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Matt Becker opened his financial advisory practice, Mom and Dad Money, not long after he and his wife, Casey, had their first son, Aiden, and struggled with all the financial decisions new parents need to make.
“I looked around and I didn’t see a lot of advisors focusing on people in this stage of life,” said Becker, a certified financial planner in Gulf Breeze, Florida.
Adding another member to your family also adds a myriad of new financial considerations and expenses. A middle-class couple can expect to spend more than $230,000 to raise a child, not including college costs. One estimate found that by 2036, four years at a private university will cost around $303,000, up from $167,000 today.
More advisors are helping their clients successfully navigate how to cover their children’s expenses without compromising their own financial security.
“There is so much happening when you’re starting a family,” Becker said. “I think that having good guidance on all of that is really important.”
Saving for college
Because of ballooning higher education prices, new parents want to start saving as soon as they can for their child’s tuition bill, said CFP Amy Richardson, senior manager in the Centralized Planning Group at Charles Schwab in Littleton, Colorado.
The earlier an advisor can get a client to do so, the better prepared they’ll be.
If a parent starts to save $500 a month at their child’s birth, they’d have around $190,000 saved when that child reaches 18, assuming an annual return of 6%, Richardson said. But if they don’t start this routine until their son or daughter is 10, they’d have just around $60,000 when their child finishes high school.
Advisors can help their clients set up a state-sponsored 529 college savings plan, which allows parents to invest money and then withdraw it tax-free, so long as the funds are used for certain education expenses.
But as parents prepare for their children’s future, they also need to look out for themselves, Becker said.
“There are lots of ways to pay for college: There are loans, grants, scholarships, work-study,” said Becker. “There’s choosing a less expensive school.
“Whereas there’s only one way to fund your own retirement: Other than Social Security, you just have to have the resources that you’ve accumulated,” he added.
Henry Hoang, a CFP and founder of Bright Wealth Advisors in Irvine, California, said he tells his clients that their children can always take out student loans, “but they will not have an option to take out a retirement loan.”
Childcare and health care
Childcare is often the biggest immediate expense new parents will face, Richardson said. (Many families will spend more than $1,000 a month on the care.)
“If one parent is making $25,000 a year and the cost of childcare is $28,000, it will actually cost the family money for that spouse to continue to work,” Morris said.
Meanwhile, childbirth and adoption count as qualifying events that allow parents to make changes to their employee benefits outside of the open enrollment period at work, said Patrick Whalen, a CFP and founder of Whalen Financial Planning in Los Angeles.
Whalen, who is expecting his third child in the next few weeks, helps clients make these adjustments.
“The money you put into an FSA or HSA escapes federal taxation, as well as income taxation in many states,” Whalen said.
Families can use these accounts for doula services, part of the expenses of childbirth classes and nursing accessories, Whalen said. In some cases, he added, employers offer a Dependent Care FSA, which they can use for costs picked up from a nanny, babysitter or childcare center.
If both parents work, they should examine which health insurance plan will cost less to add the child to, Morris said.
“Wellness visits are typically free or very low-cost in most health-care plans today,” he said, adding that “many of the child’s visits in the first couple of years are considered wellness visits.”
Talking about a client’s death when they’re preparing to give birth can be strange but necessary, experts say.
“If possible, you should consider life insurance once you decide to have a baby, not after you’re pregnant,” said Anna Behnam, a financial advisor at Behnam & Associates in Rockville, Maryland. “Your financial advisor should be able to run various calculations to figure out the amount of protection you would need.”
Many families make the mistake of only getting life insurance for the main earner, experts say. Both parents should be covered.
“Stay-at-home parents do work and that would cost a lot to replace,” Richardson said.
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Advisors should also help their clients put together estate planning documents, including a will and health-care directives, said Michael Hakimi, a CFP at Black Dog Financial Planning in Mount Pleasant, South Carolina. Others will want to talk about appointing a guardian.
“This can also enable you to make decisions around who will take care of your child if something happens to you, and how your assets will be distributed,” he said. “If the child is a minor, who will manage their finances until they become an adult?”
With all the additional expenses new parents can face, from diapers to a larger home and mortgage, it’s more important than ever that they have a safety net should something go awry, Becker said.
“Having children argues for a bigger emergency fund, simply because there are more people who are dependent upon you financially,” he said.