The moment you find out you are pregnant invokes a roller coaster of emotions. As you contemplate and dream about what your baby’s personality and physical features will be and who he or she will develop into, your thoughts may drift off to how this little blessing will change your life forever – including financially. Although no two children are alike, it is important to financially prepare for each child so you are equipped to handle anything that comes your way.
First of all, you want to protect your family to ensure you can all live the life you envision. Consequently, it is important to have a will and any additional legal documents to make sure your wishes are properly documented. If your personal legal documents are already drafted, you should review them to confirm everything is current.
Furthermore, there are multiple items you need to consider related to your job. First, it is important to decide if both parents will continue to work full-time, part-time, or if one will stay home. These decisions will effect who carries the insurance coverage, cost of daycare, and the cumulative take home pay for the entire household. Subsequently, you will want to analyze how much time you plan on taking for your maternity/paternity leave so you can review and understand each parent’s applicable policy. This will help determine the amount of time you will be paid through maternity/paternity leave, vacation time, and/or short-term disability. At this point, you will be able to budget for any unpaid leave. Additionally, be sure to review your health insurance coverage and confirm your deductible, out of pocket costs and any additional requirements needed to make sure your new baby is insured. It is important to review all of your benefits at work to confirm everything is updated, including your tax withholding elections, and your beneficiary designations on your insurance and 401(k)/retirement documents.
Once you have determined your work options, you can set a budget and establish a plan. A short list of some additional expenses to include on a monthly budget with a baby or children are: daycare; diapers; additional groceries; cleaning/bathing items; and medical costs. There will also be bigger ticket items to include in your budget such as car seat(s), bassinet/crib, dresser, and stroller.
Savings, Life Insurance and Investments
Once a budget has been established, it is essential to set aside funds each month for an emergency fund. An emergency fund is important in case something large and/or unforeseen should occur such as loss of a job, accident, etc. We encourage our clients to put three months of expenses aside in an emergency fund.
Similar to an emergency fund, it is especially important after having a child to have a sufficient amount of life insurance for each member of your family. Although you never want to think about losing a family member, you need to have a plan in place to cover funeral costs and to help supplement the income of family members if something should happen so you can ensure you can live the life you envisioned. There are many different types of life insurance that is why it is important to work with a financial advisor to determine which type of insurance is right for you and your spouse and at what value you and your spouse should be insured.
After you have established your emergency savings and life insurance for family members, it is essential to consider your other saving options. In most cases, you will want to start with the employer-sponsored retirement plan (if one is offered). It is important to contribute enough money to get any matching amount offered by the employer so you are not losing “free” money. If your employer doesn’t offer a retirement plan, you can always establish an IRA with any financial institution or advisor. Additionally, contributions should be reassessed each year to try to increase them as much as you can until you get to the maximum contribution limit (for company sponsored retirement plans, maximum contribution is $18,500 in 2018 and for IRAs, it is $5,500). Not only does contributing to one of these savings options reduce your taxable income, but the earlier you start saving, the easier and faster it accumulates in your retirement fund.
Another option to help reduce your taxable income is by contributing to a flexible spending account (FSA) up to the maximum allowed per year for medical expenses and daycare expenses. Make sure to only set aside what you plan on using because it is a use it or lose it type of account. Therefore, you should utilize all options to save more money and get taxed less, like contributing to a 401(k), IRA and flexible spending accounts.
After you maximize the above-mentioned products, it is time to think about advanced saving options. There are a variety of products available including taxable investment accounts, investing in stocks and niche investment options. An example of a niche investment option is a 529 Plan for your child’s higher education. A 529 Plan is an investment option available to parents which allows earnings to grow tax-deferred on qualified withdraws. Additionally, each state may have special plans, like Iowa, that allow you to deduct contributions from your gross income. When considering different niche investment options, it is advantageous to talk to a financial planner/advisor at your local financial institution to help you navigate your investment options and how they relate to your financial goals.
Therefore, establishing and evaluating your financial plan will help ease your mind and make sure you are prepared to sit back, enjoy the ride of a lifetime, and continue to make great things happen for you and your family.