Financial Planning Stuff You Need to Know

I work with many couples who are expecting their first child.  Many of them are not prepared for the financial implications of having a child and find themselves going from a free spending lifestyle to one where they are financially strapped with unplanned for expenses.

Here three big expenses that many new parents do not plan for:

• Child Care: Full time child care can cost $15,000-$25,000 per year.

• College Savings — If you want to pay for your child to go to the University of Illinois main campus (approx $19,000/year increasing by 6% per year) you would need to start saving $500/month beginning the month the child is born.  For Northwestern (approx $47,000/year increasing by 6% per year) you would need to start saving about $1200/month beginning the month the child is born.

• Additional Medical Expenses — Birth and first year medical expenses can easily reach the out of pocket limit of many employer provided plans.  That limit could is often $2500 to $5000.

How can you avoid the new parent trap?

• Do a financial test drive. If you are thinking you may have children change your spending habits to simulate having these expenses already. For example, have the estimated amounts for child care, college savings, and medical expenses automatically transferred to your savings account each month.  If you can’t live on the amount you have left over, you should rethink your spending priorities before you have children.

• Don’t increase your fixed expenses. If you are living below your means now, this is not the time to buy a larger house, or a new car unless you know you can fit them if your budget and pay for all of the expenses for a new child.  Many parents to be set themselves up with a high fixed expense lifestyle.  When they have children they often end up selling their house or car to afford child care.

• Have a discussion about your priorities. I find many couples have never discussed their life goals in a meaningful way until they are in my office.  This inevitably leads to disagreements about how to use their financial resources.  Parents to be should sit down and prioritize what are the most important things to each of them.  You should then quantify each goal in terms of the time required, the time frame to achieve it, and the financial resources required. Your financial planner can help with this part.

• Own your decisions. Once you have quantified and prioritized your goals, you then can make decisions about how to use your financial resources. Whatever, decisions you make, OWN THEM. My goal is to never hear a client say “we have to sell the car, house, give up vacation.” This implies that an outside force is controlling them.  Much better to say “we decided that something else is more important to us.”  Those who take the latter attitude will be more successful in achieving their most important life goals and set a great example for their children.

I’m sure many you have seen the newsreports about the failure of many child safety seats to protect children in simulated crashes. Consumer Reports Magazine recently tested 12 child seats. Of the tested seats 10 failed! Here is a link to results.

Yes, yes I know this post is not investment related, but I believe in a holistic approach to financial planning that goes beyond just investment advice.