Financial Planning for New Parents (Part II: Action Steps)
June 3, 2013
Having a child is a defining moment in everyone’s life. And as with all major life changes, being aware of the financial implications and having a plan for addressing them is vital. This article is the second in a series of blogs posts aimed at helping new parents become more financially savvy as they nurture and care for their new baby.
When you bring your new baby home from the hospital, you’ll be busy learning many new skills. My personal favorites included mastering the three-hour sleep cycle and advanced wardrobe planning (examples include selecting what you’re going to wear based on the probability of needing to clean off spit-up, along with waiting until you walk out the door for work before putting on a clean shirt).
It’s no surprise that financial issues get pushed aside when a new baby enters your life. Here are some concrete financial steps all new parents should consider taking:
- Simplify Your Life – All new parents quickly learn that time is suddenly a scarce commodity. Here are some ideas my wife and I used to simplify our financial life:
- Consolidate your accounts (savings, checking, brokerage).
- Roll over 401(k) plans from your former employers to an Individual Retirement Account (IRA).
- Reduce your number of credit/debit cards, and hence, the number of bills to pay each month.
- Set up online or automatic bill pay for recurring expenses (utilities, cell phone, mortgage, etc.).
- Track expenses and the household budget using an automated online personal finance tool (e.g., Mint.com). If using Quicken, download data instead of entering it by hand.
- Pay off any consumer debt or small student loans.
- Maximize Employer Benefits – Depending on your employment situation, you may need to make changes to your benefits enrollment and tax withholding.
- Add the new baby to your medical insurance.
- If either parent has a Flex Spending Accounts (FSAs), consider increasing your contributions.
- If you have access to a Dependent Care FSA and plan to hire professional childcare, start funding this as well.
- Update your withholding forms for federal and state income tax.
The W-4 form you filled out when starting with your employer establishes how much of your pay is withheld and sent to the government to cover income tax. By increasing the number of dependents claimed (since you now have a child), you may qualify for lower withholding and therefore, more take-home pay. Furthermore, if you are single, by having a child you may qualify to file taxes as “head of household” – which may further reduce income tax withholding (assuming you pay at least 50% of the child’s expenses).
3. Protect the Future – None of us like to contemplate our own demise, yet once you have children you will want to provide for them in the unlikely event both parents die. This is not a time to do nothing…remember, estate planning is NOT about you.
- Consider life insurance policies that provide coverage until your children will be old enough to be self-sufficient (likely until they are college age).
- Draft a will naming a guardian for your children. Depending on the complexity of your situation, best to consider hiring an attorney or at least use a software program…but do not let it sit idle.
- Revisit your beneficiary designations on retirement accounts, life insurance, trusts and anything else that you want to pass directly to someone upon your death.
By acting on these few basic ideas, you can reduce the burden of dealing with your finances in order to free up time to spend with your amazing children. Consider speaking with your financial advisor or a Certified Financial Planner™ (CFP®) for additional guidance on how to implement these action steps. In the next blog post in this series, I will address how to save for your child’s education without endangering your retirement.