You have heard it before—becoming a parent changes your life. Not only are you now responsible for forming and influencing a life, but you also must care for your little person in every way. And that takes money—as well as energy, devotion, empathy as well as all spare time and sleep! As you embark on this exciting chapter, your finances will changes significantly. It’s not just about added costs; your taxes, healthcare, insurance, and retirement are all impacted by having a child. Here are 12 moves every new parent should consider in order to help navigate this new financial reality—from maneuvers to smooth out the newborn years to top line money moves to guide life later on down the road.
There are some scary numbers tossed around. The Department of Agriculture estimates that the total cost of raising a person from birth to age 17 tops $233,000 (middle income range family). But the benefits hopefully outweigh the financial costs. There is no way to measure ROI for raising a child and experiencing the joy of child rearing and family life.
One thing to remember: this is the time for two-parent families to become a real team. If one parent is the “working” parent, the “stay-at-home” parent needs to be considered an equal. Both sides of the equation are equally worthy—and difficult. Both partners need to have an active voice in financial decisions.
Realign your financial priorities
The competing financial pressure during the parenting years can be daunting: saving for a down payment on a home, retirement, daycare, college. It is really daunting. The best advice is to do what you can afford. This will probably mean putting some priorities on the back burner altogether or cutting back on some contributions. It may even mean moving in with the in-laws for a while (if you are so lucky!). You need to live in your new financial reality.
Work or stay at home?
This goes hand-in-hand with the above statement. Crunch the numbers and listen to your heart. The reality is that child-care costs exceed rent (or a mortgage) for many American families, according to the Economic Policy Institute. (In New Mexico, it is estimated that annual full time daycare averages $8,000.) For some couples, it makes more sense for one parent to stay at home rather than fork over so much cash for childcare. For others, keeping both earners in the market will pay off a few years down the road when a child enters grade school. Again, there is no one-size-fits-all solution.
Healthcare coverage ASAP
The time is now to get your child covered on your healthcare policy! Having a child is considered a “qualifying life event,” which means that you don’t need to wait for open enrollment. And most plans require that you child be added within 30 days of delivery. (Usually you will need a birth certificate and social security number for your baby to do so.)
Health savings accounts are a great way to save pre-tax dollars specifically for healthcare needs. And with a new person in your life, that might be considerable. Ask your employer if you are eligible for an HSA plan—currently the annual limit for families is $7,000 for 2019. Taking an amount out of each paycheck is a great way to go. Not only can the money be used for qualified medical expenses, but also formula, breast pumps, etc.
You may not have considered it before, but having life insurance is vital! What if something happened to you—would you have all bases covered in terms of care for your child? This is one way to buy peace of mind. Term life insurance is an affordable option—especially for young and healthy parents. According to online financial resource Nerdwallet, the average for a 20 year $250,000 policy for a 30-year-old woman is $11.25 per month, and a 20 year $250,000 policy for a 30-year-old man costs $12.66 per month.
Create a budget
There are so many ways that having a child affects your budget—so put it all down so that you can understand it. Some of the items are recurring such as food, healthcare, diapers, clothing, childcare, while others are one and done such as a changing table. And keep at it—it takes a while to master the increased cash flow, surprises happen all the time as children go through new life stages.
There are certain tax advantages to having a little one. So don’t forget to use these credits when you file your taxes for 2019. Namely, the Child Tax Credit is $2,000 per child (income limit has been raised to $200,000 for individuals and $400,000 for joint filers). In addition, learn more about the Earned Income Tax Credit (for working people with low to moderate income) and the Child and Dependent Care Credit, which you can claim in certain situations if you paid expenses for the care of a qualifying individual to enable you (and your spouse if filing a joint return) to work or actively look for work.
A will and more
It is crucial to have your ducks in a row in case the worst happens. So get a will in place to plan for your assets and also designate a legal guardian for your kid(s). Typically, people name their surviving spouse and children as beneficiaries. You also can consider a separate guardian for your estate—to manage accounts and assets until children are of legal age. Other important legal docs to get squared away include a health-care proxy (appoint a person to make healthcare decisions for you if you are incapacitated), a medical directive (indicate what actions should be taken for your health if you are incapacitated), and a power of attorney (appoint a person to manage your affairs if you are incapacitated).
It goes without saying that having an emergency fund is important; but it is even more so when you have children. Strive to save at least six months of expenses. And it is essential if you are now living on one salary!
Dependent care FSA
This may be another great option if you – if your employer offers it. A FSA is a pre-tax account that can be used for qualifying child care expenses. And like the HSA, contributions are deducted from your paycheck. They are a good way to reduce your taxable income while effectively lowering your cost of child care costs (since pre-tax cash). However, they do not roll over to the next year if not used; so budget carefully!
Take a breath. This is a biggie. And this cost is not figured into the $233,000 estimate at the opening of this blog. According to the College Board, the average annual cost of a four-year college (in state) is $20,770 for tuition, room, and board. That balloons to an average of $36,420 per year if you attend a public college from out-of-state and the average skyrockets at private colleges to $46,950 per year. And it’s understandable that many parents do not put saving for college at the top of their financial list. But the sooner you start saving, the more options your child will have. One popular method is to save through a 529 Plan, which is a tax-advantaged plan that can be used for qualified educational expenses.
Don’t forget retirement
I know. It seems impossible. But try to keep funding your retirement savings. For those of you who have employer-matching funds, don’t leave money on the table! At the minimum, contribute so that you get that match. It seems so far away, but your retirement-age self will thank your working age self when the time comes.