The arrival of a child is a very exciting time for families and a time when many aspects of your life will change forever.
“Planning for a baby doesn’t just mean setting up the nursery. It also means preparing for the financial impact of your new bundle of joy,” says Emily Irwin, head of the Advice and Planning Center of Excellence with Wells Fargo.
To that goal, here’s how to create a finance playbook for parenthood.
List and prioritize expenses
Even before your baby is born, a good plan of action is to think about what you will be buying. To stay organized, prioritize your spending.
“Make a list of baby gear that’s ‘must- have’ and distinguish that from a ‘nice-to-have,’” says Irwin. For example, a car seat is a must-have, whereas a bottle warmer is a nice-to-have. Make a spreadsheet to keep track of spending.
Eliminate excess spending
Along with those must-have and nice-to-have items for the baby, the same prioritizing method applies to the parents when it comes to personal and household expenses. Take a look at the 50/30/20 budget rule—that is, categorizing your after-tax income into buckets of needs (allocating 50 percent of your income), wants (30 percent) and savings (20 percent)—and see where you can rein in your discretionary spending.
Establish an emergency fund
“Pay your family first by automatically setting aside money in an emergency fund,” says Irwin.
This strategy can work well if you can earmark a certain dollar amount or percentage of your income to a separate account designated as a “rainy day” fund. This emergency fund can be a cushion should you have a job layoff, a hefty car repair or unforeseen medical bills.
“A good rule of thumb is to aim for at least three to six months of expenses in an emergency fund,” says Irwin.
Review your childcare, healthcare and life insurance options
Along with any immediate childcare needs, consider planning for longer-term childcare costs as well as insurance coverages and estate planning.
Look into childcare benefits that your employer may provide, such as parental leave and childcare discounts and subsidies.
Also, review your life insurance options, weighing both permanent and term coverages. Keep in mind that life insurance is not only for after life costs; with certain permanent policies, you can leverage the policy’s cash value to pay for expenses such as your child’s college tuition and/or wedding long down the road.
And, now may be a good time to update your will, or if you don’t have a will, draft one.
Taking small measures today can add up to more financial security later for you and your loved ones.