New Parents’ Guide to Financial Planning
A few key tips
Along with the excitement of a new baby comes a new financial reality. CNN Money reported last year that the average cost for a middle-income American family to raise a child from birth to age 18 is $226,920. And that doesn’t include the cost of a college education!
Below are some key issues to think about while you are waiting for baby’s arrival:
Life Insurance
Your first order of business should be to assess the amount of life insurance you and your spouse currently have. Once you start a family, your need for life insurance becomes more dramatic. If your spouse dies prematurely (or vice versa), you want to be sure you are covered for your salary, the mortgage, child care, and your child’s college education.
Term insurance is typically less expensive and will provide coverage for a set number of years. There is no cash value, however, at the end of the term. Some parents keep their term policies in force until their children are out of college. Other options include universal life and whole life. Universal life is a hybrid of term and whole life insurance which provides flexibility in terms of premium payments and death benefits. Whole life is generally the most expensive and can be used as a retirement asset or for estate-planning purposes. There are pros and cons to each—your financial advisor can provide counsel.
Saving for College
529 plans are a great choice for saving toward your child’s college education. Although your contributions are not deductible on your federal tax return, your investment grows tax-deferred, and distributions from the plan for educational purposes are federally tax-free. Check to see if your state provides tax breaks as well—not all do. When the time comes, the money can be used for qualified education expenses including tuition and mandatory fees, supplies and equipment, and room and board. Assets in a 529 plan are controlled by you, the account owner, so if your child decides not to go to college, he or she does not have access to the account. Also, 529 plan funds can be transferred from one beneficiary to another which adds a lot of flexibility to the plan.
Child Care
If both you and your spouse work, child care could take a chunk out of your monthly budget. Most important, you and your partner must feel comfortable with the type of child care situation you select. You can opt for so-called “family care,” where a child care provider cares for a number of children in her home; a day-care center; or a nanny. If you decide to hire a nanny to care for your child at home, be sure that you pay your nanny “on the books” by completing the necessary paperwork and remitting the appropriate taxes for her. Read our recent blog on the subject and consult your financial advisor. You may want to consider enrolling in a Dependent Care Flexible Savings Account, if your employer offers one, to offset some childcare expenses.
Essentials for Baby
Let’s not forget the everyday expenses for baby supplies like formula, diapers, and clothes they seem to grow out of instantly. These add up quickly. Consider purchasing baby products in bulk from warehouse stores or via the Internet. Some websites offer next-day delivery, free shipping, and rewards programs.
Starting a family is one of life’s great joys, but is, by all accounts, a very expensive proposition! By considering the financial implications beforehand, the inevitable costs involved—now and in the future—can become more manageable.
