Carrie Schwab Pomerantz
Updated: December 31, 2013 2:37AM
Dear Carrie: Our first child is due in six months. We’re excited but also a little scared — especially about the costs. How can we make sure we’re financially prepared?
— A Reader
Dear Reader: There’s no doubt that having a child is a huge financial responsibility. A U.S. Department of Agriculture report released in 2012 estimated that it costs around $241,000 to raise a child these days. That may sound unbelievable, but when you consider the rising costs of everything from food to gas to childcare — not to mention education — this estimate is probably realistic.
But being prepared for the financial realities of a new baby isn’t just about having enough money tucked away. It’s also about taking the steps necessary to protect your child and yourselves from unforeseen economic challenges. With a little planning, you can make smart financial decisions that put your growing family on a path toward financial security.
Here’s a checklist that every parent should follow for greater economic stability and overall peace of mind:
1. Get a Social Security number for your child. You’ll need this to get your child’s health insurance, to open a bank account on his or her behalf or to apply for government benefits. It’s easiest to apply for a Social Security number at the same time you apply for a birth certificate. If you wait, you’ll have to provide proof of your child’s U.S. citizenship, age and identity, as well as your own identity.
2. Make adequate health insurance a priority. If you have insurance through your work, notify your employer as soon as your child is born. In the meantime, review your options to make sure you have the best combination of deductibles and coverage. If you need to provide your own insurance, check out what’s available under the Affordable Care Act, either through the federal exchange or your state’s exchange.
3. Build an emergency fund. An emergency fund is more important than ever when you have a child. After all, you have a very important person depending on you! Strive to have enough cash in an easily accessible account to cover three-to-six months of necessary expenses. If the unexpected happens — an illness or job loss — it will help pay the bills until you get back on your feet.
4. Look into life insurance. A term life insurance policy, which is generally low-cost and easy to get, should definitely be on your radar. Consider having enough to at least pay off your mortgage and debts and to cover your child’s education.
5. Create a will. If you have a lot of assets, a will or trust will help ensure they’re distributed according to your wishes. But even if you don’t, a will is essential to name a guardian for your child. It doesn’t have to be a complicated document, but I’d suggest consulting with your family attorney. If it’s not in writing, the state could decide who would care for your child.
6. Complete an advance health care directive. This designates not only the type of care you want in a life-threatening situation, it also allows you to appoint someone to make medical decisions for you if you can’t speak for yourself. It can be your spouse or anyone you choose. Just be sure it’s someone you trust and who’s comfortable with the role. Protecting yourself with this safeguard ultimately protects your kids as well.
7. Start saving for education. Everyone thinks about saving for college — and that definitely should be on your list — but there’s more to consider. Might you want to send your child to a private elementary or high school? A college savings account such as a 529 Plan should be a priority, but also think about an Education Savings Account, which can be used for elementary or secondary education, too.
8. Plan for the extras. While you’re focusing on savings, don’t forget about extras such as music lessons, gymnastics training, summer camps — even family vacations. Having a general savings account to cover these things will help you make choices that don’t break your budget.
9. Start your kids’ financial education early. Kids can learn at a very early age to make good money choices. A trip to the store, handling an allowance, saving for something special — all of these provide opportunities to pass on your own values while teaching your kids the value of money.
10. Contribute to your retirement account. This is as important for your children as it is for you. (In fact, it should be your No. 1 savings goal — even before education!) Contribute to a 401(k) to get the company match and open an IRA. Your kids will be financially independent one day. You need to make sure you’re equally independent.
This may seem like a lot, but you don’t have to do it all at once, or necessarily all yourself. Your employer might match a portion of your retirement savings, as well as offer tax-advantaged accounts that let you pay for health and child care expenses with before-tax dollars. Grandparents might be willing to chip in on education. The main thing is to plan ahead, so you can enjoy every precious moment with your new baby. Believe me, these moments go by all too quickly!
Carrie Schwab-Pomerantz is president of Charles Schwab Foundation and author of “It Pays to Talk.” This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice.