Planning to expand your family? Here are eight key financial considerations
Expanding your family introduces a new set of financial matters that should be added to your “new-parent” planning list. Here are our top eight considerations for this important time in life.
In general, babies are expensive! You don’t need to micromanage every expense, but having a high-level budget will help ensure spending is in line with your needs while ensuring you put money in the right places to meet long-term goals. This is especially important to review if you and/or your spouse plan on taking unpaid time off work. Review your company’s parental leave policies to understand the benefits available to you so you can plan for how your budget may be impacted. These articles on budgeting and planning tips for young professionals will provide additional details on this topic.
2. Savings plans for your child
There’s a lot to prioritize when having a baby. Suddenly your focus shifts from you and your spouse to a tiny new human. A key part of that focus should be planning for your child’s financial future. Establishing an investment account early in their life can be one of the most rewarding lifetime gifts you can give. In the younger years — when they don’t pay much attention to gifts — establishing an account that family and friends can contribute to (in place of another piece of colorful plastic!) can make a profound long-term impact. There are many savings vehicles that can be considered such as Uniform Gifts to Minors Act and Uniform Transfers to Minors Act (UGMA/UTMA) custodial accounts, savings bonds, or 529 education savings plans. Deciding which is right for your family and how much you should be saving on a monthly or annual basis takes some research and consultation. For more details check out our articles on college savings and advice for growing families.
3. Retirement savings & cash reserve
Setting your children up for success is important but so is your own financial security: as the saying goes, “you can’t finance your retirement.” Consider focusing on retirement planning first and foremost to build your financial independence before attempting to fully fund goals you might have for your children.
Start by ensuring you have sufficient cash reserves on hand. A general rule of thumb is to keep from three to six months’ worth of expenses in cash. If both spouses are working, it could make sense to target the lower end of that range. On the flip side, if your household is dependent on one income, keeping a bit more in cash could be prudent. Everyone’s comfort level is different, so figure out what feels right for your family.
The next “bucket” to focus on is your employer-sponsored retirement plan and ensuring you receive any employer match that’s available to you. By not doing so, you’re essentially forfeiting income. Other ways to maximize savings is to pay down high interest rate debt, contribute to a Roth IRA if you’re eligible, max out your employer-sponsored retirement savings plan, and contribute to a health savings account (HSA) if that’s an option under your medical insurance plan. If you still have excess cash flow after these items, an after-tax brokerage account is another way you can build your investment portfolio. For more information on this topic, check out our article on retirement planning.
4. Health insurance
The birth of a child is considered a qualifying life event under most health insurance policies and you’ll be permitted to adjust coverage within 30 days of the baby’s arrival. It’s important to review all plans available to you at this time. If your situation involves two working parents, be sure to review health benefits available at each employer to determine if it makes sense to be on one family plan or add the child to one of your individual plans. Analyzing available coverage and cost are two major considerations. Don’t be surprised when you begin to receive medical bills for your new child soon after birth. Even if a deductible is met prior to the baby being born, it will be reset to a family deductible once they arrive. Two unique ways to save in this category are:
- Health savings account (HSA): If you have a qualified high-deductible plan, an HSA is great way to put dollars away for future medical needs. They can act very similar to a hybrid IRA — you get a tax deduction when making the contribution, it can continue to accumulate year over year, and if used for medical expenses, any money taken out is tax-free. In many plans, the contributions can also be invested using a menu of options. The maximum family contribution is up to $7,300 in 2022 (plus an additional $1,000 if you are over 50).
- Dependent care flexible savings account: Are you paying for childcare? This could make sense if it is available to you. It’s a similar concept to an HSA but with two key differences: funds are used to reimburse for childcare costs (but not weekend babysitting!), and the funds in these accounts need to be used every year or you lose the money. In 2022, there’s a maximum pretax salary deferral of $5,000 for married couples and single filers.
5. Life insurance
Most families will likely need one or both parents to have at least one life insurance policy in place. The most common purpose of life insurance is to ensure income replacement if one or both parents pass away prematurely. Adequate insurance will ensure your dependents can continue to live the lifestyle they’re accustomed to without being concerned about their ability to pay the bills. It can also make sense to have enough insurance to pay off your mortgage and college costs. Check whether your employer has coverage through your benefit plan. Term insurance is often the most cost-effective option for this need.
6. Long-term disability
Without sounding like a broken record, it’s again important to check your coverage through your employer benefits first and be sure you’re enrolled in any available long-term disability plan. As a baseline the benefit should cover 50–60% of your gross wages. If you’re paying the premiums (versus your employer paying the premiums) the benefit is not taxable to you. If your income is heavily dependent on bonus/commission or nontraditional compensation, there could be a case to have a supplemental policy.
7. Estate planning
Another topic that comes to the forefront when starting a family is estate planning. It’s not an easy topic for most people to deal with, but it’s important to have a plan in place prior to any unforeseen circumstance or crisis. A basic plan involves a will, guardianship directives for minor children, durable power of attorney, healthcare power of attorney, and at some point, perhaps a trust. For more information on this topic, check out our estate planning checklist.
8. Infertility & adoption
Infertility and adoption add additional layers of planning. As each circumstance can be so different, there isn’t a one-size-fits-all solution. Whether you have fertility treatments or are going through the adoption process, there are multiple layers of expenses that can add up quickly (especially if it’s out-of-pocket!) Start by reviewing any potential employer benefits. Health insurance plans may cover a portion of infertility treatments. Additionally, some employers offer adoption benefits such as reimbursement up to a certain dollar amount. Reviewing your benefits ahead of time will give you time to adjust your budget and plan for the cost. Many fertility expenses are covered by HSA and FSA dollars but should be reviewed depending on your exact circumstance. After an adopted child becomes a legal dependent, medical expenses are eligible under FSAs, HSAs, and HRAs. Adoption fees are not eligible for reimbursement under these plans. Alternative financing and financial counseling may also be offered through the agency or clinic you are working with. Lastly, you should speak with your tax preparer regarding tax deductions and credits that may be available to you for adoption-related expenses.
Seeking professional advice
For some people, there comes a point when the mental load of financial planning becomes too great. Others would rather spend their free time investing in the beautiful family they’ve created. In either case, bringing in professional help can help ensure you’re receiving proactive planning ideas and peace of mind that your plan is on the right track. When that time comes, review these items before interviewing a professional advisor.
While there’s a lot to consider when planning for a new family member, a fellow parent recently reminded us: “Don’t overthink the numbers too much. As long as you work toward keeping spending within or below your means, it’ll all work out.”
For more information and resources on these topics and more, check out our Financial Independence Guidebook. Have questions? Feel free to reach out.