With all the ways your budget can explode after you start having kids, what can you do in advance to better prepare financially to reduce the financial stress that comes with starting a family? 👶
In this week’s podcast, I deep dive on this with Kevin Mahoney, founder of Illumint, a financial planning company focused on helping millennials in their 20s-30s navigate family finances.
- Why money so often causes marital strain and conflict
- The big money-related questions to ask that will help you understand your partner’s financial philosophy and values
- Why it’s important for both spouses to lean in equally when it comes to family finances
- The biggest ways your finances change after having a baby
- Concrete actions would-be parents can take to prepare financially for a family
- When and whether to buy life insurance
How did you prepare financially for starting a family? For getting married? What would you have done differently? Let me know by leaving a comment.
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Andrew Chen 01:23
My guest today is Kevin Mahoney. Kevin is the founder and CEO of Illumint, a fee-only virtual financial planning advisory company focused specifically on millennials.
The virtual part of Kevin’s practice means that he generally interacts with clients at night over video chat, so that, as Kevin describes it, planning consultations can happen after work deadlines, date nights, and bath time.
Kevin specializes in helping clients in their late 20s and 30s navigate the key financial decisions that arise in early to mid-adulthood, from managing student loans to buying a house to investing savings and planning your family finances to start a family.
Kevin, thanks so much for joining us today to share insights and tips about family finances for couples and new parents.
Kevin Mahoney 02:04
Thank you for having me. How are you doing?
Andrew Chen 02:06
Good. I’d love to start just by learning a little bit more about your background. Can you tell us a little bit about how did you get into financial planning focused specifically on millennials and young families, and what made you choose this specialty?
Kevin Mahoney 02:18
Sure. My background professionally has always been finance, albeit in a couple of different industries. And I got to a point, both professionally and personally, where there seemed to be this opportunity to use some of my finance knowledge and skills to help people in a way that I didn’t think they were receiving sufficient help up to this point.
It was specifically driven, on the personal side, by my wife and I preparing to have our first child, where even though I had this finance background, I have an MBA in finance in addition to the work experience, we were spending a lot of time researching these new financial questions that were coming up that we had to decide for our family what the best step forward would be.
And I just kept thinking when I was going through it, “If I’m spending this amount of time in having to figure out these questions and navigate some of these confusing articles or these unclear topics, what must other people my age, my friends who don’t work in finance, what must they be going through when they get to this point?”
And so I just saw this great opportunity for me to fill that gap and take my interest, my own experience, and my background, and apply it to financial planning advice in a way that, truthfully, wasn’t being done very much at the time and still isn’t that common.
I’ve had great success in meeting people where they’re at in life, giving them the advice that they specifically need at this stage, and not doing it in a shady way or in a way that’s not transparent or based on a certain amount of wealth or income. It’s financial advice that’s accessible for them at this point in time.
Andrew Chen 04:07
I wanted to focus mostly on family finances for new parents, would-be parents, but even preceding that, for couples who are contemplating marriage or newlyweds. Maybe we should actually begin some of the financial discussion there.
Money is one of the most common things that couples fight about and one of the main causes of divorce if you look at statistics. What is it about money specifically that causes this, in your observation from counseling clients?
Kevin Mahoney 04:40
Yeah. It’s not just money itself. It’s also the society and the culture that we live in.
Most people will recognize that money is a very emotional subject. And that can be for multiple reasons. In some cases, people have grown up with a very complicated or challenging relationship with money, depending on how they were raised and what their parents did.
Although we may not think about it on a day to day basis, that very much informs our own financial habits and how we view money and how we have those conversations with our partner.
And then the second big element of it at this point in life and in that relationship dynamic is the aspect that money so often reflects our values.
When you enter this relationship with someone who may have different spending values or just different financial values in general, if you don’t see eye to eye on those things, and particularly if one partner is judgmental about the other partner’s values, that can be upsetting, or at least emotional in a number of different ways.
