Financial strategies to put in place as you grow your family
Welcome to parenthood! Bringing a new baby home will require adjustments to every aspect of your life. While financial changes are to be expected, many parents are surprised to find out just how much money it takes to raise a child. The average annual cost is approximately $12,980 per child for middle-class American parents, and they can expect to spend $233,610 (plus inflation costs) to care for a child through age 17.1
While babies present new implications for your finances, there are steps you can take before and after your baby is born to set up a future that takes care of your family. Here are some quick tips to reorganize your finances around your new priorities.
Get financially organized
Start by reviewing your current budget. Consider what you can adjust to accommodate new expenses, like childcare, formula, diapers, and clothing and plan for any lost income from parental leave. Revisit your spending habits and look for ways to better budget your household income.
Add your child to the benefits you already receive from your employer
Look into your current employer-sponsored benefits package. When your child is born, you should be able to change your benefits enrollment status and add your child to any plans you’re offered, such as medical, dental, vision, and life insurance. Be very clear on how your health insurance policy works and watch for different deductibles and out-of-pocket maximums that will vary if you change from an individual plan to a family plan.
Use your Flexible Spending Account or Health Savings Account
If your company offers a Flexible Spending Account (FSA) or a Health Savings Account (HSA), you may consider putting a bigger allowance in it prior to the birth of your child. Most FSAs and HSAs will cover deductibles and co-pays, as well as new medical expenses that can come with babies. Adding to an FSA or HSA lowers your taxable income but you should note that unspent FSA money is normally lost, so check your firm’s requirements and estimate your needs in advance. HSA plans allow funds to rollover, so be sure you plan accordingly.
Consider accident or critical illness insurance
Find out if your company offers accident insurance to ensure that you’ll have financial protection even in the case of an injury. Your company might also offer critical illness insurance, which can help cover expenses if you or a dependent are diagnosed with a critical illness. This protection may include childhood conditions such as Down syndrome and cystic fibrosis. You’ll need to have this insurance in place in advance of your child’s birth to ensure coverage.
Protect your assets and income through life insurance or disability income insurance
You may want to reevaluate your life insurance coverage or acquire a life insurance policy to have financial confidence that your child will be protected no matter what happens to you. You can choose from term life insurance, which will last for a specific number of years, or a whole life insurance policy, which is intended to last your lifetime as long as your payments are current and helps you to build a long-term cash-value asset.
Disability income insurance can help to replace a portion of your paycheck if you become too sick or injured to work. This can safeguard your income as you support your growing family.
Plan for college savings
Saving for college should be treated separately from other long-term savings goals, such as retirement. 529 plans, for example, are vehicles specifically designed to save money for college.2 If you save money in a 529 plan early on, both the balance and interest will compound and grow. You could also use a permanent life insurance policy — which has tax advantages and spending flexibility — to build college savings. Getting started is the most important thing so save what you can now and you can always increase the amount as your income grows.
Whether it’s before or after your child is born, it's important to set up the right financial plan that will enable your family to grow and prosper. You should also consider creating a will specifying what will happen to your resources in the future. Speak with a financial professional, who can help make recommendations about how to best protect your new family and arrange your finances so that you can further the opportunities for both yourself and your celebrated new arrival.
Welcoming a new child to your family can be both exciting and overwhelming. The steps you take today can help you to be prepared as your family grows.