Financial Planning To Prepare For a New Child
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Parenthood comes with mixed feelings. You can be excited about welcoming a new life but at the same time also worried about coping with their financial needs. With all the love, you are also going to take on new roles and responsibilities. So, when preparing for a child to enter your life, you not only have to buy clothes, toys, and diapers but also invest smartly to ensure you are financially prepared to welcome a new member into your family. This can shield you from having to take out loans or depleted savings.
Your expenses will not start once the baby comes into the world. Instead, they start piling up right when you plan to conceive. Regular medical tests, doctor consultations, quality care, a good diet, and more, start to affect your budget even before you deliver the baby. And, once your baby comes to life, your financial budget can suffer if you do not prepare well. Infant care, baby food, diapers, medical care, schooling, and more, can be financially straining. Most of these expenses only tend to rise with time. The U.S. Department of Agriculture estimates that a middle-income family on average spends $233,610 in raising a child from birth to the age of 17. This figure is exclusive of any college expenses. While the figure is stressful, financial planning for a baby can help you transition into parenthood smoothly. More importantly, if you are a single parent, you may have to consider the financial preparedness aspect more seriously. If you need guidance on how to manage your finances and financially prepare for a new child, reach out to a professional financial advisor who can advise you on the same.
Here are some tips that can help you in planning for a baby financially:
1. Relook your household budget:
The first step in financial planning for a child is to revisit your household budget and make the necessary adjustments. As mentioned, raising a child can cost you approximately $233,610 until the age of 17. The report by the U.S. Department of Agriculture further estimates that the first year of the child can cost the new parents anywhere between $9,960 and $19,770. These costs are only expected to shoot up with time, especially with the steeply rising inflation. Also, this number is exclusive of college expenses, which are now averaging $54,880 annually for private schools and $26,820 for public schools. This number becomes concerning because the 2016 Consumer Finance Survey points out that approximately two-thirds of all households with young children have no savings. Hence, it is important to create a budget to account for future expenses. You can go through your bank statements and examine your current inflows and outflows. Aim to cut down on spending and save more in the present while making provisions for future expenses. In terms of future costs, housing might be a top concern. You would require more space in your home and need a separate room with more furniture. Your monthly food costs are the second in line to rise after having a baby. Diapers and clothing will also occupy a large share of your household budget, along with items like a car seat, stroller, toys, books, and more. Other than these, the most straining cost is child care and education. To overcome these costs, you can look for ways to increase your income sources. If you are co-parenting, both parents could distribute the monetary burden in their share of their earnings. Meanwhile, focus on cutting down discretionary expenditures like online subscriptions, dining out, phone bills, rent, and more. Also, when financial planning for a child, prepare a pre-baby and post-baby budget with proper allocations for necessary and optional buys.
2. Understand your health insurance and related costs:
Childbirth will require professional health care for a long period. Even if you have health insurance, having a baby can be expensive. Though the Affordable Care Act (ACA) considers maternity and child care as essential health costs, the coverage is still not equal to other health insurance benefits. You could expect to pay thousands of dollars in prenatal care, delivery, and more despite having health insurance. Hence, when you think about how to prepare financially for a baby, first check your health insurance. Ask your insurance provider-specific questions like:
- Your copays for prenatal visits, delivery charges, etc.
- Coverage under prenatal care
- Deductibles applied
- Hospital or NICU stay cover
- Homebirth or midwife services
- Equipment expenses like breast pumps
- Lactation consultant
If you have the budget, try to keep aside the money for health services that are not covered under your insurance policy. For instance, you could reserve some money for prenatal massage, which can cost up to $75 and $100 per person, or a birth coach, which could go up anywhere between $800 and $2,500. Also, check your eligibility for Medicaid by visiting the Healthcare.gov tool.
3. Create an emergency fund:
When you are planning for a baby financially, you should also consider setting up an emergency reserve to absorb the sudden and unexpected expenses, such as loss of child care, medical emergency, unemployment, etc. The objective is to have a reserve of funds that can be used to pay for your living expenses in case of an emergency. Ideally, your emergency fund should be sufficient to pay for three to six months of your living expenses. Emergency funds for single parents should typically have six to nine months of expense holding. Further, you could take a few wise steps to build your savings. For instance, you could ask your friends to give you cash instead of bringing gifts to your baby shower. Set up an automatic transfer towards your emergency fund balance from your bank account. If you get any tax refunds, bonuses, cash gifts, etc., redirect those excess savings towards your savings fund. You can also declutter your home to sell unused items and get some extra money.
4. Plan your parental leave:
When taking up financial planning for a child, consider if your employer gives you any parental leave and if they are paid. Typically, the Family and Leave Act (FMLA) gives up to 12 weeks of leave after having a child. However, not all of this is paid leave. Hence, when planning for a child, check with your employer about your parental leave and start saving your income to replace your earnings during the non-paid parental leaves.
5. Know the child tax benefits:
For all children under 17 years, the IRS (Internal Revenue Service) gives up to $2,000 as a child tax credit. Other than this, you can also claim state and federal child benefits, such as child and dependent tax benefits, adoption tax credit, adoption support by the employer, dependent care advantages, and more. To claim these benefits, you will need a Social Security number and submit it at the time of providing the child’s birth certificate details or at a Social Security office.
