Having a child is a defining moment in everyone’s life. And as with all major life changes, being aware of the financial implications and having a plan is vital. This post aims to help new parents become more financially savvy as they nurture and care for their new baby. Here are a few concrete steps to consider.
1.) Maximize Employer Benefits – depending on your employment situation, you may need to change your benefits enrollment and tax withholding.
- Add your new baby to medical insurance.
- Consider increasing contributions to any Flex Spending Accounts (FSA) you or your partner may have.
- If you have access to a Dependent Care FSA, and plan to hire professional childcare, start funding this as well.
- Update your withholding forms for federal and any state income tax.
The W-4 form you filled out when you started work establishes how much of your pay is withheld and sent to the government to cover income tax. By increasing the number of dependents claimed (since you now have a child), you may qualify for lower withholding, and hence, more take-home pay. Furthermore, if you are single, a child may qualify you to file taxes as “head of household,” which may further reduce income tax withholding (assuming you pay at least 50% of the child’s expenses).
2.) Protect the Future – none of us likes to think about our own demise, but now that you have a kid, you want to provide for them in the unlikely event that you and your spouse die.
- Consider life insurance policies for you and your partner with enough benefits to cover until your children are old enough to be self-sufficient (e.g., through college).
- Draft a will naming a guardian for your children. Depending on the complexity of your situation, you can use a software program or hire an attorney to draft the documents.
3.) Simplify Your Life – all new parents quickly learn that time is suddenly a scarce commodity. Here are some ideas my wife and I used to simplify our financial life:
- Consolidate accounts (savings, checking, 401(k)s, brokerage).
- Reduce the number of credit/debit cards used (and number of bills to pay).
- Pay off any consumer debt or small student loans.
- Use an automated online personal finance tool (e.g., Mint.com) or download data instead of entering it by hand (if using Quicken).
- Set up online or automatic bill pay for recurring expenses (utilities, cell phone, mortgage, etc.).
By acting on these few basic ideas you can reduce the burden of dealing with your finances, freeing up time to spend with your amazing child.
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