The birth of a child can be one of life’s most joyous events. As you prepare for your baby’s arrival, it may be a good time to contemplate future arrangements. One practical item to talk through could be how to prepare financially for your little one.
From buying a car seat, to preparing for related medical expenses, to saving for college, here are seven financial matters for expecting parents to discuss:
1. Plan for maternity/paternity leave
How much time you and your partner get off work and whether you're paid can significantly impact your household finances. To get an idea of how maternity/paternity leave will affect your bottom line, ask for the details of your company's policy. You and your partner may have to adjust your budget if your income will change.
For more information on maternity/paternity leave and your rights as an employee, please review the following links:
2. Re-evaluate your budget
Babies come with a variety of expenses so it may be necessary to adjust your budget. Some common costs you might need to plan for include:
- Baby food and diapers - Food, diapers and wipes can add up to over $1,700 per year. These costs may depend on variables such as breast feeding vs. formula and disposable diapers vs. cloth.
- Car seat - Much like the vehicles they’re placed in, car seats come in both budget-friendly and expensive models. Prices can vary widely from around $40 to over $500 based on the type of seat you desire.
- Child care - According to the National Association of Child Care Resource & Referral Agencies (NACCRRA), the average cost of center-based daycare is $11,666 per year or $972 a month1. If your baby will require child care, it may be worth exploring your options.
- Date night - It may take a while to get comfortable leaving the baby but date night can be important. In fact, 96% of parents in a relationship believe it brings them closer as a couple. Try to budget for a dinner at your favorite restaurant or a night at the movies.
3. Establish or build up an emergency fund
Parenthood is unpredictable. In order to prepare for the unexpected, create or build up an emergency fund. For example, you may be faced with delivery or hospital costs your health insurance may not cover. Having a cash reserve ready to help satisfy these emergencies can be very helpful in a variety of scenarios.
4. Shop for insurance
Supplemental insurance can be beneficial in many situations, including when a baby is on the way. The type and amount of insurance will vary but exploring your options could help identify what’s best for you and your family. Here are two forms of insurance to consider:
- Life insurance - Life insurance is a policy that provides a lump-sum payment to a beneficiary upon the passing of the insured2. For example, you can choose a benefit amount ($500,000) and pay a monthly premium based on that policy. If you pass away prematurely, the benefit amount will be delivered to your beneficiary. For details on the options for life insurance, please explore the difference between life and whole term insurance.
- Disability insurance - Disability insurance is coverage that will pay a portion of your salary for a period of time if you’re unable to work due to injury. There are different types of policies and protection features you should understand before making a decision. To learn more, please compare the unique types and options of disability insurance.
5. Pay attention to tax breaks
In 2016, the Internal Revenue System (IRS) allowed a personal exemption of $4,050 for each dependent and a $1,000 child tax credit for each child under the age of 173. For more information on tax breaks for parents, please review the following links:
6. Begin saving for college
College tuition and fees continue to rise4. If you’re able to begin setting money aside for your child’s education, it may be beneficial to start now. One popular method is a 529 plan. Although contributions to a 529 plan aren’t tax deductible5, the money saved is not subject to federal tax. Many states will also allow the savings to go untaxed if used for qualified expenses such as tuition, books and room & board5. Parents can open a 529 plan as soon as their child receives a Social Security number6.
7. Write a will
When it comes to ensuring your child is taken care of in your absence, a will can take care of several legal matters. Not only can you assign your money and possessions to your child, you may also designate legal guardian(s). Some parents also elect to assign a property guardian or trustee to manage the child’s money until a certain age. In addition to completing a will, consider adjusting the beneficiaries of any retirement funds including a 401k or IRA.
Think ahead
Most parents want to give their child the best life possible. To best prepare for the short and long-term, take these seven finance matters into consideration before baby arrives. By planning ahead, you can have more time to spend with your little bundle of joy.
Congratulations on the new addition to your family!
Sources:
1. https://www.babycenter.com/0how-much-youll-spend-on-childcare1199776.bc
2. http://www.investopedia.com/terms/l/lifeinsurance.asp
3. https://turbotax.intuit.com/tax-tools/tax-tips/Tax-Planning-and-Checklists/Tax-Tips-After-January-1--2014/INF12070.htm
4. http://time.com/money/4098683/college-board-tuition-cost-rose-inflation-2015/
5. https://www.irs.gov/uac/529-plans-questions-and-answers
6. http://www.savingforcollege.com/articles/college-savings-timeline-new-beginnings
