By Barbara Marquand
Having a baby brings excitement and joy -- and a whole new set of money worries. How will you afford diapers and daycare? Soccer and swim lessons? And finally (yikes!) college?
Pitfalls abound, but so do opportunities to get your finances in order. With careful attention and a little discipline, you can start your family off strong financially and create a safety net for the years ahead.
Here are five money mistakes new parents make and how to avoid them.
1. Skimping on life insurance
Most young parents don't have enough life insurance, says Johanna Fox Turner, a financial planner and owner of Milestones Financial Planning LLC in Mayfield, Kentucky.
Garrett Prom, a financial planner and founder of Prominent Financial Planning LLC in Austin, Texas, agrees. "I can't tell you how many people I meet who say, 'Oh yeah, we're taken care of with life insurance -- I have a plan through my employer."
But group life insurance through work rarely offers large enough benefits, and it usually expires when you leave the company. You need your own policy.
What to do: Both parents need life insurance, even if one stays at home, Turner says. If the stay-at-home parent were to die, the surviving parent would need to pay for day care and other services that parent performed.
Term life insurance is sufficient for most families -- and it's cheap. Choose a term that covers the years your family will depend on you financially, and buy enough to pay off your debts, fund your children's college educations, and replace income or pay for services you provide.
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2. Not creating a will
"Most young families I meet with don't want to think about a will, and even if I bring it up, they don't want to talk about it," Prom says.
But every parent should have one. A will states how your money and property should be distributed after your death and designates a guardian for your children. If you and your spouse both die, and neither of you has a will, the state will appoint a guardian and decide what happens to your assets.
What to do: Each parent should have a will. Ask a trusted friend or family member to serve as guardian and to manage property and money for your children if you both die. Some estate planners recommend appointing one person to raise the kids and another to manage the money. Work with an estate attorney to decide the best course.
3. Having no spending plan or rainy day savings
Spending can spiral out of control anytime you don't have a plan.
"There's a huge tendency to want to overdo, especially with child No. 1," says Chad Nehring, a financial planner and partner at Conceptual Financial Advisors LLC in Appleton, Wisconsin.
People don't look at their spending because they're afraid, says John Buerger, a financial planner and president of Altus Wealth Solutions in San Luis Obispo, California. Instead, they operate blindly to avoid bad news.
- Use a tracking app like Mint to watch your spending for a month. "You cannot manage what you don't measure," Buerger says. Just observe, he adds. Beating yourself up over spending will backfire.
- Categorize your spending according to needs and wants, then prioritize, Nehring says.
- Build savings for unexpected expenses. Most financial advisors recommend having enough to pay for three to six months of necessities. Buerger says your cash reserves should be on the high end before a major life event, such as having a child.
- But start where you are, Nehring says. "If you can get to $1,000, that's great." Keep going; every little bit helps.
- Find deals on items your baby will outgrow at consignment and thrift shops.
- Revise your spending plan as your kids grow, Nehring says.
4. Saving for college at the expense of your retirement
The baby's high school graduation may be closer than your retirement, but neglecting retirement savings to pour money into a college fund is a bad idea.
"There are no scholarships for retirement," Turner says.
What to do: Open a 529 college savings plan and invite eager relatives to contribute. Meanwhile, save up to the contribution limits in your retirement savings plans before putting your money into the 529, Turner says.
Preparing for retirement will benefit your kids in the long run.
"You won't have to go to your child, hat in hand, saying, 'You went to Harvard, but now I don't have any money,'" Turner says.
5. Forgetting to add the baby to your health insurance plan
Once the baby is born, it's easy to let tasks slip through the cracks. But don't forget to add your child to your health insurance.
What to do: You have 30 days after the birth to add the baby to a work-based health plan, according to the U.S. Department of Labor. Contact your benefits administrator for details.
If you bought a health plan through Healthcare.gov or a state marketplace, log onto your account or call the marketplace to report the birth. You have 30 to 60 days, depending on the state.
If you bought a plan directly from the insurer, contact your health insurance company.
As you steer clear of these pitfalls, remember that financial planning is good for the whole family.
"Parents create a money blueprint on their kids, so if you're stressed out about money, they're going to be stressed out about money," Buerger says.