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How to financially plan & prepare for a baby

At a glance:

Your baby is a full-time job. Having to make major financial decisions will add to any stress you are already experiencing, especially if this is your first child.

You can breathe a certain amount of relief if you address major decisions before your new bundle of joy arrives. That won't remove all the stress, but it will certainly give you a way to predict and then deal with challenges that do arise.

How to prepare your finances for a baby

In this Aug. 13, 2019, photo, Dr. Jasmine Saavedra, left, a pediatrician at Esperanza Health Centers in Chicago, hands newborn Alondra Marquez to her mother, Esthela Nuñez, right, after examination. Doctors and public health experts warn of poor health outcomes and rising costs they say will come from sweeping changes that would deny green cards to many immigrants who use Medicaid, as well as food stamps and other forms of public assistance. (AP Photo/Amr Alfiky)
Having a baby can be expensive. (Photo: AP Photo/Amr Alfiky)

Babies = money out the window. How stable are your finances? Consider questions such as these:

Is your insurance adequate?

  • You should know what medical expenses are covered during and after pregnancy so that your little bundle of joy doesn't come with unexpected price tags. How much of the pregnancy and delivery are covered? Not all medical procedures are covered.

  • Do you have life insurance in the event that you die? If you do, is it enough to replace the income you would have earned until your child has left the house?

  • Do you have disability insurance should one of you become unable to earn money for a while?

Do you know the costs of a child?

  • Have you factored in the costs of food, clothing, medical care, education, and childcare?

  • How much maternity and paternity leave are granted by your job? How much of that is paid?

  • Do you have adequate savings for the period when you won't be working? Do you have a budget to control expenses?

  • Can you pay down your debts as much as possible before the baby's birth?

  • Do you have investments that you can tap into if need be? Did you meet with a financial planner before the baby's birth (or before you got pregnant, or even before you got married) to get a feel for the effects of family on your money? Financial institutions often have special financial products (loans, investments, savings products) geared toward expecting and new parents.

  • Do you have a support network to help during this time? Can you borrow from friends and family if need be?

Once your baby has joined your family

  • What is the health insurance coverage for your baby? What kind of coverage can you get?

  • Do you want to make your new child a beneficiary on any of your accounts?

  • Do you have a guardian named?

  • Should you amend your will if you have one? If you don't have one, now is the time to write one.

  • Have you considered setting up a trust for him or her?

  • Do you know all the tax breaks that are available to parents? There are ones made just for you. This is where meeting with a tax advisor or financial planner can save you a lot of money.

How to prepare your baby’s finances

You are providing food, clothing, shelter, and love for your newborn. Why not also provide a good start to his or her financial life? Early exposure to this can teach them the importance of saving and investing. Here are some examples to consider:

Savings accounts just for your baby

Some parents like to set up a special savings or certificate account for their new baby and add to it periodically. Often, when the child is older, he or she can begin adding their allowance, babysitting money, or lawn-mowing earnings to it.

Inquire about other accounts for children at your bank, credit union, or other institution. Some of them offer special accounts and special incentives for opening and keeping an account.

College savings plans

The best time to start saving for your child's education is before you discover you are going to be parents. Unless you have a wealthy aunt with money to spend, you should know about two big savings vehicles that the government created for you. You can save money tax-deferred in these special accounts just for educational costs:

  • Coverdell education savings accounts. A Coverdell ESA lets you sock away tax-deferred money every year for college expenses.

  • 529 plans. These plans can help you save for future expenses; they can help you contribute more than you could under a Coverdell.

Investments

The time-honored practice of buying a savings bond for Junior is still alive. But if you can do so, why not set up a stock or mutual fund account as well (or instead)? You can open up a custodial account in the child's name and shelter a certain amount of its income from taxes.

7 financial mistakes new parents make

Parental finances may not get the same attention as diapers and vomit, but they can sneak up and fling themselves on you in much the same manner. Because of this, many new parents either avoid important issues or make last-minute decisions that don't pan out very well.

Let's look at some common mistakes new parents—whether they are single or partnered—often make:

Not having health insurance

Look into all your options for health insurance, including state-sponsored coverage. If you can get a plan with a high deductible and lower premiums, you might qualify to set up a health savings account and get tax breaks for your contributions to it.

Spending too much money

If you're the average parent, you can expect to spend over $250,000 on your child from birth to 18—and that's if things go smoothly. Lavishing money on babies is a real high for new parents. But lavishing every comfort on them is not only unnecessary but can create unrealistic expectations and dependencies from that child and future children—which can cost you years down the road if they have not developed responsible money habits and keep begging you for money.

