From Diapers to Diplomas: Financial Planning Tips for New Parents

November 15, 2023

Becoming a new parent is an incredible journey, but let’s face it – it can be expensive! From my own experience, I can tell you that my wife and I have had to have some serious talks about budgeting, saving and planning for the future since our daughter was born. It’s a new way of life, and our focus has shifted from thinking about ourselves to putting our daughter’s needs first. It’s not always easy, especially when exhaustion sets in and we’re juggling everyone’s schedules. But I firmly believe in the power of financial planning, especially for young parents who might not think they need a financial advisor.

Here are a few areas to focus on financially if you are a new or expecting parent and how your financial advisor should guide you through the early stages of becoming a new parent.

Family Risk Management

Many financial topics often overlooked are critical to your family’s financial health and long-term prosperity. One such topic is family risk management.

Managing risks for your family is a key part of wealth management. Identifying gaps in insurance coverage – mainly life insurance – and routinely looking for new risks should be discussed with your advisor as they build your financial plan. Consider the following:

  • Don’t overlook a non-working spouse. Spouses who don’t work outside of the home should still have life insurance coverage. They contribute to the function of a household in numerous and significant ways such that if, God forbid, something was to happen to them, you’d incur additional expenses to cover their workload.
  • Explore policies outside what your employer offers. Even if your employer offers a great policy, keep in mind that it’s not portable if you change jobs and your new employer may not offer this benefit. It’s wise to explore a life insurance policy on your own, separate from what an employer provides.
  • Secure early. When you’re young and healthy, you can lock in health rates for convertible term policies. The longer you wait, the higher premiums you may pay.

Edit Your Emergency Fund

When you become a parent, it’s important to think ahead and plan for unexpected situations. You want to make sure your family can continue to function even if you lose your job, face an illness or encounter a big expense out of the blue. A general guideline my family follows is to have three to six months’ worth of essential living expenses easily accessible for emergencies. This doesn’t mean you need all the money in one account, though. You can spread it out among different accounts like interest-bearing checking or money market accounts.

Explore Available Tax Credits

There are numerous tax breaks and credits available to ease the financial burden that comes with raising a child. One valuable tax benefit is the Child and Dependent Care Credit, which can help offset the costs of childcare while parents are at work and can cover up to 35% of eligible expenses, depending on your income. If you’re covering healthcare expenses, a Flexible Spending Account (FSA) can be a lifesaver. By contributing pre-tax dollars to an FSA, you can use this money to pay for eligible medical expenses for your child, from doctor’s visits to prescription medications. In general, high-income families will see more benefits from an FSA than the above-mentioned tax credit. Keep in mind, one hesitation of an FSA is that the money put into the account must be used during the plan year or any grace period extension.

Start Saving for College Now

Much like taxes and interest rates, college costs continue to rise. Saving for college early can help with the increasing cost of an education and help your family be financially prepared when your child is ready to leave the nest. 529 plans are tax-advantaged investment plans that are designed to encourage saving for future education expenses of a designated beneficiary (typically your child or grandchild). Assets inside of a 529 plan grow tax-deferred until they are withdrawn. Your contributions to the plan are not federally tax deductible, but they can be withdrawn tax and penalty free as long as the funds are withdrawn for qualified education expenses. My advice is to start the second your child is born. You might think waiting a few years or even until your child starts school is soon enough, but the average cost of college in the U.S. is currently about $36,436 per year for a full-time student1 ­– equaling nearly $150,000 for a four-year institution.

Edit Your Estate Documents

As new parents, it’s essential to have a will in place that designates guardians for your child in case something happens to you and your partner. Additionally, consider creating a living will and a durable power of attorney, which can help make medical decisions on your behalf if you become incapacitated. Lastly, ensure your retirement accounts are protected by naming beneficiaries – simply fill out the provided beneficiary form from your employer or account custodian.

Welcoming a new addition to your family is undoubtedly a joyous experience. However, it also means adding another “laundry list” to your daily routine – both literally and figuratively. As a new parent, you will quickly realize that babies generate a remarkable amount of laundry, with their little onesies and swaddle blankets seeming to multiply each day. Similarly, there’s a laundry list of financial responsibilities that will need your attention, from budgeting for diapers and baby supplies to planning for their future college expenses and life insurance.

By staying proactive and adaptable in your financial planning, you can ensure the security of your family’s financial future. Don’t hesitate to reach out to me if you have any questions or would like to set up a call to meet each other and talk about your family’s goals.

  1. Education Data Initiative (EDI)

Blog by Andrew Barnes, Shareholder & Wealth Advisor

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