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Having a baby comes with significant changes. And as with most major life events, there is a lot to think about to make sure your finances are in order. Here are seven things to consider ahead of your new arrival.
1. Health Insurance
Check with your employer’s human resources department to find out what is required to add the baby to your plan. They will likely require a birth record or birth certificate. And you’ll typically have a window of 30 or 60 days after the child is born to add them to the plan.
Most plans will only allow you to add the child to your existing plan and not change the one you’re on. So pick the plan you want to be on when your child is born during your next open enrollment period.
2. Life and Long Term Disability Insurance
Now that you have someone who is 100% relying on your income, you want to have sufficient life insurance in place. For most people, term life insurance is the best bet – you want to insure against the risk that you pass away early before you have built up enough savings to be financially independent.
A common rule of thumb is to buy a policy that would cover about 10 times your income. When deciding on the policy’s term, think about how long you expect others to be relying on your income. And remember as you build up your savings, your life insurance needs will lessen. You can consider laddering life insurance policies to save some money on premiums.
Separately, if you don’t already have long term disability insurance through your employer, you should look into buying coverage. Statistics show you are more likely to become disabled during your working career than to die early. And disability insurance is designed to replace your income if you’re unable to work for an extended period.
3. Estate Planning
If you haven’t already done some basic estate planning, this is the time to do it. You’ll want to appoint guardians for your children in case anything were to happen to you. If you don’t have this in place, the courts would ultimately decide who gets your children – not fun to think about, but something you don’t want to leave up to someone else.
It’s also a good idea to have a will in place, as well as a health care proxy, which allows someone else to make medical decisions for you if you are unable to, and a durable power of attorney, which allows someone else the ability to act on your behalf in any financial matters if you were to become incapacitated.
There are some inexpensive ways to DIY these documents online, but it’s usually best to work with an estate planning attorney to ensure they’re done correctly.
4. Update Beneficiaries
Your spouse or partner is likely already listed as the primary beneficiary on your retirement accounts and life insurance policies. But you may want to think about making your new child the contingent beneficiary. If anything were to happen to you and your spouse, you’d want to make sure your child is taken care of financially.
You have to be careful about naming a minor as a beneficiary, but there are ways around this. For example, with the help of an attorney, you could set up a testamentary trust and name a trustee to manage the money on behalf of your child based on your instructions.
5. Review Employee Benefits
Take a close look at what benefits are offered during your next open enrollment period. Some companies offer a dependent care FSA, which you can use to pay for childcare with pre-tax dollars. You’ll want to weigh this option against the benefit of the child and dependent care tax credit – you can’t use both for the same expenses.
6. Start Thinking About College Savings
There is no better time than now to start thinking about college savings. You should first think about what you want to fund for your children. Do you want them to be 100% debt free when they graduate? Are you ok with having them fund a portion, but would like to help ease the burden?
Once you know your goal, you can decide where and how much to start saving. A 529 plan is the best savings vehicle for most families, and you will quickly find out that there is no shortage of plans to choose from.
First, take a look to your own state’s plan if the state offers a tax deduction for contributions. But keep a close eye on the investment options within the plan. Low-cost mutual fund offerings are key to not letting fees eat away at too much of the money you set aside. Fees could even outweigh the benefit of a tax deduction. Savingforcollege.com is a great place to compare plans.
You’ll also want to make sure you are saving enough to meet your retirement goals first. There are many ways to pay for college (loans, scholarships, financial aid, savings etc.). But there are not a lot of alternatives when it comes to funding your retirement.
7. Review Your Emergency Fund
You most likely have some additional expenses now that you have another member of the family. So you may want to consider increasing the amount you have set aside in cash.
Your emergency fund should hold at least 3-6 months of living expenses in case you lose your job or face some other unexpected event. You’ll want to be closer to 6 months of expenses if your job is at all unstable, you are the sole income earner, or you work in a highly specialized field where finding a new job could be difficult.
There are so many things to think about as a new parent, but by ensuring you have these financial planning items taken care of, you can relieve some of the worry and help set your family up for long term financial success.
About the Author
Joe Calvetti is a CPA and the founder of Still River Financial Planning, a fee-only financial planning firm providing comprehensive financial planning to young families and professionals.
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