Planning to expand your family? Here are eight key financial considerations

The excitement of growing your family can be overwhelming, and financial priorities are frequently neglected. Here are eight important things to keep in mind as you navigate this significant life chapter.

It’s incredibly exciting to think about having a new baby, whether it’s your first, middle, or last. However, there is so much to think about that first-time parents frequently neglect crucial financial planning details in favour of setting up the nursery, making a registry, or picking the ideal name.

Adding to your “new-parent” planning list should be a new set of financial considerations that come with growing your family. Here are our top eight things to think about during this critical period of your life.

1. Budgeting

Babies are generally expensive! A high-level budget will help ensure that spending is in line with your needs and that you put money in the right places to achieve long-term goals, even if you don’t need to micromanage every expense. Reviewing this is especially crucial if you or your spouse intend to take unpaid time off from work. Review the parental leave policies at your workplace to learn about the benefits that are offered to you so that you can prepare for possible budgetary effects. These articles on planning and budgeting advice for young professionals will give you more information on this subject.

2. Savings plans for your child

When you have a baby, you must prioritise a lot of things. Your attention is suddenly drawn to a tiny new human as opposed to you and your spouse. The future financial planning for your child should be a major component of that focus. One of the most beneficial lifetime gifts you can give is to help them start an investment account early in life. Establishing an account that family and friends can contribute to (instead of another piece of colourful plastic!) can have a significant long-term impact when children are younger and less interested in receiving gifts. Savings bonds, 529 education savings plans, and custodial accounts covered by the Uniform Gifts to Minors Act and Uniform Transfers to Minors Act (UGMA/UTMA) are just a few possible options.It requires some investigation and consultation to determine which is best for your family and how much you ought to be setting aside each month or annually. Visit our articles on saving for college and guidance for expanding families for more information.

3. Retirement savings & cash reserve

You can’t finance your retirement, so while it’s important to set your kids up for success, so is your own financial stability. Before attempting to fully fund any goals you might have for your children, think about putting your attention on retirement planning in order to increase your financial independence.

Make sure you have enough cash on hand before anything else. Keep three to six months’ worth of expenses in cash as a general rule of thumb. If both partners are employed, it might be advisable to aim for the lower end of that range. On the other hand, it might be wise to keep a little more cash on hand if your household depends solely on one source of income. Determine what feels right for your family based on your family’s comfort level.

Your employer-sponsored retirement plan and making sure you take advantage of any employer matching benefits are the next “bucket” to concentrate on. You essentially forfeit income if you don’t do it. Paying off high interest debt is another way to increase savings, as is contributing to a Roth IRA if you’re qualified, maxing out your employer’s retirement savings plan, and making contributions to a health savings account (HSA) if your medical insurance plan permits it. After paying for these things, if you still have extra cash flow, opening an after-tax brokerage account is another way to expand your investment portfolio. Go to our article on retirement planning for more details on this subject.

4. Health insurance

Under most health insurance policies, the birth of a child is regarded as a qualifying life event, and you are usually able to change your coverage within 30 days of the baby’s arrival. Reviewing all of the options that are currently open to you is crucial. If there are two working parents in the situation, be sure to review the health benefits offered by each employer to decide whether it makes sense to enrol the child in one family plan or add them to one of your individual plans. Two important factors to consider are the cost and the coverage that is offered.

When you start receiving medical bills for your newborn soon after birth, don’t be shocked. It doesn’t matter if a deductible is reached before the baby is born; once they are born, it will be changed to a family deductible. In this category, there are two special ways to save:

• Health savings account (HSA): If you have a high-deductible health plan that qualifies, an HSA is a great way to save money for potential medical expenses. They can function very similarly to a hybrid IRA: you can deduct your contribution from taxes, they can grow over time, and if the money is used for medical expenses, any withdrawals are tax-free. The contributions can often be invested using a selection from a menu in many plans. In 2022, a family can contribute a maximum of $7,300 (plus an extra $1,000 if you’re over 50).
• Dependency support Are you paying for childcare with your flexible savings account? If you have access to it, this might make sense. The idea is similar to an HSA, but there are two important differences: money is used to pay for childcare expenses (but not weekend babysitting!) and money in these accounts must be used annually or it expires. The maximum pretax salary deferral for married couples and single filers in 2022 is $5,000.

5. Life insurance

Most families will probably require at least one life insurance policy for one or both parents. In the event that one or both parents pass away unexpectedly, life insurance is most frequently purchased to ensure income replacement. A sufficient amount of insurance will guarantee that your dependents can maintain their current standard of living without worrying about how they will pay their bills. Having enough insurance to cover your mortgage and college expenses can also make sense. Check your benefit plan to see if your employer is covered. Term insurance is frequently the most economical solution for this requirement.

6. Long-term disability

Without sounding repetitive, it’s crucial to confirm your employer’s benefits coverage first and make sure you’re enrolled in any available long-term disability plans. The benefit should, at the very least, equal 50–60% of your gross income. The benefit is not taxable to you if you pay the premiums (as opposed to your employer). There may be a case for having a supplemental policy if your income is significantly reliant on bonuses, commissions, or other nontraditional forms of compensation.

7. Estate planning

Estate planning is another issue that becomes more important when a family is started. Most people find it difficult to discuss, but it’s crucial to have a plan in place before any unanticipated event or crisis. A will, guardianship directives for minor children, durable powers of attorney, healthcare powers of attorney, and possibly a trust are all components of a basic plan. Please refer to our estate planning checklist for more details on this subject.

8. Infertility & adoption

Adoption and infertility add new planning complexities. There isn’t a universal remedy because every situation can be so unique. Whether you are undergoing fertility treatments or the adoption procedure, there are numerous costs involved that can quickly add up (especially if you are paying out of pocket!) Examine any potential employer benefits first. Treatments for infertility may be partially covered by health insurance plans. Some employers also provide adoption benefits like reimbursement up to a specific dollar amount.You will have more time to adjust your budget and make plans for the cost if you review your benefits in advance.Many fertility costs are covered by HSA and FSA funds, but depending on

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Conclusion

There comes a time when the strain of financial planning mentally overwhelms some people. Others would rather invest their free time in the lovely family they have built. In either situation, getting professional assistance can help you feel more confident that your plan is on the right track and that you are getting proactive planning ideas. When that time comes, consult a qualified advisor.

While there are many factors to take into account when making preparations for a new family member, a parent friend recently urged us not to “overthink the numbers too much. Everything will work out as long as you strive to keep your spending within or below your means.