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Baby On the Way: Are You Ready for Your New Financial Reality?

Baby On the Way: Are You Ready for Your New Financial Reality?

Key Points
  • From everyday budgeting to ongoing expenses, it's smart to do some planning before the baby comes.

  • Get a jump on education costs by opening a 529 account, the sooner the better.

  • Don't neglect your own financial needs—especially retirement!

Dear Carrie,

We're expecting our first child soon and are trying to get financially prepared. We know college is high on the list, but that's so far in the future. What about now? What should we focus on first?

—A Reader

Dear Reader,

Smart question. And smart to be thinking about this now. According to a 2015 report from the U.S. Department of Agriculture, raising a child is a costly proposition. The USDA estimates that a child born in 2015 will cost the average middle-income family about $233,610 through age 17 (you can also check the USDA website to do your own calculation). That's before college!

Realistically, some of these projected expenses such as housing and transportation are part of everyone's budget. But the fact is, kids do up the bill in a variety of ways, so you need to be prepared. While saving for college is definitely a top concern, the sooner you determine the impact of day-to-day costs—from diapers to daycare—the better off you'll be. Here are some things to consider.

Before the baby comes

From everyday budgeting to ongoing expenses, before the baby comes is the time to do some planning. So sit down together and put some things on paper.

  • Review your monthly spending. Start with the basics. Estimate ongoing costs for things such as diapers, formula and baby clothes. If both of you plan to work, be realistic about the substantial financial impact of childcare and look into your options in advance. Factor in additional medical costs, both in insurance premiums and out-of-pocket expenses. With the numbers in front of you, look at your current budget and see if you need to reprioritize expenses. If you can start setting aside money to cover these costs in advance, and also increase your emergency fund for the inevitable unexpected expenses, so much the better.
  • Make sure you have the right insurance coverage. Health insurance is crucial. Whether you have an individual policy or insurance through an employer, make sure you have the best combination of deductibles and coverage. You'll also want to consider life insurance, both for a working and a non-working spouse. Life insurance can protect your family and make sure there are financial resources to cover things like your salary, mortgage, debts, childcare, household expenses and your child's education if you’re not there. Term life insurance policies may be the most cost-effective in covering these types of obligations. On the other hand, permanent insurance, such as whole life or variable/universal life, can make more sense for estate planning goals or more complex financial planning needs. Some employers offer life insurance through the company, so check to see what your company offers-and what happens when you leave. You should also examine your disability insurance to cover your income in case you become ill or injured and unable to work
  • Create an estate plan to protect your child. An estate plan isn't only about money. It's also about making sure you designate someone to care for your children if you're unable. At the very least, have a will in which you name a guardian for your minor kids. Without it, the state can be involved in choosing a guardian. Don't let someone else make this important decision. Powers of Attorney for financial and healthcare decisions are also important components to your estate plan to allow someone to act on your behalf if you are unable to do so. 

Soon after the baby is born

Even though you'll have your hands full with the new baby, there are some administrative things you should take care of right away. Decide in advance which one of you will handle them.

  • Get a social security number for your child. You'll need this to claim your child as a dependent on your income tax return and to obtain medical coverage for your child. You can easily apply for a number at the hospital when you give the information for your child's birth certificate. Average processing time is about 2 weeks but it depends on your area. You can also get an application online at ssa.gov, at your local Social Security office or by calling 800-772-1213, but the process can be more complicated and may take more time.
  • Add your child to your health insurance policy. Do this right away to avoid any delay in coverage. Some companies require you to enroll your newborn within 30 days.
  • Check the beneficiaries on your 401(k)s or IRAs. Your spouse is usually the primary beneficiary. You can add your child or a trust for the child as a secondary beneficiary.

Looking ahead to school and college

College may seem way in the future, but it's never too early to start saving. Consider opening a 529 account and making monthly contributions. Even a small amount contributed regularly can add up. Plus, earnings grow federally tax-deferred and there's no tax on distributions if used for qualified educational expenses. The plan offered by your state may have additional tax advantages. A 529 also makes it easy for grandparents, other relatives or even friends to contribute to this important goal; you can consult your plan sponsor for more details around contributions.

With the new tax law, you may be able to use up to $10,000 a year from a 529 account for private elementary and high school tuition costs (not all states have language that complies with the new federal tax law, so be sure to contact your state to see if you are able to use withdrawals for private K-12 costs). If you can, and you anticipate that your child will attend private or religious schools before college, it may make sense to start a 529 as soon as possible.

Taking care of yourself

While your child will soon be a primary focus, don't forget about your own financial needs. Keep contributing to your 401(k), IRA, or other retirement account. Prioritize your savings to include other long-term goals like buying a house or buying a new car.  And while you're at it, remember to put aside a little for some personal R & R. A night out once in a while can be a welcome break—even if you spend most of the time talking about your new bundle of joy!

 

Have a personal finance question? Email us at  askcarrie@schwab.com. Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries,  contact Schwab.
 

 

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Important Disclosures

As with any investment, it's possible to lose money by investing in a 529 or other educational savings plan. Additionally, by investing in a 529 plan outside of your state, you may lose tax benefits offered by your own state's plan. State tax treatment of earnings may vary.

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The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. 

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