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There are a lot of “firsts” for new parents — and measures to shore up household finances are among them.
Expenses for a new baby are often higher than parents expect, according to financial advisors.
The average middle-income married couple spends $12,350 to $13,900 a year to raise a child, according to most recent estimates published by the U.S. Department of Agriculture. (The data, for a 2015 birth, includes costs like housing, food, child care and health care. It doesn’t include pregnancy or college costs.)
But there are important factors beyond everyday costs, too. Here are some top considerations for new and expecting parents.
Budgeting might seem like an obvious necessity.
But managing cash flow goes beyond saving for big upfront costs like medical bills for hospital stays, clothes, nursery furniture and baby gear, according to Eric Roberge, a certified financial planner and founder of Beyond Your Hammock in Boston.
“While it is smart to save in advance for these expenses, you also need to consider the fact that having kids introduces more ongoing fixed costs into your normal spending,” Roberge said.
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Such costs may include baby formula, bottles, diapers and wipes, for example. Parents should weigh these fixed expenses alongside others that may also arise, like a higher monthly rent or mortgage for a larger living space, Roberge added.
Expecting parents should also cut back on unnecessary expenses, and save or pay down debt (like credit cards, car loans and student loans) aggressively before the baby arrives to free up wiggle room in their budget, according to Sophia Bera, CFP, founder of Gen Y Planning in Austin, Texas.
Parents should also determine how their health plan covers birth costs and what they may need to be paid out of pocket, Bera said. Further, they should review their maternity and paternity leave benefits, and determine how to optimize them. (For example, should each parent use the benefits at the same time or stagger them? Will parents need, and be able to afford, extra, unpaid time off?)
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Life insurance offers financial protection for a new child in the event of a parent’s untimely death (and associated loss of income).
Financial advisors recommend buying it before the baby arrives, if possible. Term insurance, which lasts for a specified period, is typically easiest and cheapest and has a fixed premium.
A 20- or 30-year policy is appropriate for most families, to cover children through high school or college to legal adulthood, advisors said.
Parents should buy enough insurance to cover 10 to 15 times their current income, according to CFP Stacy Francis, president and chief executive of Francis Financial in New York.
For example, someone earning $100,000 would buy a policy with a $1 million to $1.5 million death benefit. (The premiums may amount to less than $1,000 a year for someone in their 30s, depending on health and amount, Francis said.)
One important consideration: Families may wish to get additional insurance on a stay-at-home parent who doesn’t earn an income, since the surviving spouse would likely incur higher costs via child care, for example, Francis said.
Another factor: It’s worth exploring insurance offered through an employer, which is typically cheaper than private insurance, but it’s not always possible or inexpensive for a parent to take the policy with them if they leave the job, Roberge said.
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A 529 college savings plan is a tax-advantaged investment account. Think of it like a 401(k) plan, but for education instead of retirement savings.
529 contributions and investment earnings can be used for qualified expenses like college tuition, fees, books, and room and board.
There are many available options, but parents can consult a resource like SavingforCollege.com, which consolidates information on state-sponsored plans, Bera said.
It’s tough to know exactly what college will cost and how much to save. But the most important thing is for parents to start as soon as possible so the money has more time to grow, Bera said. Parents can start with $1,000 up front and then $100 or $200 a month afterward, she said.
“That compound interest really goes far,” Bera said.
Parents can also request contributions to a 529 in lieu of physical gifts for a child, Roberge said.
Putting 100% of one’s college-savings budget into a 529 may not be the best approach for all families, he cautioned. For flexibility, some clients put half their college-savings budget in a 529; they put the rest in a taxable brokerage account or fund remaining college costs from cash flow in the future, he said. (That’s because parents may face penalties if they need to withdraw 529 savings for anything other than qualified education costs.)
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New parents should weigh funding other tax-advantaged accounts, like flexible spending accounts and dependent daycare FSAs, offered through the workplace, advisors said.
FSA contributions are pre-tax savings that cover out-of-pocket medical costs like copayments, deductibles and some drugs — which are likely to rise due to more frequent doctor visits. Dependent care FSAs cover costs like daycare, summer day camp, and before- or after-school programs.
Parents can sign up for these benefits during their employer’s annual open-enrollment period. There’s a cap on annual contributions and employers may not offer the benefits.
Here’s an example of the tax savings, provided by benefits firm HealthEquity. Let’s say a family has a 30% effective tax rate, $300 a month in daycare costs, $50 a month in after-school programs, and a $500 summer camp. This family would save $1,350 a year in taxes by paying for the costs with a dependent care FSA.
Parents should also update their wills, advisors said.
This step will ensure parents’ money and other assets go to a child in the event they pass away unexpectedly, and that the child is cared for by a trusted and willing guardian, Francis said.
Parents should also update beneficiaries on investment and other accounts, she said.