Because your partner’s response to those financial decisions that you make reflecting potentially who you are as a person in some ways, it can be really insulting, depending on what they say and how they act based on some of those decisions that you make. So it’s not easy coming into it based on those factors.
But then you have these societal aspects where we are very poor in the United States about discussing money. And again, that starts in our childhood where a lot of times, parents aren’t very open about financial decisions with their kids.
Kids are often in the dark. They rarely learn all of the things that they should be learning by the time they become an adult to make their own responsible financial decisions.
And so we take those same lessons. We take what we’ve seen our parents do and other adults do, and that inevitably enters into our relationship.
And so we may not be forthcoming about some of our financial fears or our financial mistakes, and we may be nervous about being honest, or we may question what the other person is doing if they haven’t said a certain amount of detail about their financial habits.
So it’s really this dual challenge that couples face that they have to navigate in order to have a strong financial relationship together.
Andrew Chen 07:27
How should couples who haven’t had a lot of the hard conversations when it comes to finances yet…
Because when you’re dating in the early stages, that often doesn’t come into the picture yet. But when you start getting serious, then those things may start to come, or at least you may start to observe things.
How can people sensitively suss out their partner’s values in a way that’s not judgmental but still is acquiring the information that you need to understand if your values are compatible?
When it comes to money, what are the most important questions that couples who are becoming serious or even contemplating marriage should ask or be observing about their partner to understand this?
Kevin Mahoney 08:14
There are a number of different levels to that conversation and sharing that information within the relationship. At the most basic level, I think it starts with the day to day things.
If you’re the partner who is particularly interested in having those conversations or you want to share your own financial interests and questions, I think recognizing the responsibility that you have as part of the partnership to be open and forthcoming about some of your own financial activities can really go a long way to just making it a part of perhaps not daily, but weekly and monthly conversations.
Those types of questions and conversations can just occur around the house or as needed, when they come up. But then for most of the other conversations, I like to suggest that people try to do it in a very relaxed, non-confrontational setting.
If it’s a nice summer night and you’re out for a walk in the park and you’re just chatting, maybe that’s a good time to raise something that’s not particularly stressful or confrontational, but this opens the dialogue. And there are any number of examples and places where those types of conversations can unfold.
It could be at a wine bar. It could be while you’re killing time waiting for a train. You name it.
In some of those conversations, they start to enter into a deeper, perhaps more philosophical element of finances where you’re asking about “Have you ever made any big financial mistakes?” or “Do you have any regrets related to financial decisions that you’ve made?
And that can start to open some doors to making sure that all of those financial cobwebs come out and are aired as part of the relationship before you take the next level of commitment.
And then I think the highest level that you can go to, and probably the most helpful level for the relationship overall, is asking a lot of questions related to values: some of those values that we’ve talked about in the previous discussion, where you’re asking things like “If you had unlimited funds and you weren’t really concerned about making your budget work this month or paying the rent, what would you want to spend your money on?”
“What do you most enjoy spending your money on on a month to month basis? What are those purchases that make you really excited and that you think about for a long time after you’ve purchased them?”
Asking questions like “If you had five years left to live and it was going to be a healthy five years, what would you want your life to look like? How would money factor into that?”
For a lot of people, I think some of those questions are just uncomfortable right off the bat. We’re not used to having discussions like that.
But when you give people the space to answer a really big open-ended question like that that has a financial component, it will start yielding responses that are enlightening both on the type of person that you are and what you hope your life to look like, but also how money plays a role in that.
And it’s less about being concerned about paying off this payment this month, but it’s more like “This is what I want to save for. When we invest, this is what I want to spend the money on in 15 years, 20 years. I’d like to start a business.”
It could be so many different things. But that both opens some doors about what finances might look like currently and in the future, and also how the partnership is going to structure life together in the years ahead.
Andrew Chen 12:40
What are the specific types of financial values that couples should be actively trying to understand about the other person to make sure that these conversations don’t get so open-ended or meandering that they don’t actually yield important information that each person should know about each other’s financial values?
Is there a way you think about values “buckets” or categories? In my mind, I’m thinking maybe you want to know how the person thinks about debt and credit and student loans or whatever the case may be, mortgages.
