5 Essential Financial Steps for New Parents
Becoming a new parent is an exciting and life-changing experience. Along with the joy and happiness, it's important to consider the financial implications that come with raising a child. We will discuss five essential financial steps that we believe new parents should take to help ensure the financial well-being of their family.
1. Review Expenses
Having a baby can be expensive, and it's crucial to be prepared for the financial impact. Consider the following:
- The average cost to have a baby is $18,865, with an out-of-pocket cost of $2,854.1These expenses include prenatal care, hospital fees, and delivery costs.
- According to recent estimates, the average cost to raise a child from birth to age 17 is $233,610.2This figure includes expenses like food, clothing, healthcare, education, and child-care. It's important to understand these costs and plan your finances accordingly.
- Talk to your tax advisor about updating your W-4 form to take advantage of potential tax credits and deductions available to new parents. There are often tax breaks granted following the birth of a child, such as the Child Tax Credit.
2. Build Up Your Cash Reserve
With the addition of a new family member, there may be changes in income and increased monthly expenses. It's essential to establish a cash reserve to handle unexpected expenses and to provide a safety net during times of financial uncertainty. Consider the following:
- Calculate your monthly expenses and compare them to your income. Identify areas where you can cut back and allocate those savings towards building an emergency fund.
- Aim to save at least three to six months' worth of living expenses in your cash reserve. This can provide a cushion that may help cover essential costs in case of job loss, medical emergencies, or other unforeseen circumstances.
3. Insurance
Protecting your family's financial well-being is of utmost importance. Consider the following insurance options:
- Life Insurance: Having a life insurance policy ensures that your child is financially protected in the event of your untimely demise. It can cover expenses such as funeral costs, outstanding debts, and provide a source of income to support your child's upbringing.
- Disability Insurance: In the event that you are unable to work due to illness or injury, disability insurance can provide a replacement income. This coverage may help you meet your financial obligations, including the extra costs associated with raising a child.
4. Start a 529 Education Savings Plan
Investing in your child’s education is a long-term financial goal that should be prioritized. Consider the following:
- Start saving for your child’s education early by utilizing a 529 Plan, a tax-advantaged investment account specifically designed for educational expenses. These plans offer various investment options and potential growth over time.
- The recent expansion of 529 Plans now allows funds to be used for K-12 education expenses as well. If the funds are not used for education, they can be rolled over to a Roth IRA, providing additional flexibility.
5. Update Your Will and Beneficiaries
Estate planning is often overlooked but is especially crucial for new parents. Consider the following:
- Update your will to specify how you want your assets to be distributed and who will take care of your child in case both parents pass away. Choose a guardian whom you trust to provide the care and support your child needs.
- Designate beneficiaries for your life insurance policies, retirement accounts, and other assets. By doing so, you ensure that your child will receive the financial support intended and prevent the courts from deciding who will take care of them.
Embarking on the journey of parenthood brings immense joy, but it also requires careful financial planning. By following these five essential financial steps, you can provide a secure and stable future for your child. Review your expenses, build a cash reserve, secure adequate insurance coverage, save for education, and update your will and beneficiaries. With careful planning and foresight, you can navigate the financial challenges of parenting with more confidence.
1 https://www.verywellfamily.com/
2 https://www.usda.gov/
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Read more articles by Zachary Jennings