Financial Planning is Not Just for Retirement
Financial planning for new parents is an extremely important step. Why is this the case? As of 2013, it cost an average of $245,000 to raise a child to the age of 18. That does not even include the cost of college. To help with the immense financial challenge of raising a child, it is vital that all parents have a financial plan prepared that will consider the aspects we will go over in this article.
Identify Financial Goals
When you become a parent your financial goals are going to dramatically change. Your focus is going to be redirected to your child instead of yourself. You need to set out goals that you want to reach and then prepare a plan based off them. Some of your goals may be starting a business, paying for college, saving for the down payment for a house, and saving for retirement.
Finding yourself a Certified Financial Planner can take your goals and put them into a realistic timeline to help you reach them. They will be able to take into consideration the hefty cost of having a child and how it affects your savings goals. It is important to note that being realistic may mean that some goals should go on the back burner until other goals are met first. Since this is the case you will want to regularly reevaluate your goals to see if you have met them, if they have changed, and if you have new ones that need to be incorporated into your plan.
You will not be able to reach any goals if you do not have a budget in place. When creating your budget, it is important that you are realistic about what you can spend and still be able to reach your savings goals. Do not get discouraged, it may take several tries before you can create a budget that works perfectly for you. Tracking your spending will help you in creating your budget. When you track your spending, you learn what you are spending your money on. You can then analyze it and see if there is anything you can cut back on, adjusting your budget accordingly.
Emergency Cash Reserve
Having an emergency fund is important for everyone, but it becomes especially important when you have a child to take care of. You will want an emergency cash reserve that will cover at least six months of living expenses. This reserve will help you cover unexpected bills or to cover expenses if you or your spouse become unemployed.
If you do not already have coverage, you will want to look into getting a life insurance policy. This policy will protect your child and your spouse from suffering due to the loss of your income if you pass. You will want it to cover the loss of your income and future costs such as paying off your mortgage or paying for college. It is considered best practice to have a life insurance policy that is worth at least 10 times your yearly income. However, everyone’s needs are different, so meet with a CFP who will help you calculate the exact amount of insurance you need. If your spouse does not work, they will want an insurance policy as well. This is the case because you will need a fund to cover the cost of child care expenses you would have to pay for if they passed.
Health Coverage Review
Now that you have a baby on the way, you will also need to take into account higher healthcare costs. Your premium will most likely go up due to having an additional person on your policy. You will also need to anticipate that you will be paying more than the usual amount of coinsurance or co-pays due to increased doctors’ visits during pregnancy and childhood. If you are worried that the cost of healthcare is going to become too great, you may want to consider setting up a Health Savings Account. This account will allow you to pay for qualified medical expenses with pre-tax dollars. It also has tax benefits that you may desire to take advantage of.
After you have a child your taxes will be different. There will be additional credits and deductions that you will want to be aware of and take advantage of. For example, by having a child you can receive a $4,000 reduction in your taxable income. You may also qualify for the Child Tax Credit, worth up to $1,000. You also may be eligible to deduct daycare costs, up to $3,000. Meet with your qualified tax preparer to learn more about these deductions and how you can qualify for them
Having an estate plan is especially important when you have minor children. A properly prepared estate plan will appoint a guardian for your children if you and your spouse both pass away. You can also use a Revocable Living Trust to pay for the expenses related to their care and gift them money to help them get their lives started as they mature. The benefits of having a Revocable Living Trust are extensive. Do not put off preparing one because you think you are too young
Financial planning is not just for those nearing retirement, it is for everyone, especially new parents. The sooner that you start planning, the more successful you will be. Set up an appointment with a Certified Financial Planner and get the process started today.
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