In a financial planning context, is there a framework or a checklist that you have found helpful for couples to try to gather this information?
Kevin Mahoney 13:32
The reason I think even though they’re open-ended and may seem like they’re not sufficiently tied to money, at least in the abstract context, I approach it from that way because it’s often not the little things, the little expenses, or the day to day things that most impact our financial lives and our financial stability. It’s the big stuff.
When you have those conversations, you start talking about things like buying a house or owning a home compared to renting. And those are the bigger financial decisions that will really impact how much money you need, what that savings needs to look like, how much you’ll be spending on that goal compared to some other goals, and the more logistical aspects of it, like how much down payment is it going to require.
Those things unfold over time and will change with time, depending on what people’s earning potential looks like, how careers are moving, how the economy is moving, like the situation we’re currently in. And so I think those logistical aspects are important when you get to that point.
But I think when you’re about to enter into a long term relationship, it’s arguably more insightful to understand what some of those big ticket items are for each person. Saving up to launch a business is a very different use of money than saying “I want to travel abroad or I want to live abroad for some period of time.”
Those are questions that shift the needle more on personal finances within the relationship than some of the day to day stuff that, while important, is less so in the overall context of the relationship.
Andrew Chen 15:31
Kevin Mahoney 15:32
Does that make sense?
Andrew Chen 15:32
Yeah, it does make sense. Related question I’d love to get your thoughts on. Are there any red flags, signals, or indicators that you’ve seen in your practice experience that couples should be aware of because they likely indicate trouble down the road if you’re observing it already now?
And if so, what would be some examples that folks should keep in mind?
Kevin Mahoney 16:07
I’m grateful that I have not worked with any clients where one partner has hidden any significant financial information or done anything destructive financially behind the other partner’s back. I know that that happens in some cases, but I can’t speak to that specific set of circumstances.
But I will say one thing that troubles me and that’s very important to me, and I think it’s important for the success of the relationship over the long term, both financially and just the relationship as a whole, is what I generally label as financial equality or financial equity within the relationship.
I’d really like to see, when I’m having conversations with clients, that both partners are equally engaged in the financial discussions.
Sure, from an efficiency standpoint, it often makes sense for “You take care of the day to day, week to week, month to month budget. I’ll make sure our money goes into the investment accounts that we have and that asset allocation is appropriate based on what we’ve discussed.”
But I think the relationships are much healthier and are more nimble and flexible over the long term from a financial standpoint if both people are at the table, engaged in the conversation, not just talking through it themselves, and getting into some of those value questions and asking questions like “When you set up your investments before we were together, why did you do it this way?”
Having those back and forth discussions is the most valuable way to ensure that the couple maintains being on the same page financially and working toward those goals that they share in the relationship.
It’s when the conversation is really dominated by one partner and the other person is just playing a very passive role or has no interest that I think can spell trouble, if not in the near term, at some point down the line.
Especially in a worst case scenario where someone gets seriously ill or passes away and the other partner is left to fend for themselves with a lot of these issues, if they haven’t been engaged or haven’t been involved, it can be really difficult for everyone involved.
Andrew Chen 18:45
Yeah, that makes sense. It sounds like that’s true whether the lack of engagement is due to lack of interest or whether it’s due to just lack of parity in financial education and savviness, where the other person just says, “I’ll take care of that.”
It sounds like you mean it both ways. Is that accurate?
Kevin Mahoney 19:05
Yeah, it could be for any number of reasons. One thing you didn’t mention is even just confidence.
Because there are some people who are very hands-on with their money. Perhaps they were well-educated on finances when they were growing up and they feel good about it. They pay attention on a weekly basis.
And other people, it’s intimidating. It makes them nervous. They feel like they don’t know, and so they spend as little time on it as possible.
As that relationship comes together, that one partner is probably going to take the leading role on most of this stuff, if not everything. And that can work. I just don’t think it’s the most sustainable, resistant model that you could have for when those bumps come along the way, whether they’re external to the relationship and it’s an economic situation or something that happens within the relationship.
