A baby makes three

Question: My wife and I (30 and 33 yrs old) are expecting our first child this week, and we are trying to determine the best way to organize our savings. I have some credit card debt, which I am paying around $700 to $1800 a month towards, and expect to pay it off in the next 4 months. Other debt is our mortgage (4.75%), a car loan (2.9%), and a home improvement loan (9.99%). In terms of savings, we are both putting money towards retirement at 10% plus a company match and putting $3000 towards a Roth IRA a year. Currently, we have around $140K in retirement savings and around $8K in liquid rainy day money.

Once the credit card is paid off we are debating where to put the additional cash flow. Should we buy a 30 yr $800K term life insurance policy? Also, should we invest in a 529 College Savings plan, pay down debt, or boost retirement savings (401k, 403b, and IRA) towards legal maximums? Timothy, Victor, NY

Answer: Congratulations to you and your wife. And you're making good progress on getting your finances in better shape for your growing family. But in reading your email I want to emphasize the importance of buying life insurance now that there are three of you at home. And, as important, do you have a will?.

The reason to buy life insurance is to protect your loved ones from your untimely death. For most people, that means term life insurance, which is what you're considering. Term life is a pure death benefit. It's a simple product that allows for extensive comparison shopping. You'll want a low cost, plain vanilla policy from a blue chip, financially strong insurance company. Both you and your wife should have coverage.

How much life insurance should you own? You mentioned $800,000. An industry rule of thumb is 5 to 10 times annual income. It's a reasonable starting point. In doing the calculations a major factor behind the wide range is whether you want your child to attend a public in-state university or a private liberal arts college.

Here is a rule of thumb calculator from Metlife. The Consumer Federation of America offers a free basic overview of all kinds of insurance, including life insurance.

You should also get a will or update your will.

To the rest of your question, these are all good goals. I would recommend putting a priority on boosting your emergency savings and paying down debts. The combination of the two will improve your overall household financial security.

So, how about concentrating for now on increasing the amount of money that goes into the emergency savings pot. And once you get rid of the credit card debt, the next debts to target are the home improvement loan and the auto loan.

I would put less of a priority at the moment on funding a 529 college savings plan. You might want to open up an account--most state sponsored plans only require an initial payment of $25 to $30--and let relatives know about the plan. At the hiolidays, birthdays and other celebration many peope today would rather contribute money to a 529 than give a toy. You can always add to the 529 later.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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