7 Ways to Financially Prepare for a Baby

Financially Preparing for a Baby

Preparing for a baby takes a lot of work and energy — both spent on practical matters and things just for fun. It’s easy to get lost thinking about what colors to paint the nursery, how you’re going to afford to buy everything your baby might need, and trying to brainstorm the perfect list of names.

And of course, there’s the financial changes that come with a growing family. There’s no avoiding the fact that kids cost money — but that doesn’t have to be something new parents panic over.

Whether you’re expecting right now or planning for the future, you can start financially preparing for children. Use these 7 ideas to get you started.

Establish a Baby Savings Fund

Even though you may have a separate emergency fund established, you should consider saving up extra in light of your new addition.

What if your car were to break down, or your roof were to have a leak — along with unexpected expenses for your child? Your emergency fund could get depleted quickly.

It’s a good idea to save extra once you have someone who depends on you and the care you provide. You don’t want to have to worry about whether or not you can afford to fix, replace, or purchase something you didn’t plan on during a time that’s supposed to be happy and positive for  your household.

Adjust Your Budget

With any major life change, you should rebalance your budget. Adding a new family member to the mix is going to increase your expenses, so you’ll need to account for them.

Diapers, formula, daycare, furniture, and clothing are going to be new expenses for you. Write down a list of what you need and what you’ll likely want and estimate how much these new line items will cost.

It’s important to do this as soon as possible.  You might need to cut back in other areas, and that will be easier to do now before you have your hands full with the new addition to the family.

Figure Out Your Income

Will the amount of money you have coming in change once baby is here? Has one of you decided to become a stay at home parent, or will you be taking additional unpaid time off?

Nail down how much you’ll have coming in during and a few months before your baby is born, and don’t forget to check your projected budget against this number.

Also, it’s extremely important you review your employer’s policy on maternity and paternity leave as they all differ. This can greatly influence how much you’ll need to save up.

Knowing how much you have to live off of goes hand in hand with adjusting your budget. If your salary is decreasing, you’ll need to learn to live on less. Saving becomes even more important.

Review Your Spending

If your income and expenses are changing drastically, and you’re finding that money is tight, you might want to think about cutting back on some luxury expenses. These include things like going out to eat, beauty appointments that occur every month, and buying clothes and accessories.

You can also look at cutting cable, exchanging a pricey gym membership for a cheaper one at a smaller organization, or calling service providers to negotiate cheaper rates.

Put the extra money you “find” in your budget toward your list of baby necessities or savings.

Keep Your Baby Purchases in Check

The “fact” that children will cost $245,000 to raise gets thrown around a lot. Children do cost more money, but the total cost is within your control. Children cost as much as you spend on them.

You don’t have to go overboard when buying things for your kids, especially when they’re newborns.

Focus on getting things second-hand, whether they’re hand-me-downs or from garage sales. Babies grow fast! It’s not worth the money you’ll spend to buy them, say, brand new clothing when they’ll grow out of it in a few months.

Review Your Health Insurance Coverage

You’re going to be incurring a decent amount of medical costs throughout a pregnancy if you’re not covered appropriately under your insurance.

Review your health insurance plan and see what it covers, and what it doesn’t. If your spouse has access to another plan through work, check to see if their coverage is better.

This will be helpful when figuring out how much you need to have in your baby savings fund.

Consider Life Insurance and Estate Planning

Do you and your spouse have adequate life insurance coverage? This is an important factor to consider when bringing a child into the world. Life insurance is a necessity when you have others depending on you.

Something happening to you or your spouse means loss of income and loss of help with childcare. Both are equally important. Life insurance will allow your financial situation to remain stable throughout rough times.

Additionally, consider estate planning — yes, even if you’re younger. This will ensure your children are taken care of according to your wishes should something happen.

Otherwise, it’s up to the courts to determine their fate. Don’t let others decide what kind of future your children will have.

Get to Planning!

Hopefully you have more than enough time to create a plan and see if it works for you before your baby arrives. By following these seven tips, you should be in great financial shape when your child is born. The goal is to enjoy parenthood without any major financial issues getting in the way!

5 Ways to a Happier Financial Life

Have a Happy Financial Life

This week on The Money-Guy Show, Brian and Bo review a piece from The Wall Street Journal’s Jonathan Clements. Clements shares the 5 keys to living a happier financial life in his recent article from a Sunday edition of WSJ.

Who doesn’t want to learn how to live a happier financial life? Money can be the cause of so much stress, but financial success isn’t as complicated as some think it is. Read on or listen in to find out what you can do to be happier.

Commuting Is a Huge Waste of Time

The first point Clements writes on: commuting destroys our happiness. Many of you can probably relate! Who enjoys being stuck in traffic for hours on end?

Clements cites a Swedish study that concluded longer commutes increase the risk of couples separating by 40%. He concludes the trade-off of dealing with a stressful drive into the city for a larger house in suburbia isn’t worth it.

Have Humility When Investing

Clements highlights that, as investors, we need to have humility. So many get caught up in trying to beat the market — but remember that “before costs, we collectively earn the market’s return.”

There’s also the issue of encountering high internal expenses when actively trading, although Bo and Brian note that fees have been decreasing over the past few years. They’re no longer the end-all-be-all when it comes to choosing what you invest in. Be smart about it.

Focus on Lowering Fixed Expenses

Clements says a third of the money typically spent in a household goes toward housing. By keeping housing and transportation costs down, we’ll have more money to spend on discretionary expenses, and we’ll be able to save more for retirement. Ideally, housing shouldn’t be more than 25% of your gross income.

Spend Money on Experiences

The guys are huge fans of spending on experiences rather than things, and couldn’t agree more with Clements on this point.

Brian touches upon the fact that when loved ones pass, we’re only left with memories. Similarly, when we pass, we can only take our memories with us. Make them count!

Don’t Work Just for a Paycheck

We all need to get paid, but working solely for a paycheck can be draining when you hate your job. Plus, what we enjoy doing early on in life might not make us happy later on.

Going back to the previous point, if we keep fixed expenses low, we can save enough to retire early, or at least take a paycut to transition to a better job in the future. Brian and Bo recommend doing what you love so it never feels like you’re working.

What Are You Doing to Live a Happier Financial Life?

These 5 keys to living a happier financial life aren’t extreme  or hard to live by– they’re common sense. If any of these issues resonate with you, then maybe it’s time to make a change so you can increase your happiness.

What Are Mid-Term Goals, and How Can You Plan for Them?

Mid-Term Goals

What kinds of financial goals do you want to work toward?

In the short term, you may like to pay off your credit card with the outrageous interest rate and to tuck away some money in the bank for an emergency fund. Perhaps in the long-term, you’d like to put a bit away towards retirement.

But what about preparing for all the things you hope to do between now and retirement? These are your mid-term goals, and they can be tough to identify and plan for. It may take a long time to achieve them, they can involve large sums of money, and they can be easy to push off in favor of shorter-term projects.

But don’t fall into this trap! Instead, educate yourself and devote a little time to thinking about those mid-term plans. Here’s how you can get started.

Find Your Mid-Term Goals

Planning for intermediate financial goals is important. But what sort of goals are we talking about here?

Mid-term goals usually happen after you’ve graduated college, secured a job and really started your career — but before you start dreaming about your day-to-day retirement schedule for when your working career is over.

In the next three to ten years, you may want to:

  • Buy a house
  • Pay for a wedding
  • Start a family or have another baby
  • Pay off student loans or go back to school
  • Go on a dream trip
  • Start a second career
  • Start a business

Many of us want to do all of these things, and it’s an expensive proposition.

With any goal, it’s essential to know exactly what you’d like to accomplish. Nail down exactly what you’d like to do, and then figure out how much money you’ll need to make it happen.

Tackling Your Mid Term Goals

One way to tackle all your goals is to sequence your goals. You’ll meet one goal, and then move on the next. Consider both the importance and the timeline of your goals.

Is there one that you’d like to do more than all the others? Which goal would you like to do in two years, and which goal would you like to do in five years? Use this to make your list.

Another approach is to save for all of your goals at the same time. Open a specific saving account for each goal and divide the money you have available to put away between the accounts (or use percentages to determine what amount goes where).

Set smaller goals for each year to remain motivated and keep those balances growing.

If you’re motivated by seeing higher balances and checking goals off of a list, you’ll probably prefer to sequence your goals. If you like the idea of pursuing all your goals at once, you might prefer the separate savings account method.

Take Care of Your Savings

Taking care of your money for medium term goals is tricky. You keep your emergency fund some place safe since it’s possible you’ll need it tomorrow. You invest your retirement money in tax-advantaged accounts like a 401(k) and a Roth IRA since you don’t expect to need it for years.

But what do you do with the money for all the goals in between? You want to preserve your savings, but you don’t want to lose out on growth if it’s going to take ten years to save up for your goal.

You want mid-term savings to be easy to access. It’s a bad idea to put the money in a 401(k) or another tax deferred retirement account as you’ll pay a penalty to access your savings.

Instead, consider a taxable investment account or a high interest savings account so you can reach your money without penalty — and give it an opportunity to work for you and compound.

Think About Your Timeline and Manage Your Risk

Since the timeline for your mid-term goals is shorter than your timeline for retirement, you’ll want to manage your risk carefully. You’ll need to strike an effective balance between protecting the savings you’ve worked so hard to accumulate while getting a bit of growth and offsetting inflation.

It depends on your timeline — is this a two year goal or a ten year goal? For more urgent goals, you can always use a high interest savings account or short term CDs. For goals with a bit longer timeline, you can consider conservative investments structured to preserve your savings in a taxable investment account.

There’s a lot of life to live between now and retirement. Start saving for your mid-term goals so you can create the life you want without worrying about how you’ll pay for it.

 

Recapping the 2015 Berkshire Hathaway Letter to Shareholders

BUFFETT

It’s our favorite time of year! Well, it’s close for financial fans and money nerds. Here’s what’s going down: Brian and Bo cover the 2015 Berkshire Hathaway Letter to Shareholders in this episode of The Money-Guy Show.

They’re excited to share these takeaways with fellow fans as there’s much that can be applied from this annual letter to our personal lives and portfolios.

In the 2015 edition of the Berkshire Hathaway annual letters, both Warren and Charlie shed light on the past 50 years of their partnership and what they hope the next 50 years will hold. Here are the highlights from each.

Highlights from Warren’s Annual Letter

Brian took tons of notes on Warren’s letter and shares the key takeaways with us:

Knowing the value of investments is priceless.

The $25 million purchase of See’s Candy, which had a $4 million cash flow with only $8 in net tangible assets. It was a great move that allowed the company to generate cash flow, which could then be used elsewhere. Brian likens this to putting your dollars to work for you in your portfolio.

Avoiding the “new paradigm.” This goes back to when the dot com boom occurred, and anything with “dot com” in the business plan was given huge valuations. As investors, we should be wary of this. P/E ratios of 200 are not normal, regardless of what pundits are saying.

A nugget of wisdom learned from Charlie: forget what you know about buying fair businesses for wonderful prices. Instead, buy wonderful businesses for fair prices.

We need to ignore market noise and focus on the basics. Warren also states you should only purchase Berkshire shares if you plan to keep them for at least 5 years. Brian says investors need to have a realistic time horizon when investing in stocks and bonds.

Warren is extremely against leveraged investments. Bo brings up that people are asking if they should mortgage their primary residence in order to invest the proceeds as rates are so low — and the answer is no!

Cash is to a business what oxygen is to a person – and people will panic in response to economic situations, we just don’t know when. Brian reminds us that having cash reserves in the form of an emergency fund is absolutely necessary.

Be aware of investments that require “sudden demands for large sums.” Brian gives the example that so many of their clients are set up for wealth and success, but they often get distracted by riskier investments that seem better. It’s key to stick to the path, because at some point, the music will stop.

Fight against companies that display “arrogancy, bureaucracy, and complacency.” As investors, we need to do the same for ourselves. Brian points out that so many people have a great income, but they’re not turning it into wealth.

Highlights from Charlie’s Berkshire Hathaway Letter

Charlie explains what the core competencies of Berkshire Hathaway are:

  • All employees should be invested in the company.
  • They want win-win results for everyone – employees and investors alike. Everyone should benefit.
  • Berkshire stays away from short-term executives. Those executives that make decisions should be there to face the results at the end.
  • They seek to minimize bad effects that come from large bureaucracies at headquarters.
  • They want to personally spread the wisdom they’ve attained throughout the years. Education is important.

What’s the Take-Home Lesson for You?

Whether you’re advanced in your knowledge of personal finance, stock markets, and smart investing, or just starting out and eager to learn the basics, there are important lessons to be learned from each of these letters. What can you apply to your own business or financial situations?