A financial guide for new parents

Congratulations!

The birth of your first child is an event you will embrace for the rest of your life. You’ve spent months preparing for and anticipating this very moment, from deciding on the perfect name and decorating the nursery to stocking up on baby powder and diapers. And from the instant your little one arrived, you knew that your life, schedule, and priorities would never be the same. After the initial whirlwind subsides, it is important to set time aside to create a plan that will help to protect and provide for the one who will look up to you for love and guidance for years to come.

What do you do after the stork leaves?

 Being a new parent can feel joyous, exciting, and nerve-wracking―all at once. From the moment you announced that you were expecting, you were no doubt flooded with advice from family and friends. And after your baby was born, the same group of well-wishers most likely continued to support and guide you through the first few weeks of being a parent. But once everyone returns to their normal routine―leaving you to establish and settle into yours―it can seem overwhelming. Consider the following helpful hints:

Recognize best intentions:  At times, you may feel overloaded by a stream of advice from other parents. It is important to understand that they are speaking from experience and understand that having a new baby can sometimes be challenging. Realize that they are only trying to be helpful. During the times when you may feel less-than-receptive to advice, consider responses such as: “It’s a good point, and I will give it some thought.” “Good idea. Maybe I’ll try that next time.” “I’ve never thought of that before. Thanks!”

Sleep when your baby sleeps:  Lack of sleep can be one of the most difficult adjustments for new parents. When your baby is sleeping, you may feel compelled to catch up on tasks and chores that have been piling up. In order to care for your child properly, you need to be at your best, and that means getting as much rest as you can. So, when your baby settles down―no matter the time of day―try to rest and recharge.

Be sensitive: Bringing your baby home is a joyous event, but a new person in your house―even a small one―can affect everyone who already lives there. In addition, it’s not always easy to make the immediate transition from being a couple to being parents. Being sensitive to any changes in the dynamic of your relationship can help you recognize, understand, and address your partner’s feelings

Communicate with your partner: It is common for many personal and financial issues to surface for expecting or new parents. It is important to identify and openly talk about the issues, and make decisions as a couple for your new family. Will one of you stay home? Is it feasible to live on one income? If you will both continue to work, who will care for your child?

 Remember date night: Now that there is a new, little person demanding your constant attention, it can be difficult to remember what it was like when it was just the two of you. Do what you can to stay connected and keep your partnership strong, such as scheduling and maintaining a regular date night.

Financial tips for new parents

Having a child is the beginning of an exciting journey, and a great responsibility. As a parent, you must nurture and teach your child, as well as provide for their every need. Even if you have always been disciplined with your finances, it can come as a shock to your wallet when there is suddenly another mouth to feed. Here are some helpful financial tips for new parents to keep in mind:

Keep it simple: Planning for your future, whether personal or financial, is an overwhelming task. Add a new baby to the equation, and it can feel impossible. You’re not alone. When you are just starting out, focus on satisfying the basic necessities. Then, make a plan to address your future needs. A financial professional can provide assistance with this process and work with you to establish short- and long-term goals, outline a strategy to help achieve them, and keep you on track.

Outline your expenses: Your larger family will most likely call for a reassessment of your household budget. It is important to consider all of your new expenses and any adjustments they may trigger to your current lifestyle. Extra money that was available for discretionary items may need to be reallocated to cover new necessities like diapers, bottles, and day care. Some common expenses for new parents include clothing, baby furniture, and “equipment,” such as a car seat, stroller, high chair, and playpen.

Establish emergency funds: Many of the early expenses associated with your new family will be easy to identify. However, unanticipated expenses are an unfortunate reality, and they usually surface at the most inconvenient times. If you are already in the habit of setting money aside for a rainy day, you should focus on increasing your safety net. As a rule of-thumb, many financial experts recommend having at least six months of living expenses set aside for emergencies.

Consider your investment options: As you re prioritize your financial goals, you will want to take a fresh look at your investment portfolio. You may find that adjustments are necessary. Or, perhaps there are investment options that were not appropriate in the past, that are now. Your financial professional can help to assess your needs and suggest any revisions to your current investment mix.

Don’t forget about your retirement: Even in light of your new expenses, it is important to continue saving for your own retirement. Consider maximizing retirement plan contributions while your child is young and expenses are more predictable.

Helpful hint…

Accept hand-me-downs! View anything handed down to your baby from friends and family as a gift for both your baby and you. Your baby will receive newer items, and you will receive an opportunity to conserve money and build savings.

Estate planning for new families

Topics such as trusts, wills, and life insurance may not be the most pleasant for new parents to consider, but they are essential. Estate planning is an important responsibility associated with caring for your new family.

Draft or update your will:  Regardless of your financial situation, every parent needs a will. In addition to outlining how you want your assets distributed, a will allows you to designate who should care for your child in the event that something happens to you and your partner. It is always wise to discuss your decision with your chosen guardian before you include them in your will to ensure that they are willing to accept the responsibility.

 Guardianship: If you do not appoint an individual to care for your minor child a court will appoint someone. Most times the court will select a relative, but you may have insight about that person that the court does not. For example, while a court may find that an individual is financially able to care for children, you may know that they have no interest in doing so. When selecting a guardian, consider the person’s age, health, finances, and comfort level with caring for your children.

