Alexandra Demosthenes, CPA/PFS, CFP®
5 Financial Questions All New Parents Need to Ask
On June 29th I welcomed my first child, Joshua, into the world! While I spent the prior nine months making sure he had the most perfect, Pinterest-worthy nursery, and having daily conversations with my husband about all the fun things we would do together once he was born (trips to Disney, the science museum and local parks) we soon realized that none of those things prepared us for taking care of a newborn!
While the non-stop caring for your new bundle of joy combined with what seems like never-ending sleepless nights can leave you with little time for anything else, it is important to take the time to get your financial house in order. To take one item off your to-do list, I have compiled the top 5 questions all new (and seasoned) parents need to ask, to make sure your family is taken care of financially.
1. Do I Have (Enough) Life Insurance?
What would happen to your child or children if something happened to you? Life insurance is an effective way to protect your family from the uncertainty of premature death. It can help ensure that a preselected amount of money will be on hand to replace your income and help your family maintain their standard of living.
With life insurance, you can select an amount that will help your family meet living expenses, pay the mortgage, and even provide a college fund for your children. Best of all, life insurance proceeds are generally not taxable as income. Keep in mind, though, that the cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased.
One thing families overlook is insuring the life of a stay-at-home parent. Even if one parent is not working and they don't have an income to replace, it still makes sense to have life insurance to defray the cost of replacing all their responsibilities. For instance, what would it cost for additional childcare such as daycare or a nanny? What would the cost be to order meals in, instead of having meals prepared at home? Would there be any potential lost income of the primary breadwinner should they need to spend more time at home caring for their family and less time in the office or running their business? All of these are important considerations when deciding how much life insurance you need to buy.
2. Do I Have My Estate Planning Documents In Place?
An estate plan is not just something for the rich and famous. It ensures that your family is taken care of in the way you would want if you are no longer around to make those decisions.
One of the most important elements to setup is to choose a guardian for your child if you were to pass away. A separate guardian can be chosen to handle financial matters and to physically care for your child. It is good to decide on a responsible party beforehand, such as a parent or sibling, and have a conversation with them to make sure they are willing and able to act as a guardian should the need ever arise.
Also, remember that life insurance you bought? Do you want your 18 year old to potentially receive a lump sum of $2 million? Or would you rather have it held in trust and only distributed at certain age increments, or for certain types of expenses like college or a down-payment for a house? If you agree that the latter is a better option, you will have to create a trust and make sure it is properly funded with the help of an estate planning attorney.
Many people put off estate planning because they don't like to think about their own mortality. However, this is one of the most important things you can do to care for your family. Consider this, you and your spouse have both pass away in a car accident. Do you want your children to remember you as a parent that cared about them so much that you made arrangements for them in this worst case scenario? Or, will your child be dealing with one of the most catastrophic events of their life, the loss of their parents, while all their other affairs are a mess and family members are fighting with the court to decide on who the guardian should be because you didn't care enough to formalize your estate plan? Your actions and planning now will directly affect the legacy you leave your family.
3. Should I Start A College Savings Plan?
According to the College Board, for the 2020 - 2021 school year, the average cost for one year at a four-year public college is $26,820 (for in-state students), while the average cost for one year at a four-year private college is $54,880 (the total cost of attendance includes tuition and fees, room and board, books and supplies, transportation, and other miscellaneous costs). Even if those numbers don't go up (and they are expected to continue increasing), that would come to $107,280 for a four-year degree at a public college, and $219,520 at a private university. Oh, and don't forget graduate school.
College costs may seem daunting, especially if you're still paying off your own college loans, but you have about 18 years before your newborn will be a college freshman.
By starting today, and utilizing tax advantaged accounts like 529 plans, you can help your children become debt-free college grads. The secret is to save a little each month, take advantage of compounding and tax savings, and you will have a sum waiting for you when your child is ready for college.
The following chart shows how much money might be available for college when your child turns 18, if you save a certain amount each month.
Child's Age Now
Table assumes an after-tax return of 6%, compounded monthly. This is a hypothetical example and is not intended to reflect the actual performance of any investment. All investing involves risk, including the possible loss of principal, and there can be no assurance that any investment strategy will be successful.
*TIP* If you have any unused 529 accounts, consider updating the beneficiary to your new child. Here is a personal example: My dad had a 529 savings account with me as the beneficiary that still has funds after I graduated from college. Since I won’t be using any of the money on higher education, I asked him to change the beneficiary to my son. This is a great solution because (1) changing the beneficiary to a qualified relative does not trigger any taxes or penalties (check with your tax advisor for what is considered a qualified relative) and (2) the money will continue to grow tax-free if used for qualified education expenses for him in the future.
4. Does My Workplace Offer Additional Benefits?
Many employers offer health insurance, health savings accounts (HSAs), health care flexible spending accounts (FSAs) and/or dependent care FSAs. Changes to these plans or increases to tax-advantaged contributions can usually only be made during the annual open enrollment period or after a qualifying life event, such as the birth of a child.
This can be your opportunity to add your newborn to your health insurance, as well as increase tax-advantaged contributions to pay for healthcare and childcare costs in an HSA or FSA. Check with your employer's HR department to see what benefits are available to you.
5. How Do Children Affect My Budget?
While many aspects of parenting are up for debate, one thing all parents can agree on is that kids are expensive! Many living expenses may increase, including groceries, clothing, transportation, health-care, insurance, and housing costs. Necessities like formula and diapers alone can run your expenses up a few hundred dollars a month. And bigger ticket items, like the cost of childcare, can vary wildly, depending on where you live and what type of care you choose.
You may also need adjust your budget to account for a decrease in your income if you decide to become a stay-at-home parent. Your budget may also need to expand to include new financial goals, such as saving for college or buying a home, while still staying on track and saving for retirement.
Making sure that your budget reflects your new financial priorities can help you stay on track for multiple family goals and avoid any financial surprises during an already stressful time.
BONUS Question - Should I Consider Purchasing Disability Insurance?
Yes! If you become disabled and unable to work, disability income insurance can pay benefits — a specific percentage of your income — so you can continue meeting your financial obligations until you are back on your feet.
What about Social Security? If you do become permanently and totally disabled and are unable to do work of any kind, you may be eligible for benefits, but qualifying isn't easy. For more flexible and comprehensive protection, consider buying disability income insurance.