Smart financial planning for your family.
While it may seem overwhelming to prepare for your new baby and your financial future, it's important to make sure that you and your family will be taken care of later and in case of an emergency. Here's expert advice on what to do now and what can wait:
Health coverage should be an absolute priority, experts say. "You'd be surprised how many moms and young people are trying to get by without health insurance," says Scott Hipp, a certified financial planner in Overland Park, Kan. But that could spell disaster if you (or your baby) need expensive care. To keep premiums manageable and still protect yourself against catastrophe, Hipp recommends getting a plan with a high deductible— $5,000 or more.
Life and Disability Coverage
Most new parents understand the importance of life insurance, but few realize that their odds of losing their income because of disability are far greater than dying young, says Mike Haggerty, director of financial planning services at Community America Credit Union in Kansas City, Mo. Be sure you're covered for short- and long-term impairments.
St. Louis financial planner Chad Slagle recommends determining how much coverage to get this way: "Add up all your debt—autos, house, credit cards, outstanding student loans—and calculate how much insurance would pay off that debt and then give you enough interest income to cover your expenses while staying home to take care of your family." For example, if you have $300,000 in debt and need $50,000 in income, you'll want a $1.3 million policy: After paying off the debt, if you invest the $1 million at 5 percent interest, you'll receive annual interest income of $50,000.
Find an attorney who specializes in estate planning and ask about a revocable living trust, particularly if you have an estate of $300,000 or more. "You need to start thinking about whom you trust to take care of your kids and who's going to do the best job of managing the finances, and those aren't necessarily the same person," says Slagle. Your paperwork should also include a power of attorney for health and finances, in case you're incapacitated and unable to make decisions for yourself.
Start small, the experts say. "We tell clients to think of it like weight loss: Don't set a goal so big that you never get started," says Hipp, who recommends trying something realistic, such as 5 percent of your salary: "You can't control how much college is going to cost or if you're going to be able to save enough." And check out 529 plans in your state: Like a 401(k), you contribute to a pool of mutual funds and the money grows tax-free, provided you use the proceeds for higher education. Just keep the account in your own name, in case your child runs off and joins a cult.
Find out more about how your neighbors are making it work, and make sure you're prepared for a financial crisis.