Each year when Father's Day rolls around, I'm reminded that I wouldn't trade the experience of raising my two kids for the world. But when I think back to how naïve my wife and I once were about the costs of raising children, I can't help wishing we'd been better prepared.
If you're a new dad, or about to become one, you'd better sit down. According to the U.S. Department of Agriculture's annual Expenditures on Children by Families report, a typical middle-income family can expect to spend over $241,000 to raise a newborn child until age 18 -- and that doesn't even include prenatal care or college costs.
Right now, you're probably more worried about getting enough sleep than funding your retirement. But at some point, you'll need to plot out a financial roadmap to ensure your family's future financial security. As one dad to another, here are a few strategies I've learned that can help:
Start saving ASAP. It's hard to save for the future when you present expenses are so daunting, but it's important to start making regular contributions to several savings vehicles, even if only a few dollars at a time:
- Establish an emergency fund with enough cash to cover at least six months of living expenses. If that goal seems unattainable, start small: Have $25 or $50 a month from your paycheck or checking account automatically deposited into a separate savings account so you never see it to begin with.
- Even if retirement is decades away, the sooner you start saving and compounding your interest, the faster your savings will grow. If your employer offers 401(k) matching contributions, contribute at least enough to take full advantage of the match: A 50 percent match is the same as earning 50 percent interest on savings.
- Once those two accounts are well established, open a 529 Qualified State Tuition Plan to start saving for your children's education. Read the guides at FinAid and the Securities and Exchange Commission for details.
If funding these accounts seems impossible, look for a few luxuries you could cut from your budget for six months -- lattes, going out to lunch, premium cable, etc. After six months have passed, evaluate whether they were actual "needs" or simply "wants" you can live without.
Get insured. If your family depends on your income, you must be prepared for life's unexpected events, whether an accident, illness, unemployment or death. Make sure you've got adequate coverage for:
- Health insurance. Everyone needs medical insurance, no matter how young or healthy. Just remember: Lower-premium medical plans aren't necessarily cheaper overall; factor in copayment, deductible and prescription costs, in- and out-of-network charges and exclusions when choosing a policy.
- Homeowner/renter's insurance. Don't let theft, fire, faulty plumbing or other catastrophes leave your family without a home or possessions. To reduce premiums, consider choosing a higher deductible. And opt for "replacement cost" vs. "actual cash value" coverage so your items will be replaced in today's dollars, rather than after depreciation has been factored in -- it's more expensive coverage but worth the extra cost.
- Life insurance. Depending on your family's size and ages, you'll probably want coverage worth at least five to 10 times your annual pay -- more, if you want to cover college costs. And don't forget to insure your spouse's life so you'll be protected as well. This calculator can help determine how much coverage you need.
- Disability insurance. Millions of Americans suffer disabilities serious enough to make them miss work for months or years at a time; yet many forego disability insurance, potentially leaving them without an income after a serious accident or illness. Learn details of your employer's sick leave and short-term disability benefits and if long-term disability is offered, consider buying it. (See my previous blog, Why Disability Insurance is Critical, for more details.)
- Car insurance. Almost every state requires insurance if you own or drive a car -- and for good reason: It protects you financially should you cause an accident or be hit by an uninsured driver. Make sure you have sufficient liability coverage to protect your net worth and income -- it only takes one serious accident to wipe out your savings.
Get organized. Make sure your affairs are in order in case something should happen to you. Organize files for:
- Medical, homeowner/renter, auto, life, disability and long-term care insurance policies.
- Banking, credit card and loan accounts, including passwords for online account management.
- A will (and possibly a trust) outlining how you want your estate managed after death.
- Durable power of attorney and health care proxy specifying who will make your financial and medical decisions if you become incapacitated. Also, a living will tells doctors which medical treatments and life-support procedures you do or don't want performed. If the primary assignee is your spouse, choose alternates as well, in case you're both impacted.
- Birth certificate, marriage license, Social Security card, funeral and burial plans, safe deposit box information and other important paperwork.
With all these documents, keep in mind:
- Review them regularly and make updates when situations change. Make sure that designated beneficiaries for your will, life insurance and retirement plans accurately reflect your current wishes. For example, if a beneficiary dies or a new child is born, you may want to amend the documents.
- Make sure your homeowner's insurance accurately reflects inflationary increases to the value of your home and its contents.
- Make backup copies of everything (and photos/videos of possessions) and store in a few safe locations.
And finally, spend responsibly. If you buy things you don't really need or can't afford, you'll just end up having to work longer hours to pay for them -- time you could have spent watching your kids growing up.
This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.