Trust: In addition to appointing a guardian for your children, consider how your assets should be managed and distributed to care for and benefit your children if they are to be raised by another person. Work with your financial professional to establish a trust and select a trustee.

Fund your children’s future needs: Your goal should be to provide for your children’s stability without putting a financial strain on their guardian. Consider the cost of education, clothing, food, entertainment, and health care. Then start a rainy-day fund to help cover those costs. Once you have some money set aside, work with a financial professional to understand investment options that will help you meet your goals.

Review your insurance coverage

Your child will depend on you and your income for years to come, so it is important to take the steps to ensure that they will be able to continue enjoying the lifestyle that you have created for them, should something happen to you. Consult with your financial professional to learn about various insurance options and how they may align with your personal situation.

Life insurance: Life insurance helps to replace lost income and the cost of time spent caring for your child. There are many varieties of life insurance, ranging from term insurance that covers certain periods of time to more permanent types, such as whole life insurance. The amount appropriate for your family is a personal calculation specific to your family’s needs.

Disability insurance: Disability insurance pays a portion of your salary for a period of time if you become disabled and are unable to work.

Health insurance: Generally, you will have 30 days to add your newborn baby to your health plan. If both you and your partner are covered by health insurance, carefully review both plans for the best option. What will it cost to cover a newborn? Is one policy more cost-effective than the other?

Teach your children to be money-wise

As your children grow, they will create many proud parent moments, such as graduating from college, getting married, and having children of their own. When you think about potential gifts to help celebrate these events, consider giving sound financial guidance. It will benefit your children throughout each major life event, and may turn out to be the most precious and timeless gift you can give.

It’s never too early to think about college

It’s natural for parents to want the best for their children, and a higher education from a prestigious institution generally tops the wish list. Not surprisingly, one of the biggest concerns for new parents is saving for the cost of a college education, so it is wise to start planning early. Tuition is the annual price that colleges charge to attend classes along with any additional fees related to enrolling in a college. The cost of tuition will vary by the type of college, as shown in the chart below.

Tuition is only part of the cost In addition to tuition and fees, there are additional categories of expenses to consider when determining the annual cost of college.

Room and board: Colleges usually offer a variety of dorm room options and meal plans to students who live on campus.

Books and supplies: On average, books and other supplies will cost approximately $1,200 each year.

Personal expenses: These include any non-school related costs, such as basic necessities and entertainment.

Transportation: There will most likely be costs associated with commuting to and from campus or making regular visits home

Rethink retirement plan loans

 A college education is a sizable expense for most parents, and many may consider taking a loan from their 401(k) plan to help cover the cost. This may seem appealing, but as you can see from the points below, it is not always the best option. Consult your financial professional to discuss college funding options that make the most sense for your family.

 Loss of tax benefits: When you contribute money to your 401(k) plan directly from your paycheck, money is added on a pre-tax basis. Loan repayments, on the other hand, are made with after-tax money. That means that you will ultimately be repaying more than the amount you initially borrowed.

 Retirement insecurity: Removing money from your 401(k) plan prior to retirement could jeopardize your overall retirement security. The amount of the loan you take may create a financial shortfall that you may not be able to replace. In addition, in the event of a job loss, many plans will consider an outstanding loan as a payment of additional income, which will cause a tax liability.

 Limited growth potential: Borrowing from your 401(k) plan will limit the growth potential of your retirement assets because the outstanding loan balance will not earn interest or benefit from compounding interest.

Tax tips

Having a baby reduces taxable income for all taxpayers, even if your child is born on the last day of the calendar year. The following are some basic tax breaks related to children. Consult with your tax and financial professionals for the guidelines and limits specific to each of these tax provisions.

Basic exemption: Having a child will reduce your taxable income, as long as your income does not exceed a certain amount.

Child tax credit: According to the Taxpayer Relief Act of 1997, you can claim an annual tax credit for each child you support below age 17.

Adoption credit: You can claim an adoption tax credit, if applicable, for a child under age 18 or a special needs child, providing your income does not exceed certain limits.

Education tax credits: These credits include the HOPE Scholarship and Lifetime Learning Credits. The HOPE Scholarship provides a federal income tax credit per student for qualified higher education expenses paid during the tax year. The Lifetime Learning Credit is a tax credit for any person who takes college-level classes. If you plan on working and paying for child care, you may need to choose one of two tax breaks:

Flexible spending account: If your employer offers a flexible spending account for dependent care, you can set money aside up to a certain amount, and exclude it from your income, to help cover the cost of day care or a nanny.

Child care credit: If you owe taxes, you can be credited dollar for dollar for up to a certain percentage of your child care expenses. In addition, to help increase your take-home pay and avoid withholding too much income from your paycheck for taxes, consider revisiting the deductions on your Form W-4. Consult your tax and financial professionals for guidance on a withholding level appropriate to your financial situation and family.

Don’t go it alone

 Having a baby is a life event that will spark many changes in your life―both personal and financial. As you achieve life’s major milestones, remember that your financial professional is a valuable resource who can help you regularly review and refine your financial needs and, as your circumstances change, recommend any adjustments to your investment strategy.