Before our son was born, even after reading the book “What to Expect When You’re Expecting”, I still felt a significant amount of uncertainty. I had no experience caring for a newborn, and I was unsure what our new budget would look like. Everyone knew that “babies are expensive”, but to what extent, we had no idea.
Among the major events in our lives, welcoming a new baby, especially your first, is unparalleled. While there are many reasons for the joy, the financial impact is a topic worth discussing. In this article, I hope to share some tips for those who are expecting or those who plan to have children soon.
1. Plan ahead – even before becoming pregnant, certain preparations can be helpful. For example -
a. Check your medical insurance coverage for pregnancy, delivery, and newborn care, and pay attention to the out-of-pocket deductibles.
b. The open enrollment period, typically in October and November, is a great time to compare different plan options and choose the one that best suits your needs.
c. Look into Flexible Spending Accounts, which allow you to set aside pre-tax savings for eligible healthcare and dependent care expenses, especially if your insurance has a high deductible.
d. Review your other insurance coverages, such as home and auto insurance, particularly if you are moving into a larger space or getting a new car. Life and disability insurance (through your employer or obtained independently) can help provide for your family in case something happens to you.
2. Research your new budget and cash flow –
a. Once a baby arrives, your budget may change as dramatically as your sleep schedule. Income may decrease if a parent stays home for an extended period, while expenses can increase significantly due to diapers, formula, baby supplies, care, and toys—not to mention the potential need to save for college down the road. Be sure to adjust your budget and expectations for discretionary spending accordingly.
b. Evaluate needs versus wants – Your lifestyle will likely change significantly with the arrival of a new baby. It is an excellent time to discuss with your family the difference between needs and wants. Eating out or attending fun events might need to take a backseat to catching up on sleep and managing new expenses.
c. Emergency fund – With your expenses likely increasing, your emergency fund may also need to be enhanced—especially if you expect a reduced income due to a stay-at-home parent. It's a good idea to save more, if possible, before the baby arrives.
3. Take advantage of tax breaks for parents – There are several tax incentives that come with expanding your family, such as:
a. Higher standard deductions for the year when your baby is born, even if they arrive on December 31.
b. Starting a 529 plan for those who expect their child to attend college. A 529 plan offers tax-deferred growth and tax-free distribution for qualified education expenses. The SECURE 2.0 Act even allows unused funds in a 529 plan to be rolled into a Roth IRA for the same beneficiary (with lifetime limits).
c. Additional tax benefits, like the Earned Income Credit, may also be available. Consult your CPA or visit the IRS website for more information.
4. Update, organize & share your legal & financial documents –
a. Discuss with family and friends and designate legal guardians for your child. Prepare or update your legal documents (wills, estate plans, etc.) accordingly.
b. Review your financial documents periodically to gain a clearer understanding of your financial standing.
c. When sharing your exciting news with family and friends, don’t hesitate to accept offers of help in various forms. Instead of gifts or toys, you might ask family members to contribute to, or set up a separate, 529 plan account. Compounding growth can make a significant difference over time, especially over an 18-year period!
In Conclusion
Having a new baby is a significant life event that comes with considerable financial responsibilities. By taking a proactive approach to financial planning, you can navigate this exciting chapter with confidence and be better prepared. Remember to communicate openly with your partner, automate savings, and seek guidance from financial advisors or tax professionals who specialize in family financial planning. They can help you create a personalized plan tailored to your unique circumstances and goals.
Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC. Li Tian, Ph.D., CFP® and LPL Financial do not provide tax or legal advice or services. Please consult your tax or legal advisor regarding your specific situation.
Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
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