Remember that much of what you buy will be used only for a year or so, so is it really important that it be so hip (and does your baby really care)? Rediscover hand-me-downs and yard sales all over again.

Not having a will

You don't need a big estate to need a will, so draft one now. Also, without a will to designate a guardian for your child, a court will do it for you, and you may not like the outcome. Taking the time to write a will—perhaps with the aid of an attorney—can ease a lot of worry.

Not saving for your own retirement

Parents often stop contributing to their retirement plans when the babies arrive. If you are starting your family later in life, this may not have adverse effects because you may have sufficient funds saved up already; if you are younger, it will have adverse effects, and it will jeopardize your quality of life in your later years. You can't always count on your children to help you out when you're old and gray. Cut your expenses and keep contributing to an IRA, 401(k), or other plan.

Not taking precautions for your premature death

This is why life insurance is popular. Unless you are wealthy, you will want a way to provide for your dependents if the unspeakable happens. Suggested coverage amounts vary, but a good rule of thumb is five times your earnings. More, if you've got a lot of debt and/or other burdens.

Then there's disability insurance. The probability of being injured to the point of temporary disability is high enough to consider this insurance. The price isn't prohibitively expensive. Take a look at your monthly spending to see how much coverage you might need.

Not knowing all your tax breaks

Junior can get you some nice tax breaks. You can take the child tax credit, the dependent care credit for childcare costs, custodial investment accounts, and an adoption credit if you adopted. If you don't want to peruse the IRS Website for information on these, consider meeting with a tax advisor to learn more.

Not taking advantage of employer benefits

Does your employer let you participate in a dependent care account? If you are fortunate, you can divert a sizable amount of money into one each year.

How to plan financially for children with special needs

Providing for children with special needs has become more complicated than ever. Unlike in days past, modern healthcare now routinely allows a large majority of those who experience disabilities to outlive their parents.

The dilemma

This is good news, of course, but it presents a dilemma to many of these parents. They recognize that our aging population is relentlessly increasing the budgetary pressure on public assistance in all forms. Yet their children, like most Americans with disabilities, rely on federal and/or state payments and programs to meet the challenges of everyday life.

The means test

While most parents with the means will want to provide for their children's needs now and in the future, the future becomes problematic for children with special needs since many public services may require that a financial means test be taken in order to qualify for benefits.

If a child with special needs has "too many assets or too much income," he or she may have to spend down those assets on private services before passing the financial means test. This could necessitate impoverishment. Furthermore, if "free" public services were later cut back or discontinued entirely, then the child would be left impoverished without his or her own means to obtain the special services needed.

For this reason, extra care must be taken when selecting how investments and savings are going to be owned and viewed by financial means testing. Assets owned outright by a child or parents are first considered available by financial means tests. Assets held in certain trusts or in life insurance cash values are usually excluded from means testing. However, if such assets later become the child's property or income, then they fall under means test scrutiny.

The role of life insurance

When set up correctly, cash value life insurance (whole life, universal life, and variable life insurance) might provide a good funding vehicle to provide cash for short-term needs and a legacy that can be sheltered from means testing in a special-needs trust. However, you need to compare policies, benefits, costs, and investment choices to find the right balance for your financial needs and to avoid adverse income tax consequences.

Name a guardian

While special-needs children are young, it is important to provide for guardianship in the event of an untimely death of the parents. This is accomplished by naming guardians for children in the parents' wills. Careful consideration must be given to who should serve as guardian, and of course, this should be discussed with potential guardians before their inclusion in a will. You may also want to provide a means for your selected guardian to care for your child. Life insurance and/or a trust should be considered for this purpose.

Maintaining eligibility for government assistance is an essential, overarching principle in all financial and estate planning for families with disabled or special-needs children. But this critical consideration should not obscure other decisions. Since disabled individuals increasingly have normal life expectancies, parents want to ensure that good care of their special-needs children will continue after they are not here to provide it themselves.

How well does your child handle money?

When bequeathing assets to special-needs children from property, investments, or insurance proceeds, consider the child's ability to manage money as well as the effect the inheritance will have on the financial means testing to qualify for public services. It is often better to create a supplemental needs trust to avoid problems.

The word supplement is the key concept in understanding this estate-planning and financial-planning tool, which is also called the special-needs trust. Since the trust document requires the trustee to use trust funds only to enhance the beneficiary's quality of life by supplementing—not replacing—whatever minimal, means-based benefits are provided by federal and state agencies, its value is excluded from means testing.

Summary of finances for new parents

Decisions, decisions, decisions—that's what being a parent entails. Get a head start now and cut down on the worry when it comes time to put your boy or girl at the center of your life. It'll be well worth it.

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

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