The idea of adding a new life into the world, especially into your own little world, gives way to so many thoughts of the future. It also brings up the need for some serious planning, particularly financial planning. I just had my first child in June, so of course a recent article from The Street caught my eye.
The Unheard-of Financial Plan Every Would-Be Parent Needs to Hear About
The Street
09/05/12
By Marilen Cawad
The cost of raising a child has reached an all-time high, as discussed on a past post, Are You Helping Households Plan for the Cost of Raising Children? This article focus on one of the largest components of the cost of raising children, childcare, and suggest three steps to create a solid plan for childcare.
“Step 1: Decide early what type of care the child will receive.”
There are several options to choose from when it comes to childcare. Parents have to consider the pros, cons, and cost of daycare centers, childcare homes, or in-home childcare. The cost of childcare varies based on the type of care and location. In our town, fulltime childcare at a daycare center runs just over $1,000 per month, which is on par with Oregon’s state average.
The article provides two good tips for step 1. First, have the clients try the future childcare costs on for size, by saving the amount of childcare cost each month into a separate account. This will provide the clients a true experience of how this cost will affect their finances. Second, clients should work to set aside six months of care to help ensure the additional cost doesn’t add too much stress on the parents post-baby budget.
The clients should start saving the amount of childcare costs as early as possible, giving them time to have the recommend six months of savings set aside and a good feel for how the additional cost affects their lifestyle.
“Step 2: Calculate out-of-work income loss.”
The next major cost for parents-to-be is lost income. Figuring out the amount to save for the period without income is a big part of the planning puzzle. “After a child is born, most couples have a significant loss of income as one parent stays home to take care of the child for the first three to six months. Expectant parents should take this into consideration and save for it before the child is born.” The article suggest a simple method to calculate the cost of lost income by use the client’s net, or take home, pay and multiply by the number of months the client will be staying home. Don’t forget to look into how many days off could be paid by using accumulated sick and vacation time.
“Step 3: Weigh child-care cost vs. potential income production.”
You will want to help make sure it pencils out when helping the clients with making the decision go back to work. The article works though a good example. “Assume that the lower-earning parent makes $2,500 per month in net pay. After work-related expenses (transportation costs, lunch, etc.) of about $350, the amount available for child care and other household expenses is $2,150. If this parent’s contribution to the household budget is $1,000 per month, subtract that contribution from the monthly available and $1,150 will be available for child care.” This example doesn’t include the cost of items like lost benefits such as insurance, but it’s a simple way to start.
Carefully laid plans can help ease some of the stress related to this life changing family transition. Discussing the desire to add children to your client’s family can provide you the opportunity to provide valuable financial planning advice.
