up losing your job and it could take you longer to find it.

Additionally, this fund helps protect you against unexpected costs, which may or may not be more likely to happen now that there is another person in the family.

Quick hint—Emergency fund calculations are based on expenses, not income. Expenses are usually 60-70% of your income because if you lose a job, you won’t be doing things like paying taxes or making retirement contributions.

These are all great examples of taking the circumstance-based approach to your finances. One-off financial plans don’t account for the different ways your life changes over time. We work with our clients to make sure they are always accounting for the changes they experience and taking action to keep them heading in the right direction.