Preparing your finances for parenthood


Emergency fund

An emergency fund is a stash of money set aside to cover the financial surprises life throws your way. These unexpected events can be stressful and costly. I typically recommend my clients have at least 3–6 months’ worth of expenses on hand at all times. If you’re light in this area, now’s a good time to beef up those savings as additional costs, like extra medications and higher drug prices, can creep up quickly and without warning.

Life insurance

Your most powerful asset in life is your earning power. Now that you have others reliant on that power, you need to protect it. Life insurance allows you to protect your earning power if you pass away prematurely. How much life insurance you and your partner should carry is specific to your individual situation. With the added financial responsibility of taking care of a child for 18 years (plus potentially covering their future education costs), you’ll most likely need to adjust your existing policy and increase the proceeds. Typically your need for life insurance will dissipate throughout life as your child becomes an adult, you pay down debt, and your retirement portfolio grows. For this reason, I encourage my clients to shop around for low-cost term life policies. These types of polices are also much more cost-efficient than whole, variable, or universal life policies, which can cause tax issues down the line if you no longer need them. Term insurance can provide you the coverage you need, and when the bird leaves the nest, you can adjust your coverage at that time (permanent polices don’t allow you to make adjustments as easily). It’s a good idea to talk to a reputable insurance broker—they can price policies at different institutions to get you the best rate. Some people think if there’s an income disparity between spouses, there should be a life insurance coverage disparity too. This isn’t the case—I encourage both parents to get adequate amounts of life insurance.

Disability insurance

While life insurance gets all the glamour in the insurance world, statistics show that a 35-year-old has a 50% chance to become disabled for 90 days or more before turning 65.* Protecting your largest asset wouldn’t be complete without having an adequate disability policy. A general rule of thumb suggests protecting about 60% of your income. If you have a policy through work, you may want to consider paying your premium with after-tax money. If you end up needing benefits, you can withdraw them tax-free, which is one fewer bill to worry about during a challenging financial time. If you’re shopping for a private policy but the costs outweigh the benefits, extend the elimination period—the period between an injury and the receipt of benefit payments—a few months if you have an adequate emergency fund to cover that period. This should help lower your overall costs.

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