From the moment they are born, children are kryptonite to financial practicality. They’re little money vampires, kids. Just the other day, my five-year-old son Charlie dumped an entire glass of lemonade on the keyboard of my wife’s MacBook. Did we ship him to an orphanage? We did not. Because when it comes down to it, Charlie could gamble away our retirement savings, burn down our house, and push the minivan off a cliff, and we’d still be scouring the house to find a couple of bucks to buy him an ice cream.
Which is to say that children don’t always bring out our most financially efficient selves. And yet when it comes time to have a kid, being financially efficient becomes so much more vitally important. So before your bundle of joy arrives and the hectic-ness of your life increases 7,000% (or even if you’ve already got a kid), it’s time to do a few simple things to make sure you’re ready, financially speaking.
Don’t deal with your baby-anticipation anxiety by buying, buying, buying.
As exciting as the prospect of a new baby may be, there will be a tendency to overspend in anticipation of the arrival. “Every other day for about six months, I’d come home and find a new box from Amazon in the driveway,” says Mike Allen, a Wealthsimple portfolio manager, whose daughter Hailey was born 14 months ago. “We ended up with twice as many clothes as we needed. In retrospect, I wish we’d gotten all hand-me-downs. No one looks at a baby picture and wonders whether the sweater is brand-new or not.”
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The Allens also plunked down $1,300 for a new Bugaboo Cameleon stroller; their neighbors bought a seven-year-old secondhand Bugaboo for $200 and spent another $100 rehabbing it at Stroller Spa. Allen feels like a chump. “There’s virtually no difference,” he admits now.
So, unless you like to burn $20 bills to entertain yourself, when Virgil Abloh comes out with his first Louis Vuitton onesie — don’t buy it. Baby showers shouldn’t be fashion shows, they should be mercilessly practical affairs. Set up an Amazon or Buy Buy Baby registry for the pricey things you actually need: a Diaper Genie, a car seat, a changing table. What you don’t get, steal from family and friends. “People want to get rid of this stuff!” says Beth Kobliner, who's a best-selling personal finance author and mother of three. “They’re looking for someone, anyone, to take the Jumperoo off their hands to make way for the incoming balance bike. So keep in touch with friends and family who may be willing to lend or give you gear you’d otherwise have to buy.” Kobliner also recommends joining local Facebook groups or parents’ Listservs, and scouring Craigslist for free listings.
Open a 529. And don’t forget to harness the generosity of your family to fund it.
There are lots of ways to plan for your new family’s future. But begin with a no-brainer. If you can even remotely afford to, open a 529 account for your kids. It’s the best deal the government offers new (or not even that new!) parents.
Here’s a quick primer on how it works. The first thing you have to do is open a 529 with your child listed as the beneficiary; the second thing you have to do is put money into it. The contribution limit as of the writing of this article is $15,000 a year. You can contribute every year regardless of your kid’s age, and as long as you’re the trustee, even after she turns 18. That money gets invested and grows tax-free. Then, when your child goes to college — community college, trade school, whatever — she can use the money for any education-related expenses. And what’s even better is she won’t pay taxes on what she takes out. The money can be used for tuition, books, housing, and the like. The amount of money you can legally park in these accounts differs from state to state, but some states allow balances to grow as high as $475,000 per kid — enough to cover four years at any of your posher higher learning institutions. What if your kid doesn’t go to college? The money in your 529 can be transferred to a sibling or even a relative who might have educational expenses.
You’re free to open a 529 in any state that offers one, and the quality between plans varies greatly. But it might make sense to open one close to home, because 35 states offer tax breaks for residents, and a few even kick in some matching funds. Savingforcollege.com is a fantastic place to start researching.
“I’m a big fan of investing in 529s for your kid’s education” says Kobliner, the family financial guru. But here’s the catch: 529s are great only if you’ve already maxed out your IRA or employer-sponsored 401(k) plans. “If you have young kids, you need to fund those retirement accounts first. Your kids can borrow for college, but you can’t borrow for retirement,” she says.
One way to get started, even if you don’t have money to put in there yourself, is with gifts. A present from grandparents, many of whom are great at spoiling kids but sometimes need a little help in knowing what your kids need, is a great first step. “A grandparent can contribute up to $15,000, and two grandparents can give $30,000 in a given year without getting slapped with a gift tax from the IRS,” Kobliner says. One caveat: Their gift should be deposited into the account with your name on it, not their own, since 529s held by non-parents count as student income and can limit your kid’s chances of getting as much financial aid.
And, as with any investment, get started as soon as you possibly can. “Begin as soon as you get your kid’s Social Security number,” she says, “so that compound interest can work its magic and grow your savings,” she says.
And then make sure your 529s are invested wisely.
You’re going to have some options when you open your account.
One of the most important is risk level. When Allen, the Wealthsimple portfolio manager, invested for his daughter’s education, he invested mostly in stocks. “I have Hailey’s money in the most aggressive portfolio available,” Allen tells us. “It's 90% in stocks, and we’re very comfortable with volatility. Since we’re depositing $3,000 into that account every year, if there are market fluctuations, it just means that some years we’ll be picking up equities at cheaper prices.” As long as you’re starting early, taking on a little more risk right now is a good idea, since stock market history demonstrates that riskier investments like equities generally earn attractive returns in the long run. Diversifying your portfolio to include investments from around the world is also a good way to reduce your risk — individual markets can always take a hit for an extended period of time, but it's a lot less likely that the whole world will. But as the date when she’ll need the money grows near, Allen plans to gradually decrease the portfolio’s risk tolerance by shifting it to less volatile investments.
