Welcoming a new child to your family is an exciting and joyous event. After deciding on nursery colors, newborn clothes and a crib, it is time to give some serious thought to the financial implications that come with a new bundle of joy. Having a child is certainly not inexpensive and many costs are on the rise. In fact, according to the U.S. Department of Agriculture, a middle-income couple may spend an estimated $241,080 to raise a child to age 18 — and that doesn’t include college. While there are many considerations for new parents, addressing the items below can help you prepare for this new chapter in your life.
Health Insurance — Prepare for your baby’s arrival by reviewing your health insurance coverage. It is advisable to review the health plans of each spouse to determine which provides more attractive benefits. Pay close attention to pre-natal care, hospital co-pays and deductibles and post-delivery benefits for your infant. It may be more cost effective in the long run to spend more per month on a top tier plan than to cut corners and have higher out-of-pocket expenses. Remember, you may no longer be visiting the doctor once or twice a year and it is critical to have solid benefits for your family.
Review a baby budget and build reserves — Are you planning on trying to make ends meet on one income? If not, have you factored in child care expenses? Perhaps one spouse is looking to reduce their hours from full time to part time. Whatever the plan, consider budgeting for various scenarios and be sure to account for increases in expenses such as higher grocery, health care and child care costs. If you are planning to drop down to one income, consider trying to bank one spouse’s salary while you are both still working to see if it is financially feasible for your family. Next, review your cash fund. Consider setting aside a baby reserve to ensure that the inevitable financial curve balls can be addressed as they come up.
Take advantage of an FSA for child care — If both spouses will be working, chances are that a large percentage of your after-tax income will be spent on day care. In fact, according to Child Care Aware of America, child care costs are increasing twice as fast as the average family’s income. Why not reduce the financial burden by paying for a portion of these costs with pre-tax dollars through a Flexible Spending Account or FSA. Consider speaking to your HR department to determine if one is available to you.
Increase life and disability insurance — Can your new family meet their financial needs in the event that your income is lost? For many new or expecting parents, the answer is emphatically no. Inadequate financial resources can lead to significant changes in lifestyle for the surviving spouse, including the need to downsize a home, take a second job or scramble for education funds in the future. If you want to ensure that your family’s current and future needs are met, consider speaking to your financial adviser to review coverage options. Begin the life insurance conversation by reviewing term insurance, as it is generally the simplest and most affordable type of insurance. Coverage can be purchased for a specified amount and “term” of 1 to 30 years based upon your needs. Young families may want to consider locking up insurance for longer terms as they may receive attractive rates while they are younger and healthy. Term is generally a good fit for those who have a temporary insurance need that will diminish as they age such as income replacement for a young family or paying off a mortgage. Ideally, women should consider applying for additional coverage prior to getting pregnant as complications can arise during pregnancy that may affect insurability. In addition to term insurance, consider reviewing and potentially increasing group benefits as they often do not require that you go through underwriting. Also be sure to review the need for disability insurance as this too, is a critical component of any financial plan.
Review guardianship and your estate plan — Without a will, you may lose the privilege of naming a guardian for your children in the event that both spouses pass away prematurely. In order to prevent the courts from making such a critical decision for you, consider addressing your estate plan. Additionally, you may want to consider provisions that would establish a trust for children. While you are at it, consider also completing durable powers of attorney and a health care directive.
Start a college nest egg — With the cost of tuition increasing each year between 4 to 7 percent, the sooner you can begin saving for college the better. Consider reviewing the benefits of a 529 plan. Remember, as long as they are used for qualified education expenses, 529 plan savings grow federally tax-free. However, if the funds are not used for qualified education expenses, a 10 percent penalty and tax on the gains will be levied on the account. While getting a jump start on college can help improve the chances of achieving your education funding goal, parents may want to consider addressing the areas noted above prior to beginning any new education plan.
While expanding your family will require some additional planning, a pro-active approach can help ensure that more time can be spent on the joys of being a new parent. Since everyone’s financial situation is unique, consider speaking to your tax, legal and financial advisers to determine the most appropriate approach for you.
Kurt J. Rossi, MBA, is a Certified Financial Planner Practitioner & Wealth Advisor. He can be reached for questions at (732) 280-7550, kurt.rossi@Independentwm.com or www.Independentwm.com. LPL Financial Member FINRA/SIPC.