Financial Actions to Take When You're Expecting A Child
Updated: Jan 17
Are you expecting a new child and feeling like your to-do list is a mile long? Financial items may not be on that list, but they should be. Children are expensive. In fact, the cost to raise a child, in the Northeast, until the age of eighteen is approximately $400,000, and this doesn’t include college savings.
Not only should you plan for these new expenses, but there are several other financial tasks that are just as important as decorating the nursery. It’s easy to put these off when there is already so much for you to do, but taking some time now to get your financial house in order is vital to helping secure your family’s future.
Planning ideally should begin as soon as you find out that you are expecting, but it is never too late to start a budget, update your estate plan, ensure that you have adequate insurance coverage, and invest for your long-term goals. Below are six easily achievable financial actions you can take to prepare yourself before the big day arrives.
1. Cover Your Estate Planning Basics Before Your Child is Born
Estate planning is often one of the most overlooked parts of financial planning. It’s an emotional topic and no one wants to consider the circumstances that require the use of these documents. But in our opinion, this is the most important action item that should be on your list. Not only will the proper estate planning documents outline your wishes for your assets, but they also determine who will act as the guardian of your child if something should happen to you. Additionally, proper estate planning will ensure that health care decisions are made on your behalf if you become incapacitated. Important documents that should be reviewed include wills, durable powers of attorneys, health care proxies, and revocable and/or irrevocable trusts that can protect your assets from the probate process and define how your assets are divided.
A guardian is generally a relative or close friend that will always act in the best interest of your child and who shares your goals, values, and parenting style, while also considering the overall health of the person and their ability to care for a child long-term. There is also a trustee to consider if doing trust planning. Think of the trustee as your child’s treasurer, the person financially responsible for his or her life. A trustee is generally involved longer than a guardian is legally necessary (age 18), but consideration should be given until an age of financial responsibility which may not be until age thirty or later. It is important to note that the guardian and trustee may be the same individual, but they do not have to be.
Once your estate planning documents have been completed, it is also important to review any beneficiaries on retirement accounts and insurance policies, as well as making sure that all of your accounts are properly titled. Estate planning is complex enough without a newborn child, so to take care of all of these items, be sure to consult a competent estate planning attorney to draft your documents and help guide you through the process.
2. Manage Spending & Create a Budget
A budget or spending plan is an important roadmap that will help you with the vast array of new expenses that generally increase as a child gets older. Your budget is not just tracking expenses like daycare, diapers, clothing and food; you will also need to factor increases in items such as health and life insurance costs, and the financial impact of any maternity and paternity leave, or reduced work schedules.
There are many ways to tackle a budget. We recommend working with Aevitas Wealth Management to create a highly customized, personalized plan. We will provide ongoing guidance and you will have access to our our eMoney client portal which directly links all of your accounts and tracks spending. Technology has made this process so much easier and we can always work with you to make adjustments after the baby arrives, once you have a better sense of actual expenses.
Be sure to also still include an adequate emergency fund in your budget. These monies should be kept in a short-term investment account, like a savings account or money market account. A good rule of thumb is to have enough saved to pay for six to twelve months of living expenses in case of an emergency like a job loss or illness.
3. Review Medical Insurance and Benefits
Medical Insurance and other health care benefits are another financial planning area that should be reviewed prior to your newborn’s arrival. Most insurance plans allow new parents thirty days after the baby is born to add a child to their healthcare plan. To make this process more efficient, complete the necessary paperwork prior to your child’s birth. Healthcare costs can vary greatly from plan to plan, so it is important to review all available plans that offer flexibility at an affordable cost.
There is another tool that could help you mitigate healthcare expenses, a health savings account (HSA). An HSA allows you to save up to $7,000 as a family, per year, on a pre-tax basis for qualified medical expenses. You won’t pay taxes on these dollars if they’re used for qualified medical expenses. Click here to learn more about the benefits of an HSA.
4. Review Life Insurance & Disability Insurance
Adding a child to your family is one of the most exciting times in life and also requires planning and a review of your disability and life insurance options to plan for would happen if you become disabled or pass away. Fortunately, most employers provide short- and long-term disability plans, so this is the ideal time to review your current coverage and learn about the plans that your employer may offer. If you are not covered adequately through work, consider purchasing a plan on your own.
Life insurance is also an important part of your financial plan that can give you peace of mind and protect your family. Term life insurance policies are generally affordable with low premiums. Prior to purchasing life insurance, review your employer options, current income, expenses, and savings. If you need additional coverage, this is a perfect time to reach out to the Aevitas Wealth Management team to discuss your financial planning options.
5. Participate in a Dependent Care FSA
If offered by your employer, consider saving with a dependent care flexible savings account (FSA). With similar tax benefits to an HSA, these plans allow you to save pre-tax dollars and take tax-free distributions for qualified childcare expenses. Some qualified expenses include day care, summer school, and nanny expenses. In addition, be sure to confirm with a competent tax advisor which expenses are eligible for reimbursement and how much you can contribute to the plan.
It is important to note that FSA funds must be used prior to the end of the year, or you will lose them. FSAs are only offered through employers, unlike HSAs which allow anyone, including the self-employed to enroll.
6. Have a Plan for College Savings
There are a few ways you can choose to save for college, with the 529 savings plan being the most popular. A 529 plan allows you to save and grow money in a tax-deferred account. Withdrawals are tax-free as long, as they are used for qualified educational expenses such as tuition, room and board, and books. Colleges are becoming more expensive, with the average annual tuition costing $25,290 for state schools and $50,900 for private schools. If you start saving when your child is born, the account has many years of compounded growth before the funds are needed, which can dramatically affect how much you can accumulate in savings. While 529s have historically been used for college-related expenses, recent IRS changes now allow you to use $10,000 per year for a child’s private K-12 education costs.
You can contribute up to $15,000 per year ($30,000 per couple) to a 529 without incurring gift tax consequences. There is also the option to “superfund” a 529 with up to five years of contributions, or $150,000 per beneficiary. This is used so that you can benefit from compounding growth over a longer period of time, but this has to make sense for your personal financial situation. There are many different 529 plan options, with most plans having no state residency requirements. We can help guide you to select not only the right plan, but also the best investments for you.
A Final Reminder:
One final reminder is to continue saving for retirement! We know that balancing increased expenses and saving for college, while simultaneously saving for retirement can be difficult. However, building a solid retirement fund benefits your entire family and reduces the chance that your child will need to support you in retirement. Let us make the process tailored to your needs and less daunting for you. Remember, we are available to assist with all financial planning and investment needs, so please call us with any questions or to schedule an appointment.
Please ask us any additional questions or inquire about a financial plan here!