Financial Advice For Parents Having a Second Baby
In this edition of "Bank of Dad," our columnist answers questions about planning for the second baby and what to do when your savings accounts are lopsided.
We have a 16-month-old and are considering a second child. But there’s a lot of financial work to be done to prepare for that. How do I know we are ready financially for baby number two. What do I need to budget for it? What are costs no one considers? — Shane T., Atlanta
After that first baby passes onto the toddler stage, a lot of parents are ready to start expanding their families. And it makes perfect sense. That current kid may want someone close in age who they can play with. Plus, you’re already in baby-rearing mode – starting over in a few years means fighting some serious inertia.
But, man, are they expensive. Every few years, the USDA releases its so-called “Cost of Raising a Child Report.” As of the latest publication, a middle-income married couple will shell out between $12,350 and $13,900 annually on each new child, through age 17. Among the biggest expense categories: housing (29 percent), food (18 percent), childcare/education (16 percent), transportation (15 percent) and health care (9 percent).
There’s some good news and bad news here. I’ll start with the more sobering bit: those figures don’t include maternity care during your partner’s pregnancy, nor costs that you’ll incur after age 17. As in, that money-sucking expenditure called college.
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According to the website Saving For College, you need to sock away $25 to $35 a month for every $10,000 in college-related costs. Granted, very few families save the entire amount of their kid’s post-secondary education by the time they enroll. But it gives you an idea of how big a chunk of your income it can swallow.
Now for the more encouraging part. Research shows that costs tend to go down with each new addition to your family. According to the USDA, per-child costs are about 27 percent less for two-child families than one-child households (but again, that’s only through age 17).
Why? Because there are certain efficiencies you gain by adding a second little one to the mix. They might be able to share a bedroom with their older brother or sister, for example. You might be able to pass down some clothing, too, though it tends to work better if they’re the same sex.
Obviously, every situation is different. If you’re bursting at the seams in your current home, those cost-savings might not apply. You’d have to calculate the monthly difference between a new, larger home and your present one to see what the impact would be.
There’s no doubt that adding to the size of your family isn’t for the faint of heart. Then again, if every parent waited until their financial situation was perfect before having a kid, the species would be in rough shape. Hope you can arrive at an answer that makes both of you happy.
My husband and I both work, and the recent birth of daughter has brought new financial conversations to the forefront. We have expenses that roughly total our combined paychecks because my husband’s sizable inheritance is being invested wisely to grow for retirement with some left over to fund vacations, home repairs, and other unexpected expenses. My salary is much higher, but he regularly contributes more than equivalent dollars out of his investment accounts to pay the bills.
However, he considers the investment account and its returns “his money”, so we’re struggling to devise a system that allows me to grow “my money” in the event that he dies first (he otherwise wants “his money” to go straight into a trust for the kids).
Do you have any suggestions to estimate an amount that we should set aside for me (either now with each paycheck or as part of our estate planning) that won’t pass to the kids? I’ve heard of similar situations for couples facing retirement when one spouse has been working for 30 years with a huge 401k while the other was a stay-at-home. How does one estimate what to set aside in anticipation of the worst? — C. S., Florida
C.S., you absolutely have a right to build for your retirement, especially when your spouse is fortunate enough to have a nice inheritance that he can lean on. But since he’s all but dug a moat and built steel bars around that money, the question is how to do it in a way that your husband finds palatable.
Getting him to pull out a checkbook every year and put a big chunk of cash into your retirement account might be a tough proposition. You may have an easier time asking to him to tweak how you split the bills, says Jill Gianola, a Columbus, Ohio-based financial planner. That’ll give you a little extra cash with each paycheck to nurse your own investment accounts – and it’s more discreet that way.
“You may want to run some general investment calculators to see how much you’ll need to set aside,” says Gianola. One rule of thumb suggests building a nest egg equal to 1x your salary at age 30, three times your salary at age 40 and six times your income at age 50 to make sure you have enough to live on. But as with any financial axiom, you might have to modify those targets based on your particular circumstances.
If you have a 401(k) at work, contributing enough to maximize the employer match is a good place to start. Alternatively, you can fund an IRA, which provides similar tax benefits and a greater variety of investment options.
Of course, you should also think about what happens if something should happen to your partner unexpectedly. The most clear-cut solution is taking out a life insurance policy on your husband that names you as the beneficiary. That way, if anything happens to him, the tragedy isn’t compounded by an inability to pay the bills. But it’s important that you own the policy.
Term life policies only cover you for a certain number of years, but they’re also a lot – and I mean a lot – cheaper than whole life coverage. If you get, say, a 20-year policy, at least you’re covered until the kids are grown and hopefully out of the house. We can dream, can’t we?
Another route you can go, according to Gianola, is something called a QTIP trust (and no, it has nothing do to with the swabs you stick in your ear). If he puts his investments in one of these, you’d have the ability to draw income from the assets after he passes. But as the surviving spouse, you couldn’t take out any of the principal itself. Since he’s concerned about his inheritance going toward your children, he might find that an agreeable arrangement.
The implications of QTIPs, and trusts in general, can get extremely complicated. So if that’s something you want to consider, book an appointment with an estate planning attorney who can talk you through it.
The biggest challenge here isn’t so much the finance piece, but rather getting him to understand your long-term financial needs. If you can see eye-to-eye on that, carving out a sensible strategy should prove easy enough.