Take Your First Steps Before They Take Theirs: Financial Planning For The New Parent
When you’re planning for and bringing home a new baby, it’s easy to get caught up in sleepless nights, organic baby food and reading every book you can find, but sometimes parents forget an obvious priority: teaching and helping your child to save money as they grow up.
(Hello, this was me in 2015 – I read all the pregnancy books but didn’t think ahead to read the actual HOW TO KEEP YOUR KID ALIVE books until about two weeks before my delivery. Lol.)
Hopefully these ideas will help you get started:
1. Set up a savings account for your child and make regular deposits.
You don’t have to know what you want to do with your child’s savings yet. However, the first step is as simple as opening a savings account for your child. Studies show that young adults who had savings accounts as children make better financial decisions, are more prepared for financial emergencies and plan better than their peers who didn’t grow up with savings accounts.
So, for now, open a savings account, put a few dollars into it every paycheck and invite your child to participate by making deposits of their own when he or she is old enough.
2. Start saving for college now.
Most parents know they need to save for their child’s college education, but few seem to realize how much college will cost. Education costs have been rising much faster than inflation, and if you’ve been out of school for a few years, you might be shocked by the costs. To make matters worse, and more expensive, many universities are receiving fewer public dollars, and getting a larger portion of their income from tuition, thus passing the cost on to students.
All told, experts expect four years of public school to cost around $250,000 by 2030. And it could be even higher. While it’s difficult to imagine saving that much money, don’t give up or neglect to even try.
First, think of college costs as a pie that’s been split into thirds. The first third will be paid for by your loans and awards your child earns. You’ll pay for the second third using the income you earn at the time. Only one-third needs to come from a college savings fund. Granted, one-third of $250,000 is $83,333.34, and that’s a lot of money.
Take a deep breath, because you have decades to save it, and you have a secret weapon: compound interest, which Einstein considered the most powerful force in the universe.
3. Focus on what you can control.
If you’ve been a parent for more than a few minutes, you’ve had at least one moment of pure panic while thinking about the future. Perhaps, on one of the few nights your baby allows you to sleep, you decided to keep yourself up by listing every terrible thing that could happen to you, your partner or your child. There’s so much you can’t control, of course, so place your focus on the things you can control.
Disaster sometimes strikes, and when it does, it’s usually unexpected. Instead of panicking over it, plan for it. Start with life insurance, then look into other savings products and programs that are designed to protect your family.
One mistake many new parents often make is to immediately start throwing money at college savings while ignoring their overall financial picture. If you read the numbers in the previous point, it’s easy to see why. Start by building a nest egg that can carry you through six to nine months of lean time, and then build your retirement fund.
As for retirement, you may not have given it much thought since your initial conversation with HR. Now is the time to see what else you need. Remember, you can take a loan to pay for college, but you can’t get a loan to retire. Even if you want to put college money away now, you can still get tax incentives if you contribute to your retirement at the same time.