The other important choice you’ll need to make is deciding how hands-on you want to be in managing your 529 investment. 529s generally offer at least two portfolio options: age-based and so-called “static” portfolios. Age-based portfolios are the set-it-and-forget-it option; they invest largely in stocks when your kid is young, and, over time, will automatically shift your money to less risky investments.
And you can move from age-based to static, or the other way around, if you like. 529 rules allow you to move money to a different portfolio twice per calendar year. One big word of warning: If you go the static route, don’t forget to adjust the portfolio toward a more conservative setting. If you space it while planning for SATs or proms, and the market experiences a major correction a week before tuition’s due, that’s on you.
Don’t let companies prey on your baby ignorance.
There is an entire industry devoted to preying upon the fears of new parents — especially your fears that the world isn’t safe for your new child. Safety is important, but it doesn’t have to be as expensive as some might like you to believe: Babyproofing services can charge upward of $1,000 to make your house safe for your kid. “You don’t need to hire a babyproofing company to turn your house into a padded cell,” Kobliner says. “Parenthood already comes with enough worry and unanticipated expenses. A few simple and sensible steps, like pads to soften hard corners on furniture, plugged wall sockets, and locks on lower cabinet doors, should be sufficient.”
Companies like Owlet, who sell a $299 baby sock that sends a constant stream of heart rate and oxygen intake info to your phone, might have you believe that your baby is constantly teetering between life and death, but the data simply doesn’t justify the fear-mongering. Obviously, you'll be vigilant enough to keep your baby away from open manhole covers and outside of chimpanzee enclosures, but in terms of babyproofing your home, common sense and readily available articles like this one demonstrate that even the least handy-with-a-hammer mom or dad will be able to handle the steps required to do everything necessary to prepare a home on the cheap.
You’re a lot more likely to croak than your baby.
Apologies, bit of a downer, but before you’re taken over by the unadulterated life-affirming joy that you will experience upon the birth of your first child, try to imagine what your spouse is going to be up against financially raising a baby alone if you keel over dead on the treadmill. Please: Consider life insurance; Allen did. “The rule of thumb is that your family should be covered for 5 to 10 years of your income,” he says. “I would want Hailey and Erin to have 10 years of my salary, plus the outstanding mortgage balance on the house.” Both he and his wife bought 10-year term life policies that include an option of extending them to 20 years. Each policy costs $700 a year, and should tragedy strike on one of the Allens, the survivor will collect $2,000,000.
And, of course, for goodness’ sake, draft a will and consider disability insurance.
Stay in the rental or buy the house that you’re going to want to live in for a long time — even in some future when you might have more kids.
In 2008, when my wife became pregnant with our son Henry, I hatched a brilliant plan to buy an apartment for our family. We picked up a cute little two-bedroom, two-bath condo in a good school district in Brooklyn that would be perfect for our planned family of three for a decade to come. Two years later, Charlie came, and our family of three was now a cramped family of four. Whoops! As they grew, we did the math and calculated that Henry and Charlie were likely to (exaggeration alert) never get a full night’s sleep if they had to share a bedroom. We decided to make a break for a more spacious house in Connecticut. We got lucky. We benefited from a rising housing market, and after all the associated costs of the sale, we just broke even on the sale of the place we had bought only three years earlier. If we’d tried a similar trick in 2008, the story would have been much, much different.
In the past, buying might have seemed like a rite of passage for young families, but that may be changing. According to Zillow, millennials are renting twice as long before buying than people did 40 years ago, advancing the median age of a first-time buyer to 32 as of 2016. “In spite of what you might hear, when you are young, renting isn’t just throwing money away,” says Kobliner. “Renting can make more sense than buying, especially in certain high-priced sales markets.” Experts who’ve run the numbers are in agreement that stock market investments have outpaced home prices, and that if wealth accumulation is a goal, renting is more often than not a financially more sound idea than owning.
But of course there are intangible values to hanging your kiddos’ Christmas stockings by a chimney of one’s own. And for those of us who aren’t disciplined, a mortgage payment can work as a kind of forced savings plan — it’s better to pay down your mortgage and gain some equity than invest in extra sushi.
Kobliner says that before pulling the trigger on buying, parents need to think hard about how long they can stay in one place — how many kids will you have, will you be relocating for a job, what about a new school district? “When you buy a house, there are closing costs, bank fees, property taxes, and of course regular maintenance. That means home ownership isn’t sensible unless you’re planning to put down roots for a while.” She actually has a rent-versus-buy calculator on her website.
To work or not to work? Run the numbers before the baby comes.
Maternity leave will vary greatly from employer to employer. A rare few super-progressive companies may pay your full salary while you’re out, and your boss may even send you roses in the hospital. This is pretty rare. The only responsibility an employer has to moms is that if you’ve worked at a company for a year or more, they must, at minimum, give you 12 weeks of unpaid leave and promise not to replace you while you’re out.
If you want more than that, you may have to plan for it yourself.
Some moms or dads may find that it makes more financial sense for one parent to ditch the workforce altogether. (And if it doesn’t make financial sense, it may be what you want.) If one spouse isn’t a super big earner, his or her job may not even cover the cost of childcare required for them to keep working.
And if you have a partner and you both want to go back to work, you’ll definitely need to plan for the cost of taking care of your baby. “The biggest surprise for us was the price of day care,” Allen says. “The day cares we looked at initially were $1,800 to $2,000 a month, which is insane.” The Allens settled on a home-based day care that cost them $900 a month.
And, of course, we believe the best thing you can do to plan for your financial future (with or without kids) is to open an account at Wealthsimple, so you can put your money to work in a better way. What are you waiting for? Get started!
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