Starting a family is often one of life’s first major milestones. It is both tremendously exciting, a little scary, and involves a great deal of change. To be prepared, there are several things you can do now that will ensure your growing family is in the right financial position. It bears mentioning, that the earlier you can move through this list the better. It is much more difficult to address these tasks when you have a newborn keeping you up at night or a toddler wrapped around your leg!
1. Review your life insurance
For a young couple, the need for life insurance is often limited. However, adding a child dramatically changes everything. Particularly family finances. Make sure you have your debts covered but a considerable amount more to allow a now single parent to make sense of their new life. Are they going back to work? Where would they live? How will they cover living expenses and savings for retirement and college on one income? In terms of the amount of coverage, consider your debt, income replacement needs, expenses, number of dependents, and other goals. Apply for inexpensive term life insurance for a 20- or 30-year period. While there are a range of different types of life insurance, term offers the benefit of being low cost and easy to change.
2. Talk about college and future savings
Start by discussing what you would like to provide. If college is the primary track, consider a 529 account* which grows tax deferred and can be withdrawn tax free for qualified education expenses. With 529s, each state will vary in terms of tax benefits. Research to find out if your state offers any tax incentives for using your state’s plan. If not, you can use any plan and select the least expensive option with the best investments. We generally suggest you invest directly with the 529 plan versus working through a financial advisor to avoid commissions and fees. If you are unsure about college or value flexibility, open a brokerage account in your name and direct savings to a broad-based index fund. You will have plenty of time to refine the plan, but the key is to begin saving early. Talking to your parents (future grandparents) about your college plans is also important. Our clients love to save money for their grandchildren and letting them know you have a plan established provides them the opportunity to gift if they are able and willing.
3. Discuss guardianship
Who takes care of your little one if you cannot? In some relationships this is an easy discussion and in others it is more fraught. Key considerations should include your shared values, their financial stability, and location (proximity to extended family). It is important to not assume someone's willingness or ability, having a conversation is imperative. The earlier you can begin to refine this answer, the better.
4. Update estate plans
Guardianship is part of the estate planning process. However, the estate plan itself will build out additional protections for your children and will add important documents for young parents, such as health care directives. We strongly suggest working with an attorney who specializes in estate planning to assist you in drafting your plan.
5. Evaluate your benefits
Having a baby is considered a Qualifying Life Event, which means you will be able to revisit and potentially change your benefits through your employer. The first step is to notify your employer of the upcoming life event. The following are a few benefits that will be worth revisiting.
Review the different plans provided by your employer. Some employers may only offer one plan, while others may offer multiple plans with different coverage options. Since your medical expenses will almost certainly change with a new child, reviewing your coverage is an important step.
Dependent care fsa
A Dependent Care FSA is a pre-tax benefit account used to pay for eligible dependent care services such as daycare. This is a simple way to save money while taking care of loved ones and being able to continue working.
The need for life insurance as a young couple is often limited, but the addition of a child will dramatically change contingency plans. Refer to section 1 for additional detail.
Depending on your employer, parental leave can end up being more of a cost than a benefit. By notifying your employer early on, you can work on having a plan in place for when your little one arrives.
6. Make a budget
One of the biggest financial changes will be to your expenses. Childcare can be exceptionally expensive in some areas, and you will also have a new line item for diapers. Refine your budget to accommodate these new expenses and begin building an emergency fund you can draw on for other costs, such as parental leave.
*529 accounts cannot be opened until you have a Social Security Number so after your child is born.
This is not a recommendation and is not intended to be taken as a recommendation. This material was prepared for general distribution and is not directed to a specific individual.
LPWM LLC does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisers.