Maybe you’re here because you want to double-check that you’re doing the right thing already. Or maybe you want a guide to help you get started. Either way, this article will cover the essentials of how to build a financial safety net as a new parent. With this guide, you’ll learn everything you need to know to ensure your child’s financial security now and in the future.
Table of Contents:
What Is a Financial Safety Net?
A financial safety net is the pool of resources that you draw from in case of an emergency. If you get injured at work or unforeseen circumstances take away your primary source of income, you’ll be able to use the safety net to keep your family comfortable. This plan aims to help you keep up your long-term financial goals even in the case of an emergency.
Of course, you won’t be able to cover every potential scenario. The steps and guidance I’ve listed below are ways to prepare for the worst without breaking your budget.
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Why Do I Need a Financial Safety Net as a New Parent?
As a new parent, you’ll want to focus primarily on your family. Because of this, having a financial safety net takes away a lot of money-related anxiety. Plus, remember that you’re bringing new life into the world. It’s critical to help your children have some stability if something happens to you or your partner.
Unlike traditional financial safety net plans, new parents have a few additional steps to consider, which I’ve listed below.
Building a Financial Safety Net
Step 1 – Create a Debt Payment Plan
Debt can be a touchy subject. I get it. But debt is more common than you think. Did you know that American households have, on average, $8,398 in credit card debt? But you don’t have to be a victim to your debt, whether from credit cards, mortgages, or student loans, among other things.
Get honest with yourself and look into all your debts. Either online or by-hand, write out the numbers on a spreadsheet. Now, how much can you put towards your debts each month? Be realistic but try to aim for getting rid of debt as quickly as possible.
Once you have your plan, stick to it. Of course, when things happen with your family, you might need to adjust. But think of all the money you can spend on your kids once you have paid off these debts.
Step 2 – Automate Your Savings Accounts
The crux of most people’s financial journey is the effort they have to put into funneling money. If you’d prefer to be focusing on your family than your money, I totally get it. That situation is where automation comes in handy.
You can either have your employer split your direct deposit between checking and emergency savings account or set your checking account to send money to your savings directly.
Related: 6 Ways To Automate Your Finances
Treat your savings account like mandatory monthly, bi-weekly, or weekly bills. You’ll feel more motivated to automate the process, and it makes savings a breeze.
Step 3 – Start an Emergency Fund Immediately
It’s absolutely critical to have a specific emergency savings account. I recommend opening a high-yield savings account that’s separate from your checking account. The goal is to keep the money stored away so that you don’t feel tempted to use it.
You’ll want to keep the funds in a high-yield account to build the emergency fund without worrying. Automate a portion of your paycheck to go to the emergency savings account.
Recommended Savings Account Deals
- American Express® Personal Savings: Earn 1.00% Annual Percentage Yield with no minimum balance required and no minimum deposit required.
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- Discover Online Savings Member FDIC: Earn a 0.80% APY with no monthly maintenance fees and no minimum balance required.
Rates are up-to-date as of 08.13.2020.
Step 4 – Invest in Long-Term Disability Insurance
Disability insurance covers your ability to work and provides income for your family. The sad fact is that 36.5% of Americans have sustained a work-related injury that resulted in a disability. The possibility of getting into an accident is real, and if you’re a parent, you have to think about how you would recover and care for your child. Consider options like Breeze, a third-party disability insurance provider for healthy and employed individuals.
Step 5 – Weigh Options for Life Insurance
As a parent, you’ll need to have life insurance. Because your children and your spouse depend on your income to continue providing for the family, life insurance is crucial.
Fortunately, most employers provide term-based life insurance. No matter who provides the majority of the income, two-parent households should have coverage for both individuals. Here’s the catch – employers often don’t provide enough in life insurance, so it’s worth checking to see if you need to get your own policy.
If you want life insurance outside your work, research and make sure that you’re 100% clear of the stipulations and policy. Policygenius is a great resource to get quotes from multiple life insurance providers when you’re ready.
Step 6 – Consider Home or Renters Insurance
Though there is no legal requirement to have home or renters insurance, you should consider purchasing a policy. If you are looking to move into a home with your new family, most mortgage lenders will require protection in case of emergencies.
For both homeowners and renters, the policies will protect your belongings up to a specific limit, whether furniture, electronics, or clothes. Make sure your insurance covers liability in case of a lawsuit. High-quality programs also include displacement coverage, in case your home gets damaged in a disaster.
When looking for homeowner’s insurance, always remember to figure out the coverage you need first. Then, go shopping for comparable policies, and look for the best policy that meets your needs for the best price. Lemonade is a good place to start. While it doesn’t cover all states just yet, if you do reside in a state that is covered, you’ll likely find an affordable price for renters or homeowners insurance.
Step 7 – Create Multiple Streams of Income
Multiple streams of income are a part of financial safety nets that most individuals don’t consider. On top of your regular job, having a side hustle allows you to have more spending money. Use this side income—instead of your income for savings and bills—to splurge on your kids.
Consider your skillset and what you bring to the table. What skills do you use in your job that you can turn into a profitable side-business? What hobbies are you an expert in that people will pay to learn? Identify your strengths and find a side hustle that doesn’t require extensive time but gives you more financial leeway.
Step 8 – Set Up a Retirement Account
A retirement account will come after you have no debts, a stable emergency fund, and enough insurance to cover your family. From there, you’re ready to start saving for retirement. Retirement is essential so that you don’t have to rely on your kids later in life to support you financially. It’s essential to get tax-advantaged retirement accounts, whether from your workplace or on your own.
If your company has a matching benefit plan, utilize it. Get set up with a 401(k), 403(b), or 457 plans, depending on which your workplace prefers. For self-employed individuals or workers without access to an employee retirement plan, go with an IRA. You can also go with a SEP-IRA or solo 401(k), if applicable.
Ensure that you won’t feel tempted or won’t need to dip into your retirement account before the official retirement age. You’ll suffer significant penalties, 10% plus income tax, for taking money out before you’re eligible.
Best IRA Account Brokers
- Betterment: The best IRA option for first-time investors. Very easy to use and extremely low fees.
- M1 Finance: The best free IRA option. Choose between their pre-built portfolios or custom build your own.
- Ally Invest: Best hybrid approach. You get access to Ally Invest Cash Enhanced Managed Portfolios, an automated investment service, as well as its award-winning, low-cost brokerage services.
Learn More: Best Brokers for IRA Retirement Accounts
Step 9 – Make a Will and a Trust
Because you’re a new parent, you have a dependent(s). Before the first child arrives, ensure you have legal documentation in order. In case of death or severe incapacitation, such as a coma, both a will and trust are necessary.
First, a will is essential for two reasons. You not only ensure that your assets go to named loved ones, but you also designate a person, or people, who will serve as guardians of your children. With the document, you can continue to grow your finances without worrying where they’ll go if something happens to you. If you have a partner, ensure that the will includes them and leave instructions on what to do if both parents pass simultaneously.
Second, a trust works in tandem with a will. The document can serve a variety of functions, depending on why you need it. It can keep inheritance details off public records and protect your child’s inheritance from creditors and future spouses. Ensure that the allocation of your assets occurs according to the needs of each of your children, among other things.
Step 10 – Teach Your Children About Finances
Finally, don’t keep things from your children. Even if they’re young, don’t be afraid to talk to them about money. You don’t need to go into full-depth lectures when they’re young, but you don’t want to shut them out of the conversations. Start them small, maybe with a savings account specifically for children. From there, continue to educate them so that they can build their financial safety net eventually.
As you can see, there’s a lot that has to be done when you have a child–outside of worrying about everything else (like parenting in general, for instance). The best advice I can give you, being a father of two, is to not panic and take your time. Tackle one thing at a time and it’ll all come together for you.