Andrew Chen 20:03
How do you nudge the person who is less engaged to become more engaged without being pedantic about it?
Kevin Mahoney 20:10
It’s challenging. For just the couple, if I’m the one who is more interested or if I feel more educated, I think it’s important for me to make sure that I’m soliciting those other persons’ opinions and questions and not shutting them down and being like “Hey, I got this. I know what I’m doing.”
So I think making sure that it feels like an open dialogue within the relationship. And then for people who engage with an adviser, in my role, I try to make sure that both partners are heard.
Oftentimes, I’ll find that one is dominating the conversation or has all the questions, and that’s great. I want to make sure those questions get answered.
But I also want to turn the floor over to the other partner and be like, “How do you feel about that?” or “What questions do you have on this topic?” so that it’s hopefully equal time or equal opportunity for both people to express their concerns, their fears, or their questions.
And then hopefully, that opens it up to being more involved down the road.
Andrew Chen 21:26
Cool. Let’s shift to new parents or young families. What are the biggest unexpected but important ways that a couple’s finances change once they have a baby that enters the picture…besides the obvious that expenses will increase?
Kevin Mahoney 21:43
I think everyone who has thought about this point in life will understand that childcare is often the biggest, although perhaps not unexpected.
But then in the unexpected category, I’d probably say it’s health insurance-related. It’s very important for people who are preparing to have their first child to understand what their insurance includes and does not include, to pay attention to whether premiums may rise substantially, depending on their family makeup.
And then specific to hospital stays, before the baby arrives, while in labor and afterward, understanding who your different caregivers are in that process, and are they in-network, out-of-network?
Everyone knows it’s unnecessarily complex and difficult to navigate, but just taking the time to ask those questions. Any provider that you’re going to go see, “Are you in-network to this insurance plan?
Calling your insurer and saying, “Here’s our hospital plan for the birth. Here’s the lineup of people. Are these people all covered?”
And if they’re not, figuring out what your other options can be. I think that’s probably one of the bigger surprises that can lead to higher cost that people would just assume, “These aspects of us having a child are all covered under our health insurance.”
There are so many different pieces to that puzzle that may not actually be the case.
Andrew Chen 23:30
Gotcha. Anything beyond health insurance?
Kevin Mahoney 23:33
Not that I think is totally unexpected. I’d actually say more commonly it’s the opposite where people assume that they need to spend a lot of money on all these different things based on advertising they might see or things that their friends have.
And I want to point out that this is specific to a particular demographic who has the resources and the network to have access to some of these things.
But for gifts that are given as part of the baby shower or friends who have already had kids, there are a lot of different opportunities to minimize your costs by getting things that are gently used, donated by a neighbor or a friend, asking family members to purchase certain things as part of a gift so that you don’t have to.
I think that’s something that people often downplay or overlook. And perhaps it’s helpful to think about that beforehand because when you’re in the moment and you’re tired and you’re stressed, it’s certainly more difficult to think about those options.
So having a feel for “Here’s where I can get some of these things” or “I should ask these people I know for help with this stuff before the baby arrives” can help to keep costs down to the extent possible in preparation for that stuff you can’t control in a lot of cases, like with the childcare.
Andrew Chen 25:08
Got it. Related to that, what are some concrete actions that new or would-be parents can take in advance to best prepare themselves financially for starting a family, whether it’s reaching out to their network or thinking about ways to reduce some of these costs?
What are some important concrete actions that parents can take to prep themselves? And when should they ideally be taking each of these actions?
Kevin Mahoney 25:38
One basic step, which we’re actually all going through in some form or another right now, is just ensuring that you have sufficient savings or cash available.
Right now in this pandemic, people may have certain things they want to do with their money or plan to do with their money, whether it’s investing more for retirement, paying off some student loans, some extra payments.
But right now, an important and invaluable thing to do is just hold on to that money to the extent that there’s no negative consequences in doing so, until we have more certainty and we understand a little bit better what the months and years ahead are going to look like.
