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A recent government study found that it takes $235,000 to raise a child from infancy to age 17. If that’s not the last thing an expectant parent wants to read, we don’t know what is. Except for maybe this: That big number doesn’t include college, extracurricular activities or family vacations.
Of course, we believe the reward of raising kids is totally worth whatever it costs. And we’re not going to scare you with the facts without providing solutions.
In this final segment of our three-part series on bringing home baby without breaking the bank (read Part 1 and Part 2), we’ll discuss concrete ways you can prepare your budget for your little one’s future.
Take Care of Your Own Future First
Yes, it sounds counterintuitive to begin by talking about you. But here’s the thing: Making sure that you and your spouse are taken care of is the best way to set your baby up for success. You can do this with a few simple steps.
1. File a will.
Dave encourages anyone over the age of 18 to file a will. If you’ve got a spouse and a baby on the way and don’t have a will—or haven’t updated it in a while—this should be your first priority. You can do this quickly and inexpensively through an online legal service.
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2. Get term life insurance.
Just like the will, getting term life insurance is an expression of love for your family. Term life insurance doesn’t cost much compared to the peace of mind it provides. Be sure to get term life insurance on both you and your spouse, equal to 10 times your income. Get a quote now from Zander Insurance.
3. Save for retirement.
If you’re debt-free except for your house and have three to six months of expenses in savings, your next step should be to invest 15% of your household income into Roth IRAs and pretax retirement plans—not your baby’s college fund. By taking care of your retirement now, you ultimately free your little one from the financial burden of caring for you in your old age. Get expert investing advice from a professional in your area.
Then Take Care of Your Baby’s Future
When—and only when—you’ve taken care of the tasks above, you’ll be ready to move forward with every parent’s dream: providing the best for their baby. It’s important to talk regularly about what that looks like for your family. You can start by addressing the areas listed below.
1. Save for baby’s college.
Be sure to use tax-favored plans, starting with an Education Savings Account (ESA). An ESA allows you to invest up to $2,000 per year. This amount must be invested after taxes are taken out, but it grows tax free. That means if you invest the top amount at an average growth of 12% from the time your baby is born until age 18, it will grow to $126,000—and you only put in $36,000!
If you’d like to save more than $2,000 per year, or if your income disqualifies you from participating in an ESA, you can save for your baby’s college in a 529 plan. Dave says to take caution with 529 plans, as some of them restrict your options. Make sure you are allowed total control of the mutual funds at all times. These are often called “flexible” plans.
Never use life insurance—like whole life, universal life or variable life—to save for college. You should also avoid savings bonds and prepaid tuition. None of these is a worthwhile investment over the long haul.
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2. Save for baby’s life experiences.
While college is a privilege that no doubt prepares students for a great career, life experiences are also wonderful teachers. By no means are we advocating that you spoil that sweet baby rotten. We’re simply acknowledging the fact that every parent has something they want their little one to see or do as they grow up.
Maybe it’s regular camping trips, the pursuit of hobbies, a vacation abroad or even a lovely wedding once they’ve found that special someone. There are also things you’ll want or need to say no to. Decide together what’s important for your family and then begin to dream. To make those dreams a reality, simply build them into your budget as you are able.
By providing for your baby’s future the right way, you’re teaching a valuable lesson: Responsibility is the best path for a life that’s full of opportunity and full of fun.
What advice would you add to this guide? Leave a comment below.