Congratulations on your new addition! This is an exciting time for your young family, and you will be making many adjustments to provide what your new baby needs.
What about financial adjustments?
Now that the baby is here, you have someone to care about and plan for other than yourselves. This is the time to make financial plans for your family that will provide financial stability now and in the future, no matter what happens.
These 3 budgeting basics from the office of a prominent national life insurance beneficiary attorney will give you the tools to take control of your family’s finances and stay in control.
Budgeting Basic #1 – Use a Budget to Live Within Your Means
Creating a budget for your family should be a priority.
But first, let’s make sure you have everything your baby needs, and everything you need to take care of him or her, then talk about monthly expenses:
Meeting Your Baby’s Initial Needs
Chances are you have acquired what a new baby needs to live in your household, but if not, here is a list:
- Nursery furniture: crib or co-sleeper and crib mattress
- Baby linens: at least two fitted sheets for the crib mattress, several thin cotton blankets, and two waterproof mattress covers
- Either formula feeding gear or breastfeeding gear or both, depending upon your choice;
- Diapering necessities, such as two packs of newborn size diapers, baby wipes, diaper rash ointment, a waterproof changing table, at least two changing table covers, and a can with a lid to use as a used diaper pail.
- Baby personal care items, such as hooded towels, washcloths, baby bath wash and shampoo, baby comb and brush, nail scissors, clippers, and file set, and cotton swabs and balls;
- Baby clothing, such as snap-crotch bodysuits/onesies, shirt-and-pants sets, pajamas, sun hat, cold weather hat, and a sweater if weather warrants, booties, and socks.
- Travel accessories: car seat, stroller, go-bag containing diapers, wipes, and a spare outfit; front carrier for a parent;
- Baby health care: pacifier, thermometer, petroleum jelly, infant Tylenol, nasal aspirator, and baby electrolyte drink to treat dehydration.
This is a minimum list of requirements, and of course, you will be supplementing with toys, bouncy seats, and other accessories.
You may have already planned to baby-proof the house, but if not, you only have about four to six months before your baby will be independently mobile. You will need:
- Gates at the top and bottom of all stairs
- Cabinet and drawer latches
- Outlet covers
- Fireplace and coffee table bumpers
Your baby will be eating solid food before you know it, and you’ll need:
- A high chair
- Several plastic bibs
- At least one set of infant feeding spoon and infant bowl
Perhaps one parent can stay home with your baby for a time, but eventually, you will need to pay for babysitting or daycare if a family member cannot help out regularly.
Creating a Family Budget
Of the baby items listed, you know which are disposable and must be replenished, such as food and diapers, and which must be renewed as your baby grows, such as clothing and toys.
Start your budget with these expenses.
Then list all of your other recurring expenses, such as rent or mortgage, car payment, insurance premiums, utilities, cell phone, cable, and the internet, groceries, household supplies, personal grooming, clothing, costs of commuting, and anything else you regularly purchase each month. Add them up.
Add up your family’s average monthly income. Does that figure equal or exceed your monthly expenses?
If not, you will either have to find ways to save money or find ways to make more money.
You must make more money than you spend each month. If not, you will fall into the trap of misusing credit cards to pay for everyday necessities.
Don’t forget to budget for children’s allowance for doing chores and teaching them financial responsibility.
If you bank online, or pay bills online, be sure to do everything you can to keep your family date secure.
Paying Off Credit Card Debt
Why is this important? Because credit card debt is the most expensive money you will ever borrow.
Let’s say you have a credit card charging 14% interest with a $2,000 balance. If you pay only the minimum payment each month, it will take you 173 months (yes, over fourteen years!) to pay off that debt, and you will have paid $1833.10 in interest!
That is almost as much as your initial balance!
Credit card debt is the number one reason people file bankruptcy. Once they start relying on credit cards for ordinary, everyday needs and can’t afford to pay more than the minimum payment each month, that debt spirals out of control and soon even the minimum payment becomes unaffordable.
Make a plan to pay off your credit cards right now.
This may mean making some small sacrifices, such as going out to eat less, or turning down the heat in the winter, or changing to a basic cable plan. Just do it – this will be temporary.
Budgeting Basic #2 – Start an Emergency Fund
Everyone must have an emergency fund.
Why? Because if you don’t, you will have to rely on credit cards should an emergency arise, and we see what happens when a revolving balance accrues interest over time.
Here’s an example: Let’s say the one car your family owns suddenly needs an expensive repair. You must repair it, and you don’t have the cash, so you put it on your credit card.
You use the same credit card as before, and charge another $2,225 to it, for a total balance of $4,225.
If you make only the minimum payment, which initially will be around $93.00, it will take you 247 months to pay it off, and you will have paid $4,429.09 in interest – more than the initial balance.
And what if another emergency arises? It will put you even further in debt.
Get off that roller coaster. Once you’ve paid off your credit cards, put the money you were using for that into a savings account.
Let’s say you were paying $200 a month towards your credit cards and you’ve paid them off. Congratulations! That is going to feel great.
Now put that $200 into a savings account each month.
In just over 11 months you will have saved the money to pay that car repair in cash, and all the while your money will have been earning interest for you in your savings account.
It might take a while to get to this point if you have a lot of credit card debt, so start now. In a year you will be in an entirely different place financially.
Stop paying the credit card lenders that exorbitant interest! Make your money work for you instead! Aim to save at least six to eight months’ worth of expenses in case of an emergency.
Budgeting Basic #3 – Purchase Life Insurance
If you do not have life insurance, you should consider purchasing some.
What will happen to your family if something happens to the primary breadwinner? You must plan for the worst and hope it doesn’t happen.
Purchasing life insurance will give peace of mind knowing that whatever happens, your family is financially secure.
How much life insurance should you purchase? It depends upon the family’s income and expenses, both present and anticipated.
An insurance agent can look at your budget and advise you as to your options.
Laddering Insurance Policies
Let’s say you and your agent determine that right now, you need $600,000 in coverage. He or she will not advise you to purchase a 30-year $600,000 policy.
Instead, they will recommend laddering policies of different terms and amounts of coverage in order to save on premiums.
For example, since your baby was just born, your partner is home with the baby for now, and you are the primary breadwinner, your policy ladder might look like this:
- Policy #1 – 10-year $300,000 coverage
- Policy #2 – 20-year $200,000 coverage
- Policy #3 – 30-year $100,000 coverage
This policy ladder provides a total of $600,000 in coverage for the first ten years, while your family is still young and needs that money to raise your baby to adulthood, pay for college, and supplement your partner’s eventual income.
Policy #1 expires in ten years, so you don’t pay those premiums any longer.
Policy #2 and #3 remain in effect, giving you $300,000 in coverage for the next ten years. This can provide for continuing education expenses of your child and supplement your partner’s income.
Policy #2 expires after 20 years when your child has grown into an adult and is either working or in college.
You are now only paying premiums on Policy #3, giving you $100,000 in coverage. This might pay for the last year or two of college and supplement your partner’s income.
Tell your agent if you are planning to make any major purchases, such as a house. A life insurance ladder can also provide for payment of the mortgage balance in full, as the balance decreases over the years you make monthly payments.
If you decide against purchasing life insurance, at least consider purchasing end of life insurance to take care of any final expenses.
Put these three budgeting basics to work for you and your young family.
You will enjoy peace of mind when you know you are living within your means, have emergency savings you can rely on if something happens, and if something happens to you, you have provided for your family’s financial future.