5 Financial Planning Tips Every New Parent Should Know
It’s no secret: Raising a kid is expensive. But many new parents don’t realize just how expensive kids are until they have one themselves.
According to a USDA study, parents spend nearly $233,610 on child-related necessities by the time their kid turns 18 ($284,570 if you account for inflation). And that doesn’t include college tuition.
That’s a decent chunk of change. But ask any parent if it’s worth it, and they won’t hesitate to say yes. Thankfully there are steps you can take now to financially prepare for the costs that come with raising a child.
Financial planning for new parents can be overwhelming, so, as a mother myself, below are 5 steps every parent should do.
It’s never too early to start planning for your future. Contact Foran Financial Group to see how we can help.
1.Create a Budget
If you’ve gotten by without a budget before now, it’s time to rethink your plan. Diapers, baby clothes, formula, unexpected trips to the pediatrician … it all adds up!
Pick out a day to sit down for an hour or so and create a budget. It doesn’t have to be 100 percent perfect. It just needs to be good enough to help you visualize where your money is going each month.
Start by calculating your average monthly income. Then, make a rough estimate of how much you spend on mandatory expenses (like transportation, groceries and housing), fun expenses (like dining out, shopping and entertainment), and unexpected expenses (like car repairs and medical bills).
It can also be extremely helpful to discuss your situation with a financial advisor. Not only can a financial advisor help you create a budget, but an advisor can also help you create a financial plan that works for you. If you’re looking for a financial advisor in New Jersey, contact me directly to see if we’re a good fit.
2. Start a College Fund Early
When starting a college fund, the first step is to estimate how much you need to save. Do you want to pay for 100 percent of your child’s college expenses? Half? Tuition only? There’s no wrong answer. It’s ultimately up to you and what you feel comfortable doing. But determining your answer is an important step.
College tuition will likely be much higher in 18 years than it is now, but the average cost of tuition and fees for the 2019-2020 school year is:
- $36,801 for private colleges
- $10,116 for state residents at public universities
- $22,577 for out-of-state residents at public universities
Remember, these fees are just for one year. If your child attends an in-state public school for four years, expect to pay around $40,000 (before financial aid and scholarships).
Which College Fund Should You Choose?
There are several accounts that are built to help you combat these expensive costs. Three popular options are:
- A 529 College Savings Plan. Arguably the most widely known college savings plan, a 529 Plan is an investment account used to cover college-related expenses. Terms and conditions vary by state, but you can usually contribute anywhere from $235,000 to $500,000 a year. There are no income restrictions and you can put the account in another child’s name if one decides not to go to college.
- A Coverdell Education Savings Account (ESA). This account allows you to save up to $2,000 per kid per year. The money can be used for qualified elementary and secondary education expenses. You contribute with after-tax dollars, but earnings and withdrawals are tax-free. To qualify for this account, you must have a Modified Adjusted Gross Income (MAGI) less than $110,000 if you’re a single filer or $220,000 if you’re married filing jointly.
- A Uniform Transfer/Gift to Minors Act Account. A UTMA/UGMA is a custodial account that’s managed by you (or a grandparent) until your child is anywhere from 18 to 21. Unlike 529 Plans and Coverdell ESAs, these aren’t education-only accounts. Your child is free to use the money for anything they wish once it’s transferred to them, which can be a pro or con depending on how financially responsible your children are.
If your head is swimming trying to figure out which account you should go with, don’t panic. The financial advisors at Foran Financial Group are more than happy to help you figure it out.
3. Update Your Insurance Plan
There are 3 main insurance policies you’ll want to revisit as a new parent: Your health, life and disability insurance.
Once your child is born, you have 30 days to add them to your health insurance policy. Once they’re added, the coverage is usually retroactive, so any medical bills your child incurs between birth and enrollment should be covered by your plan.
If both you and your spouse have employer-sponsored healthcare plans, look at each to decide whose policy your child should go on.
Does one have an in-network pediatrician you’ve heard great things about? Does the other have a more affordable co-pay that will help cut the cost of unexpected doctor’s visits? Crunch the numbers both ways to see which makes the most financial sense for your family.
Now that your family has grown, you’ll want to revisit your life insurance policy. This includes adding your child as a beneficiary and possibly bumping up your coverage.
A lot of people choose their life insurance plan when they first get a new job, then fail to update it when big life events happen like marriage or the birth of a child.
New parents will want to make sure their family isn’t financially strained if something happens to Mom or Dad.
If you’re unsure about how much life insurance you need, work with a financial advisor you trust to get an estimate.
What would your financial situation look like if you were suddenly disabled and couldn’t work? Do you have an established emergency fund that could carry you through the bad times? Or would you struggle to make ends meet?
It’s estimated that one-third of U.S. workers will become disabled for at least 90 days at some point in their careers. As a new parent, it’s important to make sure you have adequate disability insurance to cover your expenses should this unfortunate event happen to you.
4. Establish or Update Your Estate Plan
Discussing your death can be uncomfortable, but as a new parent, you will want to make sure your child is financially and emotionally cared for if something unexpected happens to you. That’s where an estate plan comes in.
Estate planning involves a lot of moving pieces, but it generally includes:
- Creating a will. This is where you list out details about guardianship, education and inheritance wishes. If you have a child with special needs, you can also list out any care they need.
- Establishing a trust. A trust holds your assets for your beneficiaries (likely your kids) until they’re old enough to handle the money on their own. There are many different types of trusts, so it’s wise to talk with a financial advisor about which is right for you.
- Getting your financial affairs in order. An estate plan also involves a good bit of housekeeping. This process includes keeping your financial documents in a safe place, updating your beneficiaries and making sure you have enough insurance coverage, among other things.
5. Consult a Trusted Professional
Becoming first-time parents should be an exciting time, but it can quickly become overwhelming as you come head-to-head with the financial challenges of having a baby. At Foran Financial Group, we’re passionate about helping families transition through the many stages of life. If you’re unsure about which steps you can take to feel financially confident, contact us to see how we can help.
Foran Financial Group has a combined 58 years of experience helping families with their financial plans.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the advisor, and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Past performance may not be indicative of future results.