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By Veronica Baxter
Special to the Financial Independence Hub
Are there some things that you wish you knew before you became a parent? Parenting comes with lots of financial responsibilities, and it’s a life-changing experience for many. Suddenly, life is about taking care of yourself, but another person solely depends on you for everything.
Preparation is critical to get ready for this exciting and, perhaps, scary new adventure. It is more helpful to be prepared for the many financial alterations to come. It is estimated that a middle-income American parent spends at least $284,570 (US$) till the child turns 18 years old.
Most people tend to focus more on their finances after a significant life event. Making the necessary financial plans will save you the stress as you embark on this journey.
Here are vital planners to get you started:
1. ) Make a Household Budget
Having a baby can be expensive. A household budget prevents you from being a spendthrift and also saving for the future. Please write down your steady monthly sources of income and compare them to your monthly expenses.
Adjust your expenses to cover the baby’s needs like diapers, furniture, formula, and other unexpected costs that come up. Also, set some spending limits and do your best to stick to them.
2.) Get a Life and Disability Insurance Policy
Many new parents question the worthiness of buying life insurance. After all, most don’t think of death. Life insurance comes in handy during such situations to protect you during such worst-case scenarios financially. Life insurance has three different choices:
1. Whole Life Insurance
This one is lifetime guaranteed. It offers a specified benefit given to your spouse or other beneficiaries upon your death. It accumulates cash value over time and provides the opportunity to earn dividends.
2. Term Life Insurance
This policy provides coverage for a certain number of years, mostly 15, 20, or 30. If you live longer than the plan, no benefits are paid out since the coverage automatically expires. However, most term policies allow for a continuation after the initial term though at higher charges.
3. Universal Life Insurance
This policy is a hybrid of the two. It also allows you to set your premiums and death benefits.
Disability insurance becomes a significant refuge when one or both parents cannot work during a disabling injury or illness. No specified amount can never be enough for anyone. That’s why it’s essential to consult a financial expert to help you explore the best option that will fit your financial capability and excellent financial standing.
3.) Write A Will
Thinking about writing a will can be pretty uncomfortable. In a case of untimely death, the state decides how and with whom your assets are shared. The state’s decisions may probably go against your preferences. This is why a will comes in handy to name the guardian to your kids and who will manage your asset distribution when they become adults.
Have the hard conversations of when they are allowed to chip in, to make healthcare and financial decisions. An attorney will give a good outlook that will help you set up a financial trust that aligns with your situation and goals.
4.) Adjust your Emergency Fund
An emergency fund is essential to ensure your household runs smoothly in the event of unforeseen financial circumstances. The amount set aside varies from family to family but should start with three to six months of living expenses. Your emergency fund should now reflect the cost of having a child versus what you initially saved for.
5.) Include your child in your Medical Insurance Cover
Having a baby is a qualifying life event that allows you to adjust your health plan to enroll your child. Most of these plans require you to add your child within 30-60 days post-delivery. Try and add up your child as fast as possible to prevent those recurring cash expenses during pediatrician visits.
6.) Don’t rush to make a Home Upgrade
Some couples equate good parenting to owning a home. However, financial planners advise couples to wait until 3-4 years to make a move. It would be best to have a better outlook of what you want the future to be like within that time.
7.) Tax Breaks
Childcare can be expensive for many parents. The [US] government offers tax breaks to reduce the tax burden on individuals, allowing them to keep more of the money that they have worked for. Tax breaks are awarded either from claiming deductions or excluding income from your tax returns.
To qualify for a tax credit, you must have a dependent child below 17years and must have SSNs assigned before the due tax date.
8.) Have a College Savings Plan
The earlier you get a savings plan for this, the better it will be. There are long-term plans that exist solely for accumulating college savings. Most of these plans are equally easy to set up, and they are tax-free.
Consult your financial expert to give you accurate details on all the rules revolving around these plans, such as the number of withdrawals and how you can spend the money.
9.) Have a Retirement Savings Plan
Your child’s financial plan is essential, and so is yours. As a thumb rule, financial experts advise that you contribute at least 10% of your income towards retirement. A retirement plan will help maintain your financial independence and ensure that you need less support from your child in the future.
It can be hard to save for college and retirement simultaneously. The hard truth is that there are more financial aid options available for college than for retirement. If this gets hard, start saving towards your retirement, and if later on in your career you get a raise, you can start saving on your child’s education.
Planning ensures that you have a well-balanced budget for you and your kids. You can’t control life events, but you can set financial plans that may affect your future. Having long-term strategies will help you achieve financial stability, especially during the years when your child depends mainly on you.
Veronica Baxter is a writer, personal finance consultant, and legal assistant for the Law Offices of David M. Offen, a successful Philadelphia bankruptcy lawyer.
