Ramit Sethi: How To Clean Up Your Finances Before Having a Kid
Written by
Adam Palasciano
Edited by
Rebekah Evans
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Having a child can bring great joy to you and your family’s life. It will also bring new expenses and financial responsibility for years to come.
On a recent episode of financial guru Ramit Sethi’s “Money For Couples” podcast, he spoke with Jason (a COO) and Megan (a flight attendant) — a couple that’s one month away from having a child but feel like their finances are in disarray.
The couple explained that they have a combined $3,073,000 million in assets. However, despite having accumulated so many assets, they’re mostly illiquid with only $27,000 in savings. They have a combined gross income of $21,408 per month but somehow rely heavily on credit cards, which has resulted in lots of debt. This is certainly concerning since the cost of having a child today is greater than ever.
Babycenter reported that the average American family spends about $15,775 to support a baby’s first year of life, thanks to inflation. To add, the cost of having a baby consumes about 27% of the average family’s income. The couple said they don’t have a plan so they spoke with Sethi to figure out the best financial next steps for their family’s future. Here was his best advice for the soon-to-be parents.
Also here are six tax benefits for new parents.
Take Caution in Being Asset Rich and Cash Poor
If you’re “asset rich” like this couple, odds are you’re spending money to maintain those assets. For example, if you own a property, there are plenty of ongoing expenses related to upkeep including property taxes, homeowners insurance and maintenance. You’ll need a significant amount of liquid cash to afford your assets.
Meanwhile, having very little cash on hand or being “cash poor,” could result in reliance on credit cards to make ends meet since most of your net worth is tied up in assets. So, it becomes important to reevaluate your finances before having a child. Determining how much money you’ll need to keep on hand and organizing your finances accordingly before giving birth become absolutely critical to maintaining financial health.
Determine How Long Your Parental Leave Should Be
If you’re offered parental leave as an employee, consult with your HR department to see what benefits they may offer. What’s the maximum amount of time off you’re allotted? What percentage of pay does your company offer during the leave period? Figuring out which parent will take leave at what times and how you’ll cope with potentially reduced pay during the leave period is crucial.
Cut Unnecessary Expenses
Welcoming a new member of your family is going to cost an arm and a leg, there’s no doubt about that. You might need to cut back on discretionary spending so you can comfortably afford the costs of having a new baby. Whether it’s dining out less or taking fewer vacations, increasing your cash flow will be important to stay out of debt and pay your bills.
Communicate With Your Significant Other
As they say, communication is key. This is true not only in the workplace but more importantly in your relationships. If you have financial concerns, speak up and have thoughtful conversations with your partner. If you’re going to have a child together, it’s important to avoid miscommunication about money and figure out how to effectively manage your finances as a team.
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