6. Get a life insurance plan for your baby:
When in the process of financial planning for a baby, it is important to get a life insurance plan too. While you might not want to think about an unfortunate situation, it is always wise to plan for it. The rates for a child insurance plan are low because of the limited coverage. However, when choosing a life insurance plan for your child, try to pick a plan that offers coverage until they are self-sufficient.
7. Adjust your beneficiaries:
When planning for a baby financially, take care not to miss out on adjusting your beneficiaries. Assuming you and your partner have a life insurance plan and other retirement savings accounts, like a 401(k), an IRA (Individual Retirement Account), etc., you would need to update the beneficiaries of these accounts to ensure your child has the right to your savings in case of your absence. You can also consider setting up a trust or creating a will. If you already have a will or trust in place, you would need to update the documents so that your child is taken care of in case of an unfortunate accident, such as your demise. You can list your directives in the will, allocate the assets, assign guardianship for your child, specify rights, mention the power of attorney, etc. If you fail to assign a guardian, the court might intervene to specify a guardian who may or may not be the right person to take care of your children. However, your will is only a part of your estate planning, and if you want holistic financial planning for a baby, you should consider completing all steps of the estate planning process.
8. Keep an eye on your retirement plans:
When you are painting the nursery walls and changing diapers, you might tend to put aside your retirement planning goals. You might be taking a long leave of absence from work, all of which would not be paid. In this case, most parents think of skipping their retirement contributions in the hope of continuing them once their budgets are back on track. However, this might not be the best thing to do. Retirement is an important goal to prioritize, whether you have a child or not. Even when you are on parental leave, try to be regular towards your retirement savings. Saving for your retirement would mean you do not have to burden your child with your finances in the future, which is also a critical aspect of financial planning for a child.
9. Save for your child’s education expenses:
Your life will change radically after the arrival of your baby. You might be focused on meeting the present expenses and likely forget about how burdening the future costs can be unless you plan for them now. As parents, you would want to secure the future of your child by giving them the best education. In a survey, 53% of the parents said savings for their child’s education is their top priority. Even though parents realized the importance of savings for their education, they rarely took any steps towards it. But with the steeply rising education costs in the country, this matter has become a concern for new parents. The cost of education in the U.S. has tripled in the last three decades. Hence, it is vital that you take immediate steps to plan for your child’s education expenses. Start by investing in a 529 college plan, one of the most popular mediums of college saving in the U.S. 529 plans are state-sponsored, tax-advantaged plans that can help you cover higher education costs. You can contribute after-tax dollars to these accounts and invest in secure bonds and low-cost stocks. The money you invest grows tax-deferred, and you can take tax-free distributions from this plan if you use the money withdrawn for qualified education expenses, such as tuition fees, room rent, boarding, books, and more. These plans also allow you to change your beneficiary in the future. Other than the 529 college plans, you can also opt for 529 prepaid tuition plans, Coverdell education savings account, Roth IRA, etc.
10. Consider a custodial account for your child:
In addition to saving for your child’s education, you might also want to teach your child the value of money and financial responsibility. For this purpose, you can set up a custodial account for your child. Some of these accounts could be savings accounts, and others can be real estate holdings. These accounts are managed by the parents until the child turns 18, and no transaction can occur without the approval of the custodian. Post the age of 18, the child becomes the legal owner of the custodial account. However, custodial accounts have tax implications. For 2020 and 2021, a person can contribute up to $15,000-$30,000 for a married couple filing jointly without incurring the federal gift tax. These accounts have specific tax advantages too. The IRS considers the minor child as the owner of a custodial account, and the earnings from the account are taxed at the child’s tax rate up to a specific limit. That said, custodial accounts have some other disadvantages. For instance, a custodial account could reduce the chances of the child accessing other forms of government or community aid. Also, any deposits or gifts made to these accounts are irrevocable, implying that all the account holdings are automatically passed to the child upon attaining the age of majority. Since these accounts are not tax-sheltered, you might want to first exhaust your 529 college savings plan and then proceed towards investing in a custodial account.
Financial planning for a child is not a one-time process. The process begins as soon as you plan to have a child and continues much further until your child attains the legal majority age. Your estate plans continue even further than that. Even though financial planning for a baby can be exhausting and tiresome, it is an essential part of the overall well-being of your little one. Growing up in a financially stable home influences your child. Your child learns the value of money and is more likely to model positive money behavior in life. As you grow your family, intricate planning for a baby financially can help you create a secure present and future for your little one. It is also beneficial for you to consult a professional financial advisor to help you formulate a foolproof financial plan for taking care of your child’s needs.
If you wish to learn and understand how to financially prepare for a new child and take care of their needs, use WiserAdvisor’s free advisor match service to find highly qualified and vetted fiduciary advisors who can guide you on the same. Answer a few questions about yourself and get matched with 1-3 fiduciary advisors that are suited to meet your financial requirements.