Financial advice for new parents
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Focusing on the big picture is not easy for most new parents. I’m currently learning, as my wife and I are expecting our first child in just a couple months. I couldn’t be more excited to meet our baby girl. However, I have to admit I’m nervous about the upcoming sleep deprivation, figuring out naps and feeding schedules, daycare routines, etc. Something that has helped alleviate stress is having a financial game plan.
Insurance
If you are already married and both working, you may have compared health insurance plans from both employers to see if joining the same plan makes sense. With a baby now in the picture, it is a good time to review and make sure you are on the best family insurance plan available. If you are on a high-deductible plan, remember to adjust or increase your Health Savings Account contributions to make sure you can pay for the additional baby-related health costs with tax-free HSA dollars.
It is important to make sure financial resources are available for your family if you’re no longer there or become unable to work due to a severe illness or injury. Though never fun to think about, now is the time to revisit life and long-term disability insurance.
You can keep life insurance simple and cheap with term policies for both spouses. You may have employer-provided disability insurance. However, it may not be enough to cover your essential expenses like mortgage, debt, childcare, and household expenses for an extended period. Supplementing with additional long-term disability coverage can be a cost-effective solution.
Expenses & Savings
Having a child places a higher importance on rainy-day planning. A good rule of thumb is to keep three to six months of essential living expenses readily available for emergencies. Keep this emergency fund in an interest-bearing account that is readily accessible.
If you have done due diligence on daycare providers like my wife and I, then you’ve likely experienced the sticker shock of the weekly/monthly prices. The prices we found ranged from $1,500 to over $2,000 per month. That is certainly not a small expense, so it may help to work on a new monthly budget before baby arrives. If offered through your employer, you should take advantage of a dependent care FSA.
Speaking of sticker shock, it is never too early to start saving for college. By the time a child born today packs their bags for college, four years of tuition and fees (including room and board) are projected to be over $240,000 at a public university for an in-state resident. A common way to save and invest for education is through a 529 tax-advantaged savings plan that can be used for qualified educational expenses.
These plans have historically been used to pay for college-related expenses; however, they can now be used for qualified expenses earlier in your child’s life, such as private K-12 education. Indiana residents are eligible for a state income tax credit of up to 20% of their contributions to an Indiana 529 plan, with a maximum credit of $1,500 per year per household.
While 529 accounts are great savings tools, it is still important to make sure you aren’t sacrificing your retirement savings to fund your child’s future education. If you must choose between saving for college and saving for retirement, choose retirement. Your child will likely have more than one way to pay for college—including scholarships, loans, and grants—but you can’t make up lost retirement savings.
Tax Breaks
You may have noticed the expenses racking up so far. Luckily, there is some relief available in the form of tax breaks! The Tax Cuts and Jobs Act in 2017 increased the child tax credit from $1,000 to $2,000 per child (subject to phaseouts based on income). Be sure to claim your child tax breaks when you file!
Estate Planning
Establishing a will is another important foundational step in preparing for the unexpected. A few items to check off include indicating guardians for your children; naming powers of attorney; and designating someone to make financial and healthcare decisions whenever you cannot. Also, be sure to update the beneficiaries named on your retirement and other accounts.
Conclusion
Planning for these items upfront can alleviate some stress and help you enjoy the experience of being a new parent. Your financial advisor should be able to help you get started. Best of luck in this exciting new adventure!
Anthony Harcourt, CIMA, is a Portfolio Manager at Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website at www.BedelFinancial.com or email Anthony at aharcourt@bedelfinancial.com.