Becoming a parent is life-changing. Late nights out with friends become early mornings up with toddlers, while fancy dinners and weekend brunches turn into dance recitals and tee-ball games. Starting a family also changes your financial life. No longer can you live paycheck-to-paycheck; with little ones depending on you, you have to be strategic with your finances. If you’re starting a family, these are the six financial steps you can’t skip.
Grow Your Emergency Fund
The more people you’re providing for, the bigger your emergency fund should be. If your emergency fund is still sized for single, childless you, it’s time to grow it to match your family’s needs. If you’re a two-income household, three months’ worth of expenses should be adequate. However, if your family relies on a single income, double that to six months of expenses.
Consider Disability Insurance
Your emergency fund covers a few months of expenses if you’re temporarily out of work, but what if you get sick or injured and can’t work for an extended period? If you’re the primary wage earner, you need disability insurance. As NPR explains, long-term disability insurance “pays a portion of your income if you are suddenly unable to work for an extended period because of illness, injury, or accident.” The coverage is generally inexpensive, especially when purchased through an employer’s group plan, making it an easy choice for parents.
Draw Up a Will
Who will take care of your children if you die? This is just one of the important questions that a will answers. If you fail to create a will before you die, questions of who raises your children and receives your assets are left for a court to decide. It’s wise to work with an attorney to draft your will, but if that’s out of the budget, you can use an online will creator and have an attorney review the document later on.
Buy Life Insurance
Life insurance keeps a roof over your family’s head if you die, which makes it a must for parents with dependent children. There are different types of life insurance, the main options being a term, whole, or universal life insurance. Cash values and premiums vary between each type; while term life insurance has the lowest premiums, it doesn’t accumulate cash value over time. Whole and universal policies, on the other hand, gain value and can be sold for cash in retirement.
Plan for Your Funeral
According to the National Funeral Directors Association, the average burial funeral costs $7,181. At an average cost of $6,078, cremation only offers modest savings. If you don’t have funds set aside for your funeral, your family will be left to deal with the stressful process of paying out of your estate or out of their pockets. There are a few ways to spare your family the grief by pre-planning your funeral. Consider a joint bank account known as Tollen Trust, which is designated to a beneficiary. The funds are payable on death (POD) or made available to your loved one when you die. Another option is a “pre-need insurance plan” through a specific funeral home, which can be purchased in a lump sum or in payments over time.
Save for College
If you have the cash to spare after paying the bills and funding retirement, you can join one of the lucky few who save for their children’s college tuition. The best college savings vehicle is a 529 plan, which allows parents to invest post-tax income and withdraw the funds, including gains, tax-free to pay qualified education expenses. A Coverdell ESA is similar to a 529, but comes with contribution limits, income caps and age restrictions. Roth IRA funds, too, can be used tax- and penalty-free for qualified educational expenses. Some parents prefer to use a Roth IRA because the funds can be used for retirement if the child doesn’t need them for education.
Being a good parent is about so much more than teaching manners, helping with homework, and setting kids on the path to their dreams. Parenting also means ensuring your family is cared for no matter what happens in life. If you haven’t already taken these steps to secure your family’s financial future, today is the day to start.