Being a parent is one of the most rewarding and challenging experiences of a lifetime. The most basic things you need to be able to offer your children include unconditional love, attention, and limitless opportunities to learn and grow. Beyond these, from a financial perspective, there are plenty of other requirements to plan for in advance. For example, growing bodies require frequent wardrobe updates and healthy nutrition, while developing brains need stimulation and education, through toys, activities, and academics.
The adventure called parenthood is unique to each of us, and no single resource can accurately predict every planning need. However, there are key points that you should consider now, to ensure that you’re thinking wisely and acting responsibly to adequately provide for your children during childhood.
When children are younger, childcare costs can be substantial, depending upon where you live and the options you pursue. For residents of metropolitan areas, yearly care costs can average one to two times the cost of annual in-state college tuition.
Care by a family member is often the cheapest option, and, if you’re lucky, it may even be free! If you’re not so fortunate, there are other options available, including center-based and home-based care. Daycare and shared care are often the most reasonable, but be sure to plan ahead, as many organizations have lengthy waiting lists.
In-home child care offers many perks, but it can also be more expensive, depending upon how many children you have and if you have a private nanny or an au pair. You’ll need to be aware of the requirements imposed upon you as an employer, such as payroll processing, employer taxes and worker’s comp insurance. For live-in positions, consider living space arrangements and the dynamic of the household too.
When considering any of these solutions, you need to evaluate the costs relative to your after-tax earnings.
Stay at Home
Staying at home is an alternative to child care providers, one that offers an amazing bonding experience for you and your child. If you consider this option, be sure to honestly evaluate both the benefits and the financial risks. It’s important to make sure that your family is financially prepared and protected. Things to consider include:
- Job security of the working parent.
- Longer term earnings and career impacts for the stay-at-home parent. These might include how easy it’ll be to return to the workforce, any time and cost associated with maintaining or updating professional credentials, reductions in future Social Security retirement benefits, and more.
- Financial resources should there be an earnings gap.
- Life and disability insurance coverage to protect you and your family should the working parent have a medical event.
- Potential stress on the marriage.
Continuing Child Care
You don’t just need to plan for child care coverage while your child is an infant or toddler; the list extends for many years beyond early childhood. Common care costs include preschool, summer camps, activities, before- and after-school programs, and babysitting. All of these potential expenses need to be realistically factored into your personal financial planning outlook.
Whether you opt for public or private schooling, educational costs vary significantly and entail far more than just saving for college. There are extras to consider throughout your child’s academic career, including field trips, activities, tutoring, study abroad programs, and college prep classes. Again, these need to be factored into your budget.
We recommend utilizing a mixture of savings vehicles to meet the continuum of your child’s education needs. Section 529 college savings accounts offer a wonderful tax-advantaged solution for college, but the funds can’t be utilized for earlier education objectives. It’s therefore important to have additional resources on hand to satisfy your child’s younger education needs and aspirations, such as personal savings, custodial accounts, or Coverdell Educational Savings Accounts (also known as educational IRAs).
Having a child means your medical budget will increase, even if you have strong medical coverage. It’s important to understand your deductibles, co-pays and other amounts that might be borne by you, including doctor or specialist consultations, urgent care or ER visits, prescriptions, and over-the-counter medications. If you have a Health Savings Account (HSA) or Flexible Spending Account (FSA), consider increasing your contributions to fund your child’s medical costs on a pre-tax basis. Otherwise, make sure you have ample reserves in terms of savings.
It’s also important to have adequate sick and vacation days available, or at least the financial resources and job flexibility to sustain a few unpaid leave days every now and then when the need arises.
Life Insurance and Proper Documents
Caring for your children doesn’t just involve the here and now. Being a responsible parent also means protecting your children in the event that you become ill or die.
Adequate life insurance can provide the financial resources to meet your child’s needs in the future, if necessary, Term insurance is often very affordable for parents, with shorter term policies being cheaper than longer term policies. You can reduce the costs of insurance premiums by laddering term life insurance policies based upon financial needs at varying stages of life. For example, a 10-year term policy can be purchased to cover younger child care needs, coupled with a longer 20- to 25-year term policy that will extend through their college years.
You also need to ensure that you have proper planning documents in place. The last thing you would ever want is for your child’s future guardian to be determined by a court official who doesn’t know your child or your family. Up-to-date estate planning documents will establish guardianship and trust provisions in the event of your death.
Preparing for the Unknown
When it comes to parenting, there’s a long list of things you need to prepare for – including preparing for the unknown. Routine schedules and budgets will frequently be disrupted, requiring contingency plans. While family, friends and caregivers might be able to intervene on occasion, you also need to be prepared for changing your daily schedule on a dime. You may need to take time off of work for medical visits and sick days, have quick changes of wardrobe on hand when your kids are younger, accumulate emergency savings for other unforeseen expenses, and more.
The Cost of Waiting
Being a financially responsible parent is important, for both you and your child. However, a key point to understand is that few parents are one hundred percent financially secure when their children are born. Waiting can become very expensive if you need to pursue fertility treatment or adoption. Delaying too far into the future can rob you of your chance to be a parent altogether. It’s important to strike a balance, and start your family at the right time for your finances, you lifestyle, and your body.
Parenting is a journey, for both you and your child, hopefully a rewarding and fulfilling one for both of you. Like every other parenting decision you make, planning ahead financially is a wise choice.
SageVest Kids is the financial literacy site for SageVest Wealth Management, a top-ranked wealth management firm with a focus on finances for families. We understand the importance of planning for yourself and those you care about most. Please contact us if we can assist further in your family financial considerations.