Similarly, when you’re preparing for that phase in life where you have those new expenses, just being aware that “Instead of putting money that we have that’s a little bit extra and locking it away into a retirement account,” even like a 529 plan for college, these are all worthwhile goals. They’re not bad moves to make.
But it’s just making sure you can navigate those new phases where you’re still feeling your way through things and understanding what certain payments and costs are going to look like. I think that’s a very basic one.
Even for people who want to invest, if the timing of the baby’s arrival is far enough down the road, there are some cases where it might be appropriate to invest that money in just a taxable account that you can access at any time when you need it.
You don’t want to put money in there that you absolutely need in three or six months. But if you’re looking ahead a couple of years, even that’s an option to achieve the investment goal but also have money available for when the baby is six months or a year or you name it.
And then related to what we were just talking about, becoming familiar with the resources that you have in your community or your network.
A good example, in D.C. where I live, there’s a Facebook group that’s largely comprised of mothers, but there’s a good number of fathers there too, that, in theory, started in one neighborhood but has actually spread to a good portion of the city where people post useful information for young parents to know.
But they also really frequently say, “Hey, I have these extra diapers that we grew out of,” or “My child got this gift from a grandparent for Christmas. Never really played with it.”
“We don’t have the space for it. Anyone can come pick it up at our doorstep this week.”
Things like that are invaluable in a number of different ways because it can save you money. When you’re talking about toys, it can give your child a new form of entertainment that you don’t have to really go out and look for or fund the price of.
Similarly, planning ahead with family and friends who want to contribute in some way. Grandparents, in my experience, have great intentions that are often eager to do something nice for both the child and perhaps the parents, but that can often be in ways that the parents don’t really want.
So being upfront and saying, “Hey, we would be really grateful if you could make a diaper fund, or you just buy the diapers for us for a certain amount of time.”
There are a lot of useful ways in there to get exactly what you need and not things that you don’t and minimize your costs in doing so.
From a more tactical finance perspective, a flexible spending account (FSA) is an often underappreciated way to pay for a lot of things that a baby needs.
A lot of the typical things like formula, breastfeeding supplies, these are all things that if you have an FSA, a flexible spending account through your employer, that’s a “use it or lose it” account, so you need to spend it typically by the end of the next tax year.
You can go into CVS or similar stores and buy those things that you really need and are essential with that money that you’ve saved from your paycheck in the FSA account.
Things like that can’t necessarily chip away at the biggest expenses, but they can help keep everything else under control.
Andrew Chen 30:23
Just for folks who aren’t yet knee-deep in the Google research on planning for all the things they need to have ready for a new baby coming into the family, what are the big categories of expenses that new parents will suddenly find themselves dealing with once their newborn arrives, as you’ve seen?
Kevin Mahoney 30:47
We’ve talked about childcare. I think diapers and, in some cases, formula can certainly add up.
A crib is a good example. A new car seat is something that’s very important for the safety of your child, but a crib that’s in good condition can be taken from someone else, as long as it’s intact and all the pieces are there, without you having to spend a lot of money on something like that.
Those first three or four items that I mentioned are often very specific to each family and each new child that arrives. But keep in mind that a lot of those other expenses can be greatly reduced if you can find creative ways to get in touch with the people who no longer need them.
Andrew Chen 31:52
Any other tips or hacks for helping to reduce some of the expenses that spike when a newborn arrives?
Kevin Mahoney 32:01
For the childcare front, it’s not going to reduce the overall cost, but a Dependent Care FSA is a way to capture some tax benefits when you’re putting away part of your paycheck and then apply that money that you’ve saved toward childcare.
I also think for a very small percentage of the population, but I will bring it up just because I’ve had a number of clients who have been in this situation, everyone knows daycare is not cheap, particularly in high-class cities where a lot of us live.
For people who have a spare room in their house and are willing to have someone live with them, going the au pair route often is one of the least expensive ways to go, just because of the cost savings you theoretically get by providing housing for someone, providing some of the meal costs for someone.
