Financial Planning When Expecting Your First Child
Planning for significant life transitions is central to financial planning. As recent first-time parents, we can say with confidence that there may be no greater transition in life than becoming a parent. Coming from the perspective of both financial advisors and new parents, we’ve outlined here some key financial considerations when expecting your first child.
Get Started with Education Planning
Given the significant cost of a college education—not to mention private grade schools and high schools—it’s important to start thinking about the type of education you foresee for your child and what financial contribution you want to provide.
Start saving for your child’s education as soon as possible, especially if you plan to send your children to private schools. To determine how much to save, talk to your financial advisor or use an online college savings calculator, which provides college cost projections and suggests monthly savings contributions. One option to make saving easy is to set up automatic monthly transfers into the savings vehicle.
Parents can benefit from using tax-advantaged education savings vehicles such as 529 college savings plans, available in each state. One of the benefits of a 529 plan is that many provide a state tax benefit. In addition, starting in 2018, parents can withdraw up to $10,000 per year from a 529 account to pay for qualified expenses related to private school tuition from kindergarten through 12th grade. Another option that provides more flexibility in spending, but is less tax-advantaged, is a custodial account (UGMA/UTMAs). Both have their advantages and limitations which you can read more about in our perspective, “How Do Savvy Investors Plan for Education Expenses?” Be sure to speak with a tax professional about the specific tax implications for your situation and state of residency.
Work on Cash Flow Planning
Parents should plan for increased expenses associated with their new child, ideally several months in advance so they can adjust their cash flow and lifestyle before the child is born. For many parents, the most significant new cost will be childcare. Whether planning to use a daycare facility or a nanny, gathering cost estimates from multiple sources will help you plan accordingly. Parents may also want to see if their employer offers a Dependent-Care Flexible Spending Account (DCFSA), through which you can set aside pre-tax dollars (up to $5,000 per year for those married filing jointly or as head of household) to cover the cost of dependent care. For households that may be considering one working parent, not only should you plan for the reduced income, but also consider the potential impact to employer benefits.
Another important cost to factor into your cash flow plan is healthcare—both the cost of having the baby and the ongoing costs associated with your child’s healthcare. Data from the U.S. Department of Health and Human Services for 2014 (the latest year available) estimates $13,524 for delivery and care for mothers and $3,660 for newborns based on national averages. If both parents are working, it is wise to carefully review each of your employer’s benefits, including healthcare plans, to see which plan is most advantageous for the delivery and ongoing care of your child.
Finally, if you are already saving for retirement and will now be contributing to a 529 plan or other savings account, make sure to factor in room for both in your budget. You don’t want your retirement and college savings accounts to be competing for your hard-earned dollars. Both are important.
Make Sure You Are Properly Insured
After your child is born, life insurance is no longer optional but is now an essential part of your plan. Determining how much coverage, as well as what type of coverage you should get, depends on your family’s situation. As a general guideline for a household with two working parents, both parents would ideally have term life insurance policies. Even if one parent does not work outside the home, there would be tangible costs associated with losing that parent, such as the need for childcare. Parents should also consider disability insurance to replace lost income in the event of illness or other factors that may impact your ability to work. Although disability insurance is frequently less of a focus than life insurance, it is actually more likely to be used.
Get Your Estate Plan in Order
Outlining clear goals for how you would want all of your affairs handled is an important first step when establishing an estate plan. Our Estate Planning Primer, which outlines various types of trusts, is a good starting point for parents wanting to learn more.
As part of these documents, establishing guardianship for your child is a priority. If your intentions aren’t clearly stated as the parents, then the court will name a guardian of your child in the event of your death. Parents should also update beneficiary designations on accounts to include their new child. If parents have a will or trust already drafted, you should also update those documents to include your new family member. To learn more about considerations for naming beneficiaries, refer to our article on Naming Account Beneficiaries.
Taking steps to establish a solid financial foundation before your baby is born will save you time—and reduce stress—so you can focus more fully on your new little bundle of joy when he or she arrives!