12 Financial Tips for New Parents

Written by Private Wealth Advisor Andrew Allen

Whether you’ve just welcomed a baby, become a grandparent, or are close to someone who has recently had a baby, this is a special time filled with joy and new beginnings. You’ve likely seen the excitement and anticipation building over the past months for this precious “gift from the Lord” (Psalm 127:3). While the days and nights may feel long for new parents, the years will fly by quickly. Making thoughtful financial decisions now can help set the family on a solid path for the future. Here are a few helpful tips for navigating this journey.

1. Budgeting: While the new bundle of joy may have received many gifts, the baby’s needs will undoubtedly impact the family budget. Adding a baby to the mix will affect available cash flow, so intentionality and planning accordingly will help maximize family finances. New parents are encouraged to take advantage of the many resources available for money management, including budgeting apps, online software tools, an envelope system, and spreadsheets, as well as wisdom from the experience of grandparents and mentors.
2. Shopping: The baby will grow quickly, so be careful of spending too much on clothing that they may only wear a few times before they’re on to the next size. Be sure to keep receipts and tape them to clothing tags. Don’t pull them off until the baby is ready to wear the clothing since it may need to be returned. Online parent groups, churches, children’s consignment stores, yard sales, coworkers, friends, and family may have gently used clothing, toys, or books that they may pass on or that you can buy at deep discounts. Some brands have loyalty programs, so check for coupons, discounts, or rewards online or via an app if there are preferred brands of diapers, formula, or baby food.
3. Emergency Funds: Saving an emergency cash reserve will help build a firm financial foundation and increase freedom now and for the years ahead. It’s important to save for unexpected expenses, such as medical expenses for the new baby that may not be fully covered by health insurance or having to take unplanned time off to care for the baby. A starter emergency fund of $1,000 to $2,000 will establish an initial fund if unexpected expenses occur as the family works towards saving six months of living expenses. Your financial advisor can help determine the best amount to set aside. Grandparents, family, and friends may consider making financial gifts for this fund to get it jump-started.
4. Debt Payoff: Proverbs 22:7 says, “The borrower is servant to the lender.” Debt will impact the ability to have flexibility and freedom in making financial decisions, so the faster debt can be eliminated, the better. Young parents can look for opportunities to cut expenses, sell unneeded items online or at a garage sale, and consider side hustles or part-time opportunities to increase income. One method of debt payoff called the debt snowball starts by listing all debts from smallest to largest, then paying as much as possible on the smallest one. As each item is paid off, the extra cash is added to the next one, and so on. The process will accelerate as more and more goes towards knocking out debt.
5. Education Savings: A 529 education savings account can be a great way to set aside money for a child’s education. Even small contributions made consistently over time will grow into a nice amount by the time the child is ready for college. Investments in the account can grow tax-free, and as long as the money is used for qualified education expenses, no taxes are owed on the earnings. As an added bonus, some states also offer a state income tax deduction for contributions. Family or friends who would like to help can also make contributions to the account and receive a tax deduction. In addition to college expenses, 529 education savings can be used for private school K-12 tuition.
6. Estate Planning: A will is a legal document that determines how assets and responsibilities will be settled when a person passes away. When a baby is born, one of the most important decisions the parents must make is selecting a guardian for the child if something happens to the parents. It’s also helpful to think of a backup if the first person is unable or unwilling to serve as the guardian. While a financial advisor or attorney can help determine what’s best for each family’s situation, often a legal entity called a trust will be set up to manage finances for a child as they are growing up and even into adulthood. An individual or a corporate trustee like Blue Trust can be chosen to manage the trust. In straightforward situations, affordable options are available online for a basic will. It’s not necessary for new parents to feel like they must set things in stone when they first create a will. As life changes, a will can be updated and generally should be reviewed every few years.
7. Health Insurance: Babies should be added to health insurance plans normally within the first 30 to 60 days after birth. If there are other insurance benefits available through the employer, it’s a good idea to determine if the baby should be added as a beneficiary.
8. Childcare: If the child will attend daycare, a helpful benefit that many employers have is a dependent care flexible spending account (FSA). This allows parents to set aside money tax-free to be used specifically for childcare, and some employers will even contribute to the account. The current limit is $5,000 per year. If a dependent care FSA is not available, parents can also get a tax credit for 20% to 35% of up to $3,000 of childcare expenses with the amount of the credit depending on their income.
9. Life Insurance: Life insurance is a good tool to cover any financial gaps and provide for the child if the parents were to pass away. Reviewing existing savings and living expenses will help inform how much insurance is needed. Many life insurance needs can be covered by term policies which are for a set number of years. An example would be aligning the term with a need, such as funding education expenses and when the child would expect to complete their education. Life insurance can work in concert with estate planning and name a trust as the beneficiary if that’s appropriate.
10. Disability Insurance: Similar to life insurance, disability insurance can help cover the financial gap if a parent is unable to work for a longer period of time. If available through the employer, this is typically very inexpensive and an important part of financial planning. Obtaining disability insurance is especially important with a new baby because, according to the Social Security Administration, more than 25% of people will become disabled before reaching retirement. ssa.gov
11. Beneficiaries of Investment Accounts: Parents should review beneficiary information on investment accounts such as 401k, 403b, 457, TOD, HSA, and IRA accounts and consider adding the new child as either a primary or contingent beneficiary. It’s a good idea to coordinate estate planning with this step since accounts with beneficiaries pass directly to the beneficiary rather than via a will.
12. Tax Credit and Withholdings: Parents may claim a $2,000 tax credit for a baby if their annual income is under $400,000, so they should consider adjusting withholdings from their paychecks with an updated W-4.

Smart financial decisions early in a child’s life will set young families on a solid path as God guides them in the parenting journey. At Blue Trust, we love helping clients make wise financial decisions in planning for their children, grandchildren, and loved ones. For more information or to connect with an advisor, please contact us at 800.987.2987 or blog@bluetrust.com.

 

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