Clients (or the children of clients) who have a baby on the way usually have so much to worry about that any financial advice you offer them during this exciting-but-stressful time may initially be viewed as yet another thing that needs to be done. But, your words of wisdom could help them through the rough first months of parenthood, plus plan for the future and protect their financial security from the worst possible events. Here are some issues they should address, preferably well before the due date.
Name the baby “Bill”?
According the 2015 USDA report Expenditures on Children by Families, parents spend about $12,600 annually during the first two years of the child’s life. Parents can estimate what their bills might be in the first year (and beyond) by visiting the BabyCenter’s calculator at tinyurl.com/costofbaby.
The results will hopefully alert prospective parents to the affect the birth will have on their pocketbooks, prodding them to be more mindful of where their money is going. If they need help that’s more sophisticated than the “pencil, paper and calculator” method, direct them to a site like Mint.com or ynab.com.
Run the financial plan
Once the parents have a handle on their spending, you can put the numbers into a long-range financial plan that will either calm their nerves over the impending birth (and life change) or scare them into a healthy state of hyper-frugality. As part of the planning process, you can help them weigh out some important issues, such as how to prioritize saving money versus paying off debt and balancing saving for college and retirement.
Work or home?
Perhaps an even more urgent dilemma is one faced by many new parents: if one or both of them should cut back on work, or leave the workforce completely, to stay home to care for the child. You can run two different scenarios to show them the current and future costs and benefits of continuing to work, versus staying home. If you have any personal experience in this matter, or know of older clients who dealt with this question way back when, you could share those stories (anonymously) with the young parents, along with any subsequent regrets or relief they experienced.
Covering the cost of childcare
If neither of the parents are going to say home, make sure they know how much daycare might set them back. The organization Child Care Aware says that, nationally, the average annual cost of daycare for an infant is close to $1,000 per month and can be twice that amount for certain metro areas. In-home care may cost twice those amounts, but the time saved and consistency of care may be worth it to parents who can afford it. The organization’s site (childcareaware.org) has a wealth of resources for parents seeking care for their children, including information on providers, financial assistance and the different types of care available.
An uncomfortable conversation
The financial plan will likely also reveal that the expecting parents don’t have enough life insurance (assuming they have any at all). The amount of coverage they require will vary depending on their situations. But between the cost of raising the child, paying for college, retiring debts, and potential lost wages, don’t be surprised if they need anywhere from a half million to a million dollars. Don’t forget to insure the life of a stay-at-home parent as well. In the event of a tragedy, the benefit could allow a working parent to either quit to care for the children or hire outside help to replace some of the responsibilities previously shouldered by the stay-at-home parent.
Young parents usually can’t afford cash value policies with those benefit amounts. But they can probably cover the cost of term life insurance that lasts as long as the parents expect to support the child (say, to age 25 or so). Although many workers can purchase life insurance via their employers, that coverage may be more expensive and less customizable than what they could purchase on their own, especially if they are in good health.
Speaking of uncomfortable topics, don’t be surprised if the young parents haven’t done any estate planning. A recent survey conducted on behalf of Caring.com found that only 36 percent of respondents with children under age 18 had completed any of the appropriate documents.
A will is the most basic first step, but parents may want to also establish a trust to control the aforementioned life insurance proceeds and any other assets until their children are responsible enough to properly manage that money. Once the parents have decided who is going to be in charge of or inheriting their assets, they have another, tougher decision: who will care for their kids if the mom and dad aren’t around. Help the parents reach a conclusion by reminding them that the decision can be changed in the future, and that it’s better for them (and their children) if they decide now while they are alive and well, rather than have the choice made by the courts after the parents are gone.
After they have chosen and formally named the guardians, getting the remaining necessary documents (such as powers of attorney and health care directives) in place will seem like a piece of cake. You can help them find an estate planner by familiarizing yourself with various estate planning attorneys in your area and, perhaps, develop a mutually beneficial referral relationship in the process. If you don’t know where to start, visit Avvo.com to search for attorneys by specialty and geographic location.