It’s not for everyone. A lot of people aren’t comfortable having that other person in their house. But I think it’s worth raising for people who haven’t thought about it.
I can speak for myself. When my wife first floated the idea, it felt like such a foreign concept to me. I didn’t have a nanny or au pair growing up, so I definitely balked initially at the idea.
But when you look at the daycare costs, it’s really tough to swallow. For a lot of people, they’ll do whatever they can, whether it’s putting a nanny with another family or two that you know in the area, or going the au pair route can be a strategy that some people aren’t familiar with.
Andrew Chen 33:56
Did you guys do the au pair?
Kevin Mahoney 33:58
We did do it temporarily.
Andrew Chen 34:01
Kevin Mahoney 34:02
Overall, we had a good experience. It can certainly be hit or miss, depending on how the relationship unfolds with the family and the au pair, but it also can have a lot of benefits.
More flexibility compared to a strict daycare schedule. It offers more flexibility, in many cases, than a daycare schedule would allow.
Andrew Chen 34:34
We thought about the same as well. We considered that the au pair relationship is usually one year, then the person rotates out. Maybe they can extend for a second year, but they often will want to go to a second location just to broaden their experience.
Was that your experience? And the transitional issues where the child was becoming attached, how did you guys find that?
Kevin Mahoney 34:59
The programs we looked at, the au pairs are allowed to stay for two years. So if you get a new au pair who is not currently in the U.S., they can live with you for two years. And we found, being in D.C., similar to your point, being in a big city was appealing to a lot of the au pairs compared to being in further out locations.
We actually preferred the option where the au pair could only stay with us for one year, but they also had a year of experience working in the U.S. in this role.
For children at a young enough age, the transitional part we didn’t find was detrimental in any way. They adjusted very quickly. I think they were young enough that it wasn’t a huge shift for them.
That was our experience.
Andrew Chen 36:04
Gotcha. One thing I also recall, because my wife and I were considering this at the time, was that there’s strict hour limits.
I think 35 or 40 hours, depending on the agency, and you have to give the au pair a continuous weekend break. It’s been a while, so please correct me if this was not your experience.
There were definitely gaps where there would not be childcare because the au pair needs to have a break. So I was just curious if that posed any challenges at all or how you guys managed the schedule so that there would always be coverage.
Kevin Mahoney 36:45
The programs that we looked at, the au pairs were allowed to work 45 hours a week. And you’re right. They need a day and a half consecutive off.
In theory, it doesn’t have to be a weekend, but that’s obviously the most common time for most people. It’s different for everyone’s work situation. 45 hours is enough that, for a lot of families, they could do a fairly typical Monday through Friday schedule and still be able to cover most or all of the workday.
And then, when I talked about that flexibility piece, if one of the parents has a more flexible work schedule, that’s where if there’s a certain number of hours during the week that you don’t need coverage for, you can shift it to the nighttime so that the parents can go out on a date night. That’s when you can just move hours around a little bit more.
That won’t apply to everyone, of course, but if one or both parents does have some flexibility to work from home (obviously, things are a little bit different now than when we were looking at it), but that can free up hours to help you with your adult lives and not just taking care of the work hours.
Andrew Chen 38:05
We talked about some of the categories of expenses that spike and some of the ways that you can manage those expenses. All in, how much do you recommend couples have saved up by the time a newborn arrives so that they’re well-prepared and can focus on the kid and not be stressed out about money?
Kevin Mahoney 38:28
I hope I don’t disappoint you here, but I don’t have the specific number for you here. It actually reminds me of a lot of what we read about saving for retirement where you’ll see “You should have “X” amount saved by the time you reach age 35,” or “By the time you plan to retire at age 60 or 65, you need to have $1.2 million.”
Those numbers are nice in theory. In the context of retirement, they’re based on a lot of assumptions that we have no control over and that they can tweak as they see fit to hit that number.
