Baby Boom: How to Financially Prepare

Birth rates are UP for the first time since the recession began and economists are cheering! It’s not that the practitioners of the Dismal Science are lovers of baby showers, but they say that the new mini baby boom is yet another example of an improving economy. Birth rates reached a record high of 4.3 million in 2007, when the economy was still percolating. But when the Great Recession hit, rates began to plummet, falling below a level necessary to keep the population steady. The drop-off was expected, because according to various studies, fear of the financial future prevents couples from having babies during downturns.

Thankfully, the low birth rate trend tends to be short-term in nature and six years after the end of the recession, it is finally reversing course. Nearly four million babies were born last year, coinciding with improving economic conditions and jobs data, as well as a renewed boost in consumer confidence and optimism.

It makes sense that people have to feel more secure about their job prospects to make the big financial plunge into parenthood. According to the most recent data from the Department of Agriculture, it costs an average of $245,000 to raise a child -- and that’s BEFORE factoring in college! Here’s the breakdown:

$107,970 (Housing & Transportation) $44,400 (Child care & Education) $39,060 (Food) $33,780 (Clothing & Misc.) $20,130 (Healthcare)

So what can families do to prepare for the financial burden bundle of joy? The first step is to calculate anticipated expenses, including unreimbursed medical claims. To understand what you are likely to encounter, talk with your health care provider about what is and is not covered. Ask about co-pays, co-insurance, deductibles, out-of-pocket costs, birthing and other classes, and specialty tests. If you have the ability to use a flexible spending account (FSA) or health savings account (HSA), you should increase your contributions, so that Uncle Sam helps to shoulder some of the burden.

You will also have to factor in unpaid time off, clothes, diapers, and food -- and assume that many of these costs will be part of your monthly nut for some time to come. You should then try to set aside the extra money that you will need in your emergency reserve fund ahead of time. If cash flow is already tight, you might want to talk to your family about skipping the frivolous gifts and focus instead on the must-haves.

Next, if you are not carrying life insurance or are relying on employer coverage, it is time for action. Both parents need to purchase enough insurance to cover: living expenses for survivors; the lump sum amount necessary to fund future educational expenses; and/or money to provide for the future retirement needs of the surviving spouse. To determine your specific needs, you can use the LifeHappens.org calculator.

Term insurance is best for those who have a specific insurance need for a defined period of time, like new parents who may not yet have saved a sufficient nest egg to support their survivors in the event of premature death. During the stated term of a term-life policy, if the insured dies, the insurance company pays the face amount of the policy to the named beneficiary. Some insurance companies will write policies for pregnant women up until the third trimester, so check around and see what is available and be sure to compare apples to apples.

Finally, a child on the way should prompt you to take care of your estate planning. For many, a simple will (including guardianship instructions), power of attorney and health care proxy should do the trick. However, if the situation is more complicated, you may also need a trust. In all cases, I recommend engaging a qualified estate attorney. This is one area where paying up for advice and expertise is worth it.