3 Financial Moves Every New Parent Should Make
Key Points
New parents need a last will and testament to name a guardian for their child and to determine how to manage their estate.
Health, life, and disability insurance planning is essential for your family’s financial security.
Raising a child is expensive. To stay on track of your short- and long-term financial goals, it’s vital to prioritize needs and create a budget for life events.
Congratulations — you’re a parent! Having your first child is life-changing. Although you may be thinking of so many different things, here are three financial planning moves that you should prioritize:
Reviewing your estate plan
Reviewing your insurance policies
Preparing a budget
Doing these three things will give you a great foundation to ensure your new family is financially secure.
The Importance of a Will
A last will and testament is one of the most essential estate planning documents for new parents to have. A last will describes how to manage your estate at your passing. More importantly though, it allows you to name a “guardian,” or the person who will raise your child should you pass away. This person needs to be both emotionally and financially responsible to support your child in the manner you desire.
Writing your will isn’t a “one and done” deal. You’ll need to periodically review your will as your child gets older since their needs—and possibly your choice of guardian—may change. If you have an existing estate plan, you’ll also want to periodically review its details to ensure your beneficiaries and directives are correctly documented.
Insurance Protection
Once your baby is born, first and foremost: add your little one to your health insurance plan. You have just a 60-day window to add your newborn to your medical plan. If possible, the enrollment period before your baby arrives is the ideal time to review your medical plan’s network of doctors, deductibles, coinsurance, and maximum out-of-pocket expenses. Reviewing these details will help you prepare and budget for you and your baby’s upcoming medical expenses.
If you haven’t purchased a life insurance policy yet, now is the time. Life insurance is designed to provide a tax-free, lump-sum benefit to support your loved ones’ financial needs if you unexpectantly predecease them.
The life insurance benefits can be used for a specific need, such as final expenses or paying off a mortgage, but it can also cover multiple future financial needs. You may also consider using life insurance benefits to financially cover a readjustment period; lifetime income replacement; education expenses; debt repayment; emergency expenses; and/or support for elderly parents.
Term life insurance is the least expensive type of policy and a great choice for new parents on a budget. Permanent insurance is more expensive; however, it has the advantage of lifetime protection, and a tax-deferred savings or investment component.
Disability insurance is also a necessity and should not be overlooked. The Social Security Administration reports “for an insured worker born in 2000, the probability of becoming disabled between age 20 and normal retirement age is 25%, and the probability of dying between age 20 and normal retirement age is 13%.” ¹
Disability insurance is designed to cover 60%–70% of your income if an unexpected illness or accident prevents you from earning income. This benefit can last until your normal retirement age and is tax free when paid with after-tax dollars.
Choosing the right life and disability insurance policy can be cumbersome. This decision should be well thought out, as there are a wide range of products and price points to choose from. Capstone can assist in evaluating your insurance needs, while comparing the best options available to help you make the right choice for your family.
Budgeting and College Planning
While it’s natural to want to give your new baby everything and buying them the latest and greatest products and gadgets, it’s essential to stay within a budget you can afford. A budget will keep you on target to meet your own financial goals. A three to six-month emergency fund is an ideal way to prepare for life’s surprises without relying on high-interest credit card debt.
Before you know it, you and your child will be scheduling college visits. According to the College Board, a non-for-profit organization that connects students to college success, the average 2019-2020 annual tuition of a four-year, public, in-state college (including room-and-board) is $21,950. If this amount increases at a rate of 8% a year², the annual cost of tuition will rise to $87,713 over the next 18 years.
Prioritize these larger expenses that need time to grow. A 529 College Savings plan is an excellent way to start saving for college. The savings are tax deferred and qualified withdrawals are tax free. In certain states, 529 plans have expanded to K–12 education expenses and have a state income tax deduction for your contributions.³ Plus, thanks to the 2020 Secure Act, up to $10,000 from the 529 plan can be used to pay student loans.
While the cost of tuition is rapidly increasing, remember: there are loans for education but not for retirement. The best way to tackle these new expenses is by creating a budget, paying yourself first, and starting these habits early. Saving a little each month goes a long way when you can benefit from market growth.
Becoming a new parent is fun and exciting! Your first baby brings so many new first joys, as well as new financial responsibilities that can seem overwhelming. Capstone is here to understand your personal and financial circumstances and walk you through the steps to secure your family’s financial future.
Sources:
¹ https://www.ssa.gov/oact/NOTES/ran6/index.html
² https://research.collegeboard.org/pdf/trends-college-pricing-2019-full-report.pdf
Disclosures:
This article is not a substitute for personalized advice from Capstone and nothing contained in this presentation is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed by other businesses and activities of Capstone. Descriptions of Capstone’s process and strategies are based on general practice, and we may make exceptions in specific cases. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.