But in the context of saving for kids, there’s only so much that people can do to save on a monthly or annual basis. I’m not trying to make this punitive for people and say, “You need to stop going to Starbucks so you can have more on hand when your child arrives.” That’s not the way I prefer to approach budgeting and spending and saving in this case.
So this ties into what I was saying about making sure you have enough cash on hand and perhaps holding on to some money that you might otherwise be interested in putting in different places. If you do plan to invest it, maybe it’s better investing it in a taxable account that you can take out without a penalty compared to a retirement account.
But other than that, I think the more important way to look at it is what does your savings strategy overall look like? What does your own savings plan look like? And can you improve that?
Are you automating your savings so that you don’t have to do it manually at the end of the month, and instead, it hits your checking account after you get your paycheck, and then a day later, “X” amount is moved into your savings account?
Once or twice a year, are you increasing your savings amount by a small percentage so that you don’t really feel the pain of doing that, but at the same time, that percentage is incrementally going higher over time?
If people are doing those things, then you’ll have this savings bucket that, depending on how child costs unfold, maybe it goes into the emergency fund or stays as part of the emergency fund. Maybe there is enough left over that more can be invested in your IRA next year.
I think the better way to approach it is just focus on how well you’re doing at savings and making sure that you have it accessible to you in the time before the baby comes, and then seeing how things go, trying to keep costs under control to the extent possible. And then if you’ve done well and you have more left over, then you put it out into these other goals that you’re working on.
Andrew Chen 41:32
Yeah. It makes sense at a high level. Are there any heuristics or rules of thumb that you advise clients, or it’s really just very individual-specific based on the things that you mentioned?
Kevin Mahoney 41:42
I think it’s individually specific. And part of the reason I feel okay saying that, in addition to how I feel about just having a good savings strategy in place, is that kids aren’t cheap, and a lot of people struggle to save in general, but they manage to make it work.
Somehow these kids arrive. People are really stressed about the cost before they come. And it may not be easy, and things may be tight, but it becomes part of your monthly spending.
I have kids who are in the toddler age now, and so our grocery bill is just higher than it was when it was the two of us because they’ve added to what we eat each week. Sure, our grocery costs have gone up, but it’s just flowed through our budget. And as we adjust each month or every six months based on what we’re earning and what needs to go out the door, we just figure out where to tweak here and there to make it work.
It’s really just most important, in addition to that savings strategy piece, understanding what those big costs are we’ve talked about, like figuring out those childcare numbers and what that looks like, the more expensive purchases that you might have, like the car seat or ongoing diaper costs, whatever it might be.
Just doing the math on that and getting a sense for what the big ticket items are. The smaller stuff, you’ll figure out. And to the extent you have savings, you can use it for that.
Andrew Chen 43:29
Do you recommend new parents buy life insurance?
Kevin Mahoney 43:33
Yes. Plain term life insurance does not need to be expensive.
The most common mistake I see parents making is that almost all of us are introduced to life insurance through our employer. We fill out those HR forms when we start or when we go through open enrolment every year, and they’ll offer you the life insurance option.
Almost everyone checks the free option that’s a benefit. Some people will add on the additional math.
But that insurance doesn’t stay with you if you leave your job. It’s often more expensive than what you can get on your own just through the private market. And it’s probably not enough for what you need.
I find that a lot of families are surprised at exactly how much coverage they would need if they’re trying to have funds available for the big goals that they’re really trying to replace income. We’re talking about paying for college, paying off the mortgage, and any other supplemental income that the remaining partner might want to have.
So going online, there’s a website that is called lifehappens.org. They have a good calculator that parents can use to determine what coverage amount they actually need. And then going online and just looking for some quotes.
Most parents will find that they’re only going to be spending $30-60 a month probably at most on term life insurance, given the exact coverage that they need more or less for those goals that I just named or anything else that might be important to them.
That’s really all that I think people need. Beyond that, their money is better off toward other uses, like saving for retirement in a low cost index fund.
Andrew Chen 45:43
Are there any scenarios where whole life might make more appropriate sense for new parents? If so, what are circumstances or facts that would tend toward that direction?
Kevin Mahoney 45:54
Generally, the answer is no. Term life insurance is just so much less expensive.
Life insurance shouldn’t be viewed, especially at this age, as an investment. Get life insurance to replace the income that you need if something happens to one of the parents, and then invest on your own through your 401(k) or on your own through an IRA, at a place like Vanguard which offers low cost diversified index funds.
You’re better off, for the long term, both probably from a return standpoint and from a cost standpoint, if you keep those two things separate and get exactly what you need in both of those categories than trying to buy a product that combines the two in unclear ways that won’t work for almost everyone in this group.
Andrew Chen 46:48
Where does life insurance stack up in a household budget, in your view, compared to all the other expenses that new parents are prioritizing? We’ve talked about how budgets are tight. When a kid enters the picture, it’s even tighter.
Where should life insurance rank compared to other expenses in the budget?
Kevin Mahoney 47:07
I think it’s relatively low, especially if you think about a lot of the things we’re willing to pay for gladly. I’m talking about a gym membership or some of the fitness classes. I could go on and on.
But it’s not that expensive. It’s not as expensive as I think a lot of people fear it will be.
And I think that’s often because people hear those horror stories about the really expensive insurance that, if you’re a teacher, oftentimes people will come into the school and they get access to sell these products to teachers or however else you may find your way into life insurance that’s not term insurance. It doesn’t have to be that expensive.
Beyond that, just looking at what you get for what you pay. We all know how much people want the best for their kids, and paying this relatively small amount to make sure that your children and your family is truly protected if something happens to you is a no-brainer. It’s just the type of thing that you need to make a high priority and fit into your budget.
Andrew Chen 48:23
Got it. Cool. I would love to also get your thoughts on what the specific tax benefits are that are available to new parents.
And if you have any tips for new parents that they should keep in mind to maximize those benefits, whether it’s timing income, expenses, or deductions, or even trying to time the kid to come out before the year’s end, for example, managing your income levels, etc.
Just help us understand, what are the tax benefits available for kids and how to best utilize them?
Kevin Mahoney 48:57
A lot of my adviser colleagues like to joke that tax invocations shouldn’t drive a lot of the major decisions you make in life. It’s important to keep them in mind, but I’m not going to suggest that anyone try to plan the arrival timing of their baby to help themselves on the tax front.
I think we’ve talked about the big ones. The Dependent Care FSA can certainly be helpful, using just the regular FSA component to buy a lot of those supplies (breastfeeding supplies, for example) that you’ll need for your baby.
What we haven’t talked about is the 529 plan and the tax benefits that you can get when you want to save for college starting at a young age, because that’s a question that I get a lot and a lot of young parents are interested in doing.
So feeling confident to go ahead and invest in that account, but just understanding how you value college, what percentage you want to cover for your child, the type of school you would like them to go to.
Some of these assumptions are difficult to make when the baby is a newborn, but it can help to inform just how much of your income you’re putting into these accounts and when you increase those levels or decrease those levels.
Andrew Chen 50:28
Got it. Cool.
Kevin, thanks so much for taking the time to chat with us. This was really interesting to hear about the observations you’ve seen with new parents in your practice.
Where can people find out more about you and your financial planning practice and services?
Kevin Mahoney 50:47
My company’s website. The company is Illumint. The website address is illumintfc.com, F for financial and C for community.
I write a monthly article for Forbes, so check me out there in their adviser section.
And I have a podcast about housing decisions and how that plays into our personal finances and all of these tradeoffs that we’ve talked about today. Rent, Move, Buy is the name of the podcast. You can find it on Apple, Spotify, you name it.
Those are the big ones. And then people are always welcome to reach out to me over email or whatever social media platform they prefer.
Andrew Chen 51:34
Great. Wonderful. We’ll make sure we link to all those things in the show notes.
Thank you so much again. I look forward to sharing this with our audience, especially the new parents out there. I’m sure they’ll get some good value out of this.
Thank you so much.
Kevin Mahoney 51:45
Yeah. Thank you for having me.