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Bringing a new life into this world has several financial implications that everyone might not think about but should consider beforehand. Having a solid game plan for your new baby will help you manage your finances and plan for the future.
While newborns bring us lots of joy and happiness, we must get our financial status in order to provide them with the best quality of life. Financial management is a crucial life skill, and its importance increases once you’re responsible for another person.
To minimize repercussions and unexpected costs your kid might have, there are some tips you can follow to be prepared for what’s coming next. 20 Financial Planning Tips for Brand New Parents
1. Health Insurance Plan
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You might already have a health insurance plan; however, with a new baby, you need to update your plan to add a dependent. According to Health Partners, most children are covered by a health insurance plan as dependents under their parent or guardian’s employer-sponsored health plan. If you add your child anywhere between 30 and 60 days post-delivery, they’ll be covered.
2. HSA Accounts
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HSA stands for health savings account, which people often overlook. Putting money into this account can help pay for medical costs. If you’ve contributed money and didn’t spend it in the current year, the money will roll over to the next one, so you can use this account anytime you need to access the funds. However, whether your HSA plan rolls or not depends on your plan provider. According to The HSA Store, all costs related to a child’s birth are HSA-eligible, while doctor’s fees, infant formula, and birth classes are also eligible.
3. Term Life Insurance
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It’s natural to doubt how valuable life insurance is, but if someone in your family depends on you, you should look into it. According to Forbes, a term life insurance package prepares you for the worst-case scenario as it’s a contract between you and the company. If you pass away, your dependents will receive the monetary benefit to pay for funerals and keep living without worrying about money. Most people don’t realize just how cheap it is to join.
4. Write Your Will
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While you might feel like writing a will at this point in your life is unnecessary, it really isn’t. Unexpected incidents can occur, which might leave your child helpless. This is why having a legal guardian to care for your kids prevents them from ending up in the foster system. According to Legal Zone, the simplest way to write a will is to put your final wishes on paper and have the document witnessed by at least two qualified witnesses.
5. Take Advantage of Tax Breaks
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For working parents, caring for a child takes a hefty sum of money. According to the IRS, if you meet specific eligibility criteria, the Child and Dependent Care Credit can cover up to 35% of eligible expenses. However, this is based on your income. There are other tax advantages, such as Child Tax Credit, which reduces your tax liability and Earned Income Tax Credits, which can also provide some relief.
6. Long-Term Disability Insurance
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Life insurance and disability insurance are different things. Life insurance gives your family benefits in case of your demise, while a disability insurance scheme covers a portion of your income if you are sick or injured. According to USA Today benefits last anywhere from five, 10, or 20 years to retirement age, and they cover 60%-80% of your monthly salary.
7. Budgeting Is Key
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While new parents might think they’re prepared for the cost of raising a child, they can’t effectively do so until they’ve made a proper budget. Costs like diapers, baby formula, clothes, pre-and post-natal care, and childcare all cumulatively drain your bank account quickly. A budget can go a long way to ensure you stick to what you have, preventing overspending.
8. Build up an Emergency Fund
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If you’ve never had an emergency fund before, get ready because now you’re also responsible for a tiny baby who needs you to survive. Experts at Consumer Finance discuss strategies to help you build that fund. They state that setting a clear goal, monitoring your progress regularly, and celebrating the little wins motivate you to save up continuously.
9. Plan Out Your Retirement
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Remember to take care of yourself in the middle of all the chaos. It can seem unimportant when you’ve just had a baby, but saving up for retirement and planning in advance are the only ways to make retirement right. Bankrate suggests that at age 30, you should have at least your annual salary saved. If you want to meet this benchmark, you better start planning now.
10. Save up for College
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According to the Education Data Initiative, the ultimate cost of a bachelor’s degree can exceed $500,000. This staggering amount is precisely why you must save up for your child’s college fees as soon as they’re born. It might seem far away, but time flies by, and before you know it, a hefty sum of money looms over your head.
11. Consider an FSA Account
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Experts at Investopedia state that certain Flexible Spending Accounts (FSA) can cover daycare expenses for a child aged 12 or younger. The money you use to fund this account is considered pretax. This means that it’s taken from your paycheck before tax is applied, reducing your overall taxable income while helping you save to meet your child’s needs. However, money does not roll over to the next year if you don’t use it.
12. Update Your Estate Planning Documents
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You must contact your attorney to discuss your estate when your newborn arrives. Ensure your documents are up to date to prevent mishaps in the future. This includes powers of attorney for financial and health care decisions and beneficiary designations. Your attorney will be able to guide you on the next steps.
13. Assess Your Finances
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Dig deep into your money, calculate monthly net take-home pay, figure out what assets and liabilities you currently have, and do the math to estimate your monthly expenses. This will set your family up for success in the future.
14. Plan Your Work Leaves
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According to Baby Center, maternity leaves are often a cumulation of short-term disability benefits, vacation and personal days, and FMLA-protected unpaid time off. This means you need to plan your work leaves before it’s time to ensure no issues. The process of notifying HR and getting your leave approved can take some time
15. Calculate the Costs of Raising a Child
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For new parents, the cost of raising a child is alien since they’ve never done it before. According to Brookings, the average middle-income two-child family will spend about $310,605 to raise a child born in 2015 up to 2032 (age 17). Consider one-time and ongoing costs to calculate the value according to your needs.
16. Consider Getting a Credit Card
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With one extra member in your family, your spending habits will change. This means that a credit card can come in handy. Credit cards like Chase Freedom Flex allow you to receive cashback on multiple purchases, online grocery, travel, etc. However, ensure you’re not overspending and racking up unnecessary debt on your card.
17. Improve Your Credit Score
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A baby arriving can be chaotic. However, it’s important not to lose focus on their well-being. Improving your credit score is paramount, whether with or without a baby; however, it becomes more crucial when your family expands. According to Parents, you must track your spending, update beneficiaries, and eliminate any nasty debt you’ve piled up to improve your credit score as a new parent.
18. Update Tax Withholdings
While we’ve already talked about tax breaks, tax withholdings differ slightly. When you have a child, the government considers them your dependant, so you must ensure everyone around you knows it, including your employer. Using the IRS Tax Withholding Calculator is a quick and easy solution.
19. Meet a Financial Planner
There’s no harm in seeking additional help. If you feel like you won’t be able to manage your money on your own, it’s time to call a financial planner and seek their guidance. They can help you define clear-cut goals and help you save up for your child’s needs by telling you different strategies and benefits you can explore.
20. Limit Spending
Limiting how much you spend might seem obvious, but new parents often fall prey to splurging with their newborns. It’s great to be excited and want to give your baby the world. However, you don’t need five hundred baby jumpers if they will grow out of it in a month or even less.
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