You just found out that you are going to be a parent soon; there will be a million and one things to worry about, getting the financials in line will help to reduce the amount of stress that you have to go through. Other than budgeting for the costs, you will also have to consider managing your insurance requirements and emergency cash buffers. Also if one parent decides to stop working and take of the baby full time, you have to consider if the family can survive on a single income.
Dual Income versus Single Income Household
You also have to think about whether both parents still want to work or one parent decides to stay at home to take care of the child. Dual income may alleviate a lot of the financial burden, but it comes at the cost of time spent with the child. A single working parent trades income for time, so it is essential to determine if the family can survive on a single parent’s income. Adjustments have to be made to the usual household budget for an extra mouth to feed while sacrifices may have to be made to lifestyle costs.
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It is best to simulate living on a single income prior to the baby coming in. You can do that by putting the parent’s current income into a separate account and see how the existing household budget works out with only one working parent income. Do it for about 2-3 months at least to get used to spending less on lifestyle if required.
Setting Up and Increasing Your Emergency Fund
If you haven’t already done so, you need to set aside at least 3 to 6 months of expenses of liquid cash to serve as a safety buffer against any sudden loss of income or emergency cash requirements. If you already have an emergency fund, you would have to increase it as your monthly expenses would be increased due to the new child. This is especially important if you are shifting to a single income household. The risks are increased as there is only one breadwinner.
Review Insurance Requirements
Contrary to common belief, life insurance for the baby is not necessary at this point as the baby is generally healthy and the family does not depend on the child for income. The idea of life insurance is that should any unfortunate event happen to the insured, the dependents would still have money to survive on. Therefore, it is most important to get life insurance and possibility disability insurance on the parent who is working.
When the child comes into the family, the existing insurance policies would have to be reviewed. Firstly, the amount insured will no longer be enough to cover the household as there is a new child. Secondly, one parent may stop working, so the amount insured on the sole income earner has to be increased as well. Thirdly, the insurance does not just cover for the living expenses of the beneficiaries, but should also cover for higher education costs of the child in future. You will also have to review and update the beneficiaries on existing insurance policies. To increase the existing insured amount, the most affordable way is to get a term insurance plan on top of the current existing policies.
While life insurance is not required for the child, medical or healthcare insurance is recommended. Check with your medical insurance provider to see if they allow you to add your child to your current health insurance plan or if you need to take out a separate plan altogether for your child.