Starting a family is a momentous and life-changing experience — and it’s also is expensive. According to the U.S. Department of Agriculture, it can cost a middle-class family $233,610 to raise a child until they are ready to leave for college. It’s important for families to financially plan for this big step. Here are some key financial considerations and tips you should keep in mind as a new parent.
1. Several months in advance, do your research and create a new budget.
Starting a new family means dramatically adjusting your cash flow and lifestyle. Calculate items like baby clothes, food, formula, nursery items, and diapers. A significant new cost will be daycare, whether it’s a daycare facility or a nanny. Get estimates from multiple sources so you can plan effectively. Monthly full-time childcare can cost on average $1,000.
Include new medical expenses in your budget. Talk with your health insurance provider to find out how much coverage you have for hospital bills, such as ultrasounds, labor costs, vaccinations, and regular check-ups.
Try to pay off credit card debt before your child arrives. Also, establish an emergency fund. Aim to save at least three to six months of expenses.
2. Think about lifestyle changes.
In the future, you may want to buy a new home for your growing family; when your child is school age, you might want to move so they are in a good school district. Other lifestyle changes include factoring in the costs of activities like piano lessons, soccer team memberships, etc.
3. Determine how you want your child to be covered under a healthcare policy.
Having a baby is considered a “qualifying life event” that allows for a mini open enrollment period so you can make changes to your health coverage. If both parents are working, view each of your employer’s benefits to see which plan is most advantageous for the delivery and ongoing care.
Increase your Health Savings Account (HSA) contributions. HSAs are available to those in high-deductible health plans; it can can be used to pay for a variety of medical expenses. HSAs are different from Flexible Spending Accounts (FSAs) for medical expenses in that there is no “use it or lose it” provision; there’s no time frame in which you are required to spend the money.
4. Research your employer benefits.
Does your employer offer paid parental leave or a FSA (which allows you to save money for medical expenses pre-tax)? Talk to your company HR department. With a FSA, you can have additional money withheld to cover the cost of daycare expenses. This will make some of the expenses come out pre-tax and lower your taxable income.
If your employer offers a 401(k) retirement account, contribute to it so you can prepare for retirement. Many employers also offer a 401(k) match; find out about the contribution match levels.
5. Plan for your child’s education.
Start setting aside money to cover college costs. Talk to your financial advisor about tax-advantaged education savings vehicles such as 529 college savings plans.
6. Know of tax breaks.
Know of the tax benefits of having a child. The Child Tax Credit (CTC) provides a $2,000 tax credit per child, subject to an income phase-out starting at $200,000 for individual filers and $400,000 for joint filers. Research the Child & Dependent Care Credit if you are planning on using some form of childcare,. This reduces your tax liability by up to $2,100 if you have two or more dependents and have incurred more than $6,000 of qualified expenses.
7. Review your life insurance needs.
If you pass away, life insurance can bring your family some financial security by replacing the income needed to maintain their lifestyle. It can also help with outstanding debts, mortgages, and your child’s education. Two types of life insurance policies to consider are term and permanent. Talk with a financial professional to find the right life insurance policy for your family. Also consider disability insurance to replace lost income.
8. Have an estate plan in place.
An estate plan will protect your family’s future. Make sure you have the following in place: a will, a durable power of attorney (DPOA), a health care proxy, and a living will. Update beneficiary designations on accounts to include your child.
9. Talk to a financial advisor.
Talk with a financial advisor to protect your finances — now and for in the future.
Financial Planning with The Humphreys Group
Starting a family is one of the biggest and most exciting transitions in life. Reach out to The Humphreys Group today to start financial planning.