6 Financial Moves To Make Before Your First Child
Babies are adorable and loving – but they are also long-term responsibility that come with a hefty price tag. The average middle-income couple living in the Klang Valley spends at least RM20,000 in the first year of their child’s life. If you are reading this as a father or a mother, you would know by now that raising a child is not easy – especially on the finances.
If you could turn back time, there might have been some financial moves you would make before the arrival of your baby. It is always advisable to get your financial house in order long before your child is born because the sooner you do it, the easier the road will be. Here are six financial tasks you should do to help ensure you’re prepared for your first child:
1. Ensure a stable income
This may seem like a no-brainer but not everyone sees the importance of this. If both parents are not earning a stable income – perhaps certain months there might be no income at all – that’s too big a risk to take when you have a child depending on you 100%. This problem should be tackled as early as possible prior to expanding your family by getting a steady job and income. With a steady job, you are assured of a regular cash flow to pay for expenses like rent or mortgage and food and most importantly, medical costs for your baby. A steady income also allows you to save for the future (see point #4) and thus, safe-proofing your child’s future.
2. Pay off your debts
Being a parent is all about being prepared for eventualities. Raising a child is going to be hard on your wallet, even when there are no illnesses or unforeseen incidents happening. However, if there is, it’s going to be a lot harder to deal with if you are also carrying a credit card debt at 15% to 18% interest rate. The moment you are planning to have a baby, start to actively knock out some of your high cost debt. Though medicine has advanced significantly, child birth is still unpredictable. With a clear credit card, you can also use it to pay for any unforeseen emergency medical costs.
If you’re carrying a RM5,000 credit card balance at 15%, you could be blowing up to RM790 in interest payments over one year and 11 months, if you are just paying the 5% minimum payment. If you choose to pay RM500 a month, it will still take you 11 months and RM375 in interest to clear you credit card debt. The sooner you clear your credit card debt, the sooner you’ll be able to start saving real money.
3. Create or update your budget
Everyone should have a budget. If you already have one, you need to review it to make the necessary changes with a new addition in the family. If you don’t, it’s the perfect time to create one now.
Your new budget should be implemented months before your child arrives, so you will be able to adapt to the changes long before you welcome your baby into the world. There are various free mobile apps or you can even use the good old Microsoft Excel to help create and maintain your budget.
Things that will change drastically in your budget are likely to be: groceries (now that you need to include baby formula, diapers, etc.), childcare expenses (if both parents are working), and medical costs (even a healthy child will incur medical expenses with the various vaccines and check-ups). Begin cutting frivolous purchases out of your household budget and you’ll soon be spending less, saving more and preparing for a brighter financial future.
4. Review your life insurance
If you already have an existing life insurance policy, review it and if need to, increase the coverage to include your child. If you do not have a policy, get one immediately! However, the question is not just about having a policy, but having adequate coverage on the policy. At minimum, get a life insurance policy for the primary breadwinner, but ideally, both parents should be insured, even when one isn’t working.
Life insurance becomes even more necessary and important with a child as it ensures the financial well-being of your child should something happen to you. The best way to gauge adequacy of your coverage is to carry a policy that insures ten times of your income, if not more. Also consider riders like critical illnesses and disability. Though these can add on to the premium, but prepare for all eventualities.
5. Start an emergency fund
It sounds impossible to juggle paying off your debt and saving up an emergency fund, on top of the extra expenditure that comes with a baby. However, with the added responsibility, an emergency fund is now even more critical, and the risk becomes greater without one. Ask yourself if you have a reserved buffer at a minimum of three months’ worth of expenses. If not, you need to start working on it the moment you decide to have a baby. Work together with your spouse, as they said, two is better than one. Put the fund accumulated in a high interest savings account or even a fixed deposit account.
6. Start thinking about college savings plans
If you think it’s insane to think about, let alone start saving for your unborn child’s college fund, you may need to rethink your strategy. With an average inflation of 5% in education fees, tertiary education has become so expensive now, it will inevitably balloon into an exorbitant amount when your child turns 18.
Raising your child is going to be expensive, and college education will take a huge chunk of the expenses. The average price tag of local private college tuition fee for medicine is about a quarter of a million now, and will likely inflate to three quarters by the year 2032. Don’t panic. With a little planning and saving now, you can ease the future sting.
Sleep deprivation and dirty diapers are the least of your problems as a parent. Providing the best for your child is ingrained in you as a parent, and by planning ahead, you may just be able to have the peace of mind of doing the best for your child. Before taking the plunge into parenthood, consider taking these important financial moves first. They not only help you manage your money better now, but it will also ensure a financially stable future for your family.
This article was first published in February 2014 and has been updated for freshness, accuracy and comprehensiveness.