MoneyWise

October 21, 2007
article by Amy Baldwin


STAY-AT-HOME PARENTS WHAT YOU SHOULD KNOW

Honey, let's talk about money

Play dates. Temper tantrums. Hugs and kisses.
A day's work for a stay-at-home mom or dad.
Hardly time to shower, much less contemplate boring home economics, like personal finance, right?

Time out.

If you quit your job to be Mr. or Mrs. Mom, there are some financial chores you must tackle between piano lessons and the PTA.
"You need to be prepared in case of an emergency, if something happens to change the structure of your family," said Anne McPhail, senior vice president and certified financial planner at Novare Capital Management, an asset management firm in Charlotte.
In other words, unexpected things happen. Your spouse could become unemployed or disabled. You could divorce.
Don't like thinking of worst-case scenarios? Sorry. Reality bites.
If you need positive motivation for getting money savvy, consider this: Parents who stay at home are in prime position to teach their children the value of money, McPhail said.
"In order to be a good financial role model, you need to know something about it," she said.
In Charlotte, a bigger-than-average percentage of families with children under 18 have a parent who stays at home. It's 22 percent, compared with 15 percent for the overall U.S.
What do the nonworking better halfs need to know about money? Here are the basics to get started.

Know where you stand
"It is important at the bare minimum to know what your family's balance sheet looks like," McPhail said.This means making sure you understand what your family's assets -- bank/brokerage/retirement accounts -- and liabilities -- mortgage, credit card debt, car loans, student loans, etc. -- are. It will help you come up with a family budget, so you are not always stressing over what you can and can't afford.

Continue funding your nest egg
Your current "workplace" doesn't have a 401(k). But you could and should contribute to a spousal IRA (individual retirement account) or a spousal Roth IRA. After all, if you were working outside the home, chances are you'd participate in a retirement plan or at least have one available to you.

Invest $4,000 a year - the max allowed in an IRA - for 40 years and at a 9 percent return, you will have saved $1.35 million, said McPhail. Quick explainer on the different accounts: In traditional IRAs, your contributions are tax deductible, so you owe taxes when you tap the funds. With Roth accounts, you contribute post-tax dollars, so you aren't taxed on withdrawals or earnings.

Maintain your good name
You should keep credit cards in your name and use them (just pay them off and don't rack up debt), said Tom Nichols, certified financial planner at Rinehart & Associates in Charlotte. You want to maintain a credit history in case your spouse dies unexpectedly or you divorce and you need to buy a car or refinance your mortgage.

Insure your "earnings"
Lots of couples think they need to buy life insurance to replace only the working spouse's income. But you need life insurance, too, because if you die, your other half would need to hire someone to take care of the kids and clean the house. If you were thinking of going back to work at some point, your spouse might want to replace that future income, too. Financial experts generally recommend that your insurance coverage equals eight to 10 times your gross annual income. Term life is your most economic option, especially for young people without a lot of money yet. You are paying for coverage for a fixed period of time, like 10 or 20 years. Whole life has a savings component, too, so it costs a lot more.

In a previous column, I reported that a 30-year-old nonsmoking man or woman will pay $500-600 a year for a 20-year, $500,000 term policy and between $4,200-4,700 for a whole life policy.

But how much do you need if your job is at home, meaning one that you aren't paid for? Nichols said you need coverage for at least as long as you have children at home younger than school age. He crunched some numbers. If you want to generate annual income of $50,000 for 10 years -- assuming 3 percent annual inflation and 5 percent annual growth -- you are looking at a $440,000 policy.

Stay sharp
You need to keep your brain engaged, McPhail said. That means volunteering in your community or occasionally taking on part-time or freelance work. Or you might keep up with networking groups or make sure to maintain your professional credentials. You might want to rejoin the workforce someday -- or suddenly need to. Besides, it beats being consumed by nap schedules and homework.

Thinking of Being a Stay-at-Home Mom or Dad?
Before you ditch staff meetings for play dates, you should plan ahead and budget accordingly.

"What are the areas you are going to cut back on? The cleaning person? Going out to dinner? You have to be careful when you are looking at cutting your income potentially in half," said Todd Calamita, certified financial planner at RBC Dain Rauscher in Charlotte. "You have to have a very good budget in place."

Calamita recommended going back over six months' or a year's worth of household expenses. Ask yourself if each expense was a need — i.e. mortgage, property tax, insurance, car payment, basic food — or a want, such as happy hour drinks, movies, clothes and vacations. You need to figure out if your spouse's income can cover at least the basics and hopefully a little more. Don't forget that having a baby — even without the day-care expense — will produce other necessary expenses, such as diapers, pediatrician visits and a college fund, if you want to start one. — AMY BALDWIN