Why having a baby requires a lot of financial planning
Many working women choose to quit or take a long break when planning for a baby. Thus, in such a situation, the reduction in household income can be a source of great stress.
They went to school together. She was better in studies and a class topper. In college, they fell in love. She got into a better ranked management school, and at placement, a better offer. They got married. They had a child. She simply fell off the career curve.
There is a lot of conversation about women who work and those who choose not to. What many do not understand is how tough it is to leave an infant at home and return to work. There was a time when severe economic constraints made it compulsory for both the man and woman to work. With the new economic prosperity, many highly qualified women are making the choice to not go to work.
Workplaces are designed and managed primarily by men. Performance standards are set by men, and so are expected behaviours for business activities and deliverables. What women can solve over a phone conversation, men like to deal with personally by sprinting across the city. While women can resolve a complex team task from their desks using a chat window, men need a team meeting. Women find it tough to perform and grow in workplaces where wearing the pants is preferred to bringing a feminine touch to work.
Workplaces may solve this problem as more women move up the ladder, but finding solutions for the infant at home has not happened to the satisfaction of the young mother. Except for working from home, no other choice matches the needs of the infant efficiently. The erratic work hours, the inability to respond to mails and calls instantly, and the rigours of coordination while working alone, sets the woman back. Employers provide all-day parking facilities, but an in-house crèche that helps a working mother is not a priority. Many women thus choose to quit or take a long break. What are the personal finance implications?
The family needs to prepare to switch to a single income. Without advance planning and a clear understanding of what that entails, the reduction in household income can be a source of great stress. Household helps and daily wage workers return to work too soon after delivering a child, as their households cannot suffer the loss of income.
The problem in dealing with the switch is the inability to differentiate between mandatory expense and discretionary expense. In what we know as “lifestyle creep”, a lot of discretionary spends end up becoming necessities with time. Does the household need two cars? Is it essential to renew gym and club memberships that are sparely used? Is the expense on entertaining and going out excessive? Little expenses add up, and it is important to agree on what is essential and what is not. The single income should cover these and leave a surplus for emergencies.
There are unexpected expenses that come with the birth of a child. Young parents discover to their dismay that insurance does not cover the frequent trips to the pediatrician. Some young parents unfortunately have to deal with special medical situations. Insurance policies for neonatal and infantcare may not cover all these situations, and could entail large additional expense.
There are other costs of supportive help at home, increased outlays for infrastructure to house the new born, and additional expenses on ceremonies and rituals that bring a flow of guests who have to be taken care of. Young families find that expenses shoot up unexpectedly after the child arrives.
A young household will need time to prepare adequately before having a child. The woman will need to build a corpus from her income so she can draw on it when she takes a break. She would also want to have worked long enough to establish her career and credentials, so she can return to work when she is ready. She would also want to provide for the expenses expected with the arrival of the child, by saving in advance. The man would additionally have to ensure that he has achieved stability in his career to not put the new single income family at any risk of inadequate or irregular income.
The insurance and investment needs of the new household also multiply. Adequate insurance cover is a must. It is important to cover the needs of the household for a period till they have enough assets to fall back on. A term insurance that kicks in and supports the family in full should have been taken and paid for before the family plans for a child. So is the case for an adequate and comprehensive medical insurance.
The arrival of the child is also the time when the family begins to seriously act on long-term goals. Young couples who till then would happily spend their incomes would now dream about the future for their child and what they could do to secure and nurture it. Having a regular saving habit much before the child arrives helps. A family that has been setting aside 20% of its income would have made it a habit and persist, or do better as time rolls.
Many argue about the merits of living for the present and dismiss financial planning as too conservative and cautious. Major events like the arrival of a child can jolt careers, modify priorities, and make substantial changes to incomes and expenses and is therefore, a classic example of a goal that needs advance planning and adequate action.
Parents who push newlyweds into having a child early should back off and allow the couple the space and time to prepare themselves. Many young couples are too proud and independent to seek help from others for their personal financial situation. It is time we celebrated that attitude to take charge. We haven’t found a solution for the young mother’s career yet. We could at least solve some of the personal finance problems so that she can enjoy her new motherhood.
(The author is Chairperson, Centre for Investment Education and Learning)