Thanks to your beloved first-born, you’re now a total pro at this parenting thing: You can change a diaper in five seconds flat, your banana puree recipe is near perfection, and you have every single baby song memorized. So with Baby No. 2 on the way, you’re already feeling a lot more confident and prepared than you did the first time around.
Now as you (more wisely) whiz through your list of baby to-dos, like crib assembly and onesie shopping, don’t forget one very important action item: reviewing your finances.
Think back to how much your financial situation changed with Baby No. 1. Well, that’s about to happen all over again. And even if you deftly adjusted your spending the first time, you’re almost certainly going to need to review and recalibrate your budget once more. We partnered with Charles Schwab and leading personal financial guru and CFP® professional Carrie Schwab-Pomerantz to find out what to expect (financially) when you’re expecting your second, and what to do about it. Make sure to visit her column, Ask Carrie, for this and other vital money questions that you and your growing family may have.
1. Take Another Look at Your Budget
No matter how fiercely you pinch those pennies, there’s really no way around it: An additional baby means additional expenses. In fact, a family of two spends about $13,000 a year on each child, according to a U.S. Department of Agriculture’s Consumer Expenditures Survey. Even if you live in a locale with a low cost of living, baby expenses add up fast (you can see just how fast using the Economic Policy Institute’s Family Budget Calculator), so now’s the time to review your spending, according to Carrie.
“Estimate ongoing costs for things such as diapers, formula and baby clothes as well as for extras like family outings,” Carrie says. “Factor in additional medical costs, both insurance premiums and out-of-pocket expenses. With the numbers in front of you, review your current budget and reprioritize if necessary.”
2. Update Your Insurances
This item is actually two-fold: First, be sure to add Baby No. 2 to your (or your partner's) health insurance plan. (Note that some companies require you to do so within 30 days). If you and your partner both have health insurance, check with HR and your provider about how benefits are coordinated. Next, review — and potentially increase — your life insurance coverage. Don’t have life insurance yet? As your family continues to grow, life and disability insurance becomes exponentially more important, in order to help cover the costs of things like a mortgage or your child’s college tuition if something should happen to you.
“Young families in particular have more debts and fewer financial assets, so life insurance is often critically important,” says Carrie. “It’s often better to buy life insurance sooner rather than later. Life insurance is cheaper the younger and healthier you are; a big health change can even make you uninsurable.”
Although knowing just how much life insurance you need can be tricky.
“An industry rule of thumb says you should have six to eight times your annual salary,” explains Carrie. “However, in reality life insurance is a highly individualized need. Unless your needs are very straightforward, it is probably best to consult with an insurance specialist.”
3. Get Your Estate Plans in Order
If you think you’re too young to need a will, think again. Once you become a parent, having an estate plan in place is imperative to protect your loved ones. A good estate plan should include powers of attorney for financial and health care decisions, medical directive or living will that provides end of life instructions, along with a will and possibly a trust depending on your situation. “At the very least have a will to name a guardian for your minor kids,” says Carrie.. “Without it, the state can choose a guardian. Don't let someone else make this important decision.” If you’ve already drafted a will, be sure to update it to reflect all the members of your household. If you don’t have a will, you can draft one yourself, though it’s best to work with a lawyer to make sure the document is sound — and don’t forget to update your beneficiaries on life insurance and investment accounts.
4. Bump Up Your College Savings
Chances are you’ve already opened a 529 account to set aside money for Baby No. 1’s education, and if so, you’ve given yourself a great head start.
“Even a small amount contributed regularly can add up,” says Carrie. “Plus, earnings grow federal tax-free and there's no tax on distributions if used for qualified educational expenses.”
With Baby No. 2 coming, you may be wondering if you can use the same 529 account or if you need to open a new account. According to Carrie, while it is possible to use a single account for both children, she advises against it for a few reasons, including the ability to have only one named beneficiary and the loss of potential tax advantages.
5. Nurture Your First Child’s Financial Literacy
It’s never too early to start setting a good example of spending and saving for your children, and if your first child is old enough by now, you may want to start having very basic chats with them about how money works. “Tailor your conversations to your kids' individual needs,” says Carrie. “This may sound obvious, but the kinds of conversations you have with your kids should depend on their age, developmental level, and personality. Some kids like details, others respond better to ideas or general thoughts ... You know your kids better than anyone else, so work with that knowledge.” If nothing else, consider purchasing a piggy bank for their next birthday or holiday to start instilling these values.
6. Keep an Eye Out for Your Own Future
With the added financial responsibility of a second baby, it may be tempting to skimp on your own retirement or personal savings. Don’t do it if you don’t have to, says Carrie. “Keep contributing to your 401(k) or IRA,” she says. “Prioritize savings to include other long-term goals like buying a house or taking a family vacation. And while you're at it, remember to put aside a little for some personal R & R. A night out once in a while can be a welcome break — even if you spend most of the time talking about the new little person in your life.”
This article is sponsored by Charles Schwab. Make sure to visit Ask Carrie for any and all money advice you might need. The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager.
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