If adding a new member to your family is something you’re considering, putting some financial plans in place ahead of delivery day can make all the difference.
It’s your baby… and your budget
There are so many advertisements, blogs, Pinterest boards, Instagrammers, and well-meaning friends out there showing off the latest and greatest baby gear. But the vast majority of those things aren’t necessary to raise a child.
“Kids aren’t nearly as expensive as marketers might have us think,” says Jesse Mecham from You Need A Budget (YNAB). “As a father of six, I’m speaking not just from my experience professionally, but also personally.”
To help you prepare for baby’s arrival, here are tips on what to expect (financially) when you’re expecting and how to avoid pricey pregnancy spending traps.
Focus on the essentials
Baby’s immediate needs should be your financial focus early on. “The essentials for your baby are a place to sleep, a way to eat, and a way to get around safely,” says Brynne Conroy from Femme Frugality. “The things you should buy new are a crib, breast pump or bottle/nipples, and a car seat. These are non-negotiable.”
Conroy says that many insurance plans cover breast pumps, and some even provide new parents with a free car seat if you attend all your prenatal appointments.
Don’t let postpartum depression catch you off guard
Expectant mothers should prepare for the very real potential of postpartum depression. “It doesn’t happen to everyone, but it happens frequently enough that planning for it isn’t unreasonable,” Conroy says. According to Centers for Disease Control (CDC) research, 1 in 9 women nationally experience symptoms of postpartum depression. This figure varies by state, and it can be as high as 1 in 5 women depending on where you live.
The financial impact can be sizeable if you miss out on some paychecks because of heading back to work later than planned due to mental health issues. Also consider putting together a mental healthcare plan before you need care.
“Mental health professionals are notoriously difficult to book in this country, even if you have insurance coverage,” Conroy says. She suggests getting on a patient wait list ahead of baby’s arrival, just in case. “Therapy doesn’t hurt when things are good, but it can be essential when something like PPD happens,” she says.
Insure your life to provide for your dependents
We know it’s morbid to think about, but if something happens to you, who will handle the financial void left in your wake?
Life insurance is a must for every parent or guardian, even if you plan on being a stay-at-home parent. “Stay-at-home parents provide vital services that will have to be paid and budgeted for should they pass,” Conroy says.
If your workplace offers life insurance, take a second look. Just be aware that the policy may not be sufficient, says Delia Bouchard, State Farm Agent. She suggests putting in place a policy that will pay off all of your debts and be 5-10 times your annual income. For example, if you make $50,000 a year, your policy should be somewhere around $500,000. And these benefits go to your beneficiaries tax free. (See these guidelines to help you pick the right kind of life insurance.)
Take advantage of all the tax breaks you can
There are multiple tax benefits when you have a child that can either boost your tax refund or lower your taxes. Lisa Greene-Lewis, Senior Communications Manager and Tax Expert for Intuit shares some of those perks:
- You can take the Child Tax Credit of up to $2,000 if you have a child under 17.
- The Earned Income Tax Credit, which is a credit for low to middle income taxpayers who work, can be up to $3,526 with one child and up to $6,557 for three or more kids.
- If you take your child to daycare so you can work, you can claim the Child and Dependent Care Credit, and get a credit up to up to $1,050 for one child and up to $2,100 for two or more kids. Summer camps and sports camps may also qualify for the credit, as long as you take your kids to camp so you can work.
“Whenever you have a life change, like having a baby, you should revisit your W-4 and adjust your withholding,” Greene-Lewis says. (See our W-4 explainer.) “When you have kids, you are eligible for so many tax credits and deductions, you may not need to have as much withheld from your paycheck. TurboTax W-4 calculator easily helps you figure out your withholding.”
Start saving for your newborn’s freshman year
Trust me… it’s never too early to start saving for college. According to the Vanguard College Cost Projector, four years of public, in-state tuition now costs around $85,480. In 18 years, 2037, that cost is estimated to be $221,667. (Figure out how much you need to save.)
“I personally started saving for my children’s college education before they were born,” says Mark Kantrowitz, Publisher and VP of Research for SavingForCollege.com. He recommends starting with a 529 College Savings Plan. Like a Roth IRA, you contribute after-tax dollars. “Earnings accumulate on a tax-deferred basis and, if used to pay for qualified higher education expenses, distributions are entirely tax-free,” he says. What makes a 529 plan superior to a Roth is that your contributions are eligible for a state income tax deduction or tax credit in more than two-thirds of states.
But won’t that money count against you on your FAFSA (Free Application for Federal Student Aid)? Kind of, but not by much. “Money in a 529 plan that is owned by the student or a parent will reduce aid eligibility by as much as 5.64% of the asset value,” Kantrowitz explains. “So, $10,000 in a 529 plan reduces eligibility for need-based aid by at most $564.”
The downside? If a student doesn’t go to college your investment can be subject to income taxes and penalties. But there are ways around it. “There are alternatives, such as changing the beneficiary to a sibling,” Kantroqitz says. “Parents can change the beneficiary to themselves and use the money for continuing education or returning to college to finish their education. The money can also be left in the account for future grandchildren.”
Postpone spending money on screens
Growing a family is a long-term commitment. Soon your newborn will be at an age where you’ll start thinking about their screen time… and whether you should buy gadgets for your little ones to use. Independent research from Common Sense Media says, on average, kids aged 0 to 8 spent 48 minutes a day on a smartphone, tablet, or laptop in 2017. With 98% of families with kids owning a mobile device, it’s not hard to see why so many little ones end up using them… But these devices can be a huge expense, and it’s not out of the question for parents to spend thousands of dollars on tech for their kids before they’re even old enough to drive a car.
YNAB’s Mecham advises parents to put technology purchases on the backburner: “Don’t give them a device, tablet, phone, etc. for as long as you possibly can… Our 15-year-old doesn’t have his own phone and it’s awesome. These things are not givens. They’re luxurious accessories. View them as such.” Instead of spending that money on tech, put it away for college, plan a family vacation, or give your child another enriching experience that will guide them on their journey to adulthood.
Keeping your kids away from screens has other upsides, including limiting the time they are targeted as consumers. “The more TV/YouTube/screen time your kids have, the more they’ll be exposed to all of the things they should supposedly want,” Mecham says. “If you keep them away from that stuff, you’ll find they’re pretty content with what they have.”
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