Updated to include IRS limits for 2017. There’s a lot to do when you’re expecting a child. But before you plan the baby shower, consider these tips for a fiscally friendly family. Many new parents are caught off guard by new financial obligations. If you’re expecting a child or looking to grow the family, it’s important to start preparing now. Get started with these financial tips for new parents expecting a baby.
How much will it cost to raise a baby?
While every expecting parent knows that a new baby’s going to cost money, many are surprised by just how expensive it’ll be. According to a 2013 report from the USDA, the average parents spend almost $13,000 annually on children throughout their first five years. Aside from inflation, this amount increases with the age of the child, geographical region, and the income level of parents. Raising children in the urban Northeast is the most costly.
It won’t get any less expensive as your children grow up. The USDA also estimates that a baby born in 2013 will cost middle-income parents about $300,000 until age 17, which includes inflation. The study defines middle-income as families as earning (roughly) between $61,000 and $106,000 per year. Families that earn more can expect to spend over $500,000 until age 17. Notably, this projection excludes higher education.
So how do people do it? Here are five lesser-known tips that may be able to help.
1. Consider your maternity and paternity leave options
Check with your employer to see what they offer for maternity and paternity leave. A 2014 study revealed only 12% of companies offered new parents some type of paid leave. While the Family and Medical Leave Act requires employers with over 50 employees to offer 12 weeks unpaid leave, that can be little comfort to parents who weren’t prepared to go three months without a paycheck.
Understandably, many parents are tempted to use up all their vacation time or take unpaid leave even after paid time runs out. As you evaluate what is best for your family, be sure to weigh your budget and financial situation appropriately against the preference to be home longer. Not only might those vacation days come in handy if your baby gets sick, but you’ll want to ensure taking an unpaid leave doesn’t eat into your emergency funds or further delay other financial goals, like purchasing a bigger home.
2. Delay major purchases
While a new addition to the family may seem like a great excuse to upgrade your car or start looking for a bigger house – it may not be the best time in reality. Especially for new parents who may not know what to expect, increasing your monthly fixed costs limits your ability to bