What Financial Steps Should I Take Before Staying Home With My Kids?


From Health magazine
Q: I just had my second child and am considering quitting my job. We should be able to get by on my husbands salary, but what other financial considerations should I take into account?

A: Before you make a move, make sure you and your husband have saved up three to six months worth of your expenses so you have a cushion if your husband loses his job.

Also, buy both life- and disability-insurance policies before you quit. (Your husband, as the breadwinner, should have both, too.) The American Council of Life Insurers recommends getting policies that are 10 times your current salary; you can also calculate how much to get based on your circumstances on their website. Many people think that only working people need this coverage, but thats a mistake. Just think: If something should happen to you, the cost of replacing all the services you provide for your kids would be enormous. You are your childrens full-time doctor, chauffeur, teacher, day-care provider, and more. In fact, if the typical American stay-at-home mom got paid, shed earn more than $116,000 a year for her work, according to Salary.com.

One final bit of info: Keep saving for retirement. The average married woman outlives her husband by 15 years. Try to set aside as much money for retirement as you did when you were working. Invest it in an individual retirement account (IRA) in your own name; you can put up to $5,000 in one this year.

Q: After the stock markets dismal year, Im tempted to stop making contributions to my 401(k)—just until Wall Street settles down. Is this a good idea?

A: The short answer: No. Its a bad idea if youre investing for the long-term, meaning your retirement is a decade or more away. The problem with stopping your contributions is that none of us has a crystal ball to tell exactly when the stock market will recover.

And if you put off investing until the market improves, youll miss out on the opportunity to “buy low and sell high,” which is time-tested financial wisdom. And though its tempting to switch out of stocks into less-risky investments, dont: Youll need stocks to help you recoup your losses once the market rebounds.

Take comfort in knowing that stock returns during each decade since the Great Depression have averaged out to around 10% a year—even during those decades when the market suffered big losses. After the 1987 crash, it took just less than two years for stocks to recover. By making regular contributions to your 401(k), you can ride out the volatility on Wall Street and still have a nice nest egg for your golden years.