Parenthood is a life-changing event for many people. That said, caring for kids can be expensive. Many parents experience a rapid surge in their expenses after welcoming their first child. Diapers, food, clothing, school fees, and insurance can exert financial pressure. Therefore, smart financial planning is key to successfully navigating this wonderful journey that is full of responsibilities; you are not only responsible for your well-being but the kids who depend on you. Here are some smart financial tips new parents should know.
Tip #1: Include your child in your health insurance plan
As a tip, don’t assume that your health insurance company will automatically add your new child to your health policy. After all, the provider may not know you just welcomed a new member to your family. Many policies usually require you to add your child one or two months post-delivery. If you do this within that time frame, you can cover your child retroactively, helping you save money on insurance.
Tip #2: Stick to a financial budget
When you realize that you are a pregnant mom or dad, your focus will likely shift toward getting a good home for the baby. However, it would be best if you also plan your finances in order. One good strategy is to create a budget and a list of important financial obligations like mortgage, rent, utility/phone bills, and insurance. Be sure to add other costs like vehicle maintenance and travel adventures if you love exploring new places. Afterward, see if you cut back on expenses and allocate more cash into your savings fund.
Differentiating your recurrent and one-time expenses will help you optimize your long-term budget. You can make the process seamless with online budgeting apps like Mint and Personal Capital, so feel free to consider this.
Tip #3: Save for your kids’ education
The cost of education keeps rising with inflation. Therefore, you may want to start saving for your kid’s tuition. Only 13% of millennials prioritize education savings as their top child-related financial responsibility – this is because the expenses generally seem far off. Admittedly, higher education may not be an immediate priority. However, the earlier you save for your child’s school financial needs, the more options they will have in the future.
One good idea is to take advantage of tax-saving plans for qualified educational expenses. While at it, you can supplement your child’s tuition fees with fundraising donations, so feel free to consider this.
Tip #4: Get ready for a drop in earnings
Preparing for an income drop is a great financial tip for new parents. This is because paternity or maternity leave can result in lower income, which can affect finances if there is no plan. Therefore, find out from your employer the paid leave terms and conditions and other forms of support you may be eligible for. If you can estimate how much your income may drop, you can budget effectively for life as a new parent.
Tip #5: Find ways to reduce expenses and boost your income
Creating a side hustle is one smart financial move new parents can make. It can help supplement your primary income stream and make you more financially capable of caring for the family. Depending on your profession, you may be able to diversify your income streams and reduce your expenses in different ways. Teachers, for instance, can sell digital educational resources or teach online courses. As a tip, choose part-time jobs that do not conflict with your main career.
Tip #6: Set up an emergency fund
If you lack an emergency fund, now is the right time to create one. As explained before, raising kids can be challenging and sometimes comes with unexpected costs. Additionally, you may experience an unanticipated job loss or a medical emergency. Experts suggest you should have at least three to six months’ worth of expenses catered for in your emergency fund. Dedicate a small portion of each pay cheque into a separate bank account. You may also want to deposit refunds and birthday money into that account. Increase your contribution to the emergency account with time until it covers your living expenses for three months in a row.
Welcoming a child raises the need for financial planning. Setting up an emergency fund will ensure you can meet your financial obligations and keep the household running in the event of an unexpected event.
Tip #7: Improve your credit score
Experts recommend improving your credit scores before the newborn arrives. Since kids are expensive, doing this can benefit your financial safety. Here are some tips to improve your credit score: settle your debt as much as possible, pay your bills on time, build a credit history, and consider automating bill pay for credit cards and other accounts. This will help improve your creditworthiness.
Tip #8: Take advantage of tax breaks
For most parents, child care is as costly as a mortgage or car payment. That said, tax breaks can help a bit. If you meet specific conditions, Child and Dependent Care Credit can cover up to 35% of eligible expenses based on your earnings. Employer-sponsored programs like a flexible spending account (FSA) are great options for parents to enjoy tax-free expense benefits. You can enroll through your employer during the dedicated period. Your HR department or benefits administrator can provide tips regarding enrollment and how to get started. Expenses to go to kindergarten or higher grades may not be eligible for FSA, but before and after school expenses for kindergarten kids or higher grades are eligible. In most cases, high-income families benefit more from FSA than Child and Development Care Credit. However, one downside is that the Internal Revenue Service (IRS) may require that you spend money you contribute to an FSA during the plan year. Not using the money this way could result in it being forfeited. It would be best if you check with your tax advisor to see what tax benefits can work for your situation.
Tip #9: Consider disability and life insurance
Adequate health insurance is crucial for new parents. It would help if you prioritized disability and life insurance, as they will help protect your loved ones financially when you are no more. You can use this to provide peace of mind for your partner while you are still alive. The payout from an insurance policy can cover expenses like education, mortgage debt, and wedding for your kids.
Disability insurance, too, can be a great help to new parents who are unable to work due to injury. Although your employer may provide you with disability insurance, you still have to ensure you get additional coverage for childcare, mortgage, and family expenses for a considerable length of time. Another smart insurance decision you can make is to supplement existing coverage with an individual plan. When shopping around for the right cover, take note that some disability policies may pay benefits only if you are unable to work at all instead of the ability to do the particular type of work you do now.
Tip #10: Prioritise retirement savings and estate planning documents
If you have to choose between saving for your kid’s education and retirement, consider going with the latter. The reason is that your child can have several ways to finance their education through scholarships, grants, and loans. However, you may find it hard to make up for lost retirement savings. Updating your estate planning documents is also important for parents. A will allows you to determine who should be a guardian for your child when you are no more. Therefore, discuss with an attorney to ensure every aspect of your estate plan is in order, including updating beneficiary designations. Your lawyer will let you know if creating a trust makes sense for your needs. Prioritizing your own retirement now will prepare you for the future – it can reduce your probability of needing more support from your kids later in life.
Tip #11: Build a professional financial team
In the heat of busy preparation for an addition to your home, you may lose track of the best financial practices. Your first child’s arrival is a joyful experience, but it can be nerve-wracking when your finances are a mess. Give yourself enough time to plan and work with the right financial experts so you can stay calm and enjoy huge milestones. Seasoned financial advisors can help you learn more about growing your finances and mistakes you should avoid.
Tip #12: Know the basic things it takes to raise a child
Understanding the costs of raising a child is an important step in planning your finances. Even before your baby arrives, you would likely have to buy essential gear and nursery furnishings to meet the little one’s needs for the first few months of their life. Examples of one-time purchases to plan for are a car seat, crib, baby carrier, and breast pump. You will also need to consider ongoing costs like toys and entertainment, education, healthcare, food, and diapers.
Welcoming a child is a huge milestone, but it can come with its financial challenges. Knowing how to navigate your new role is important. With these tips, you can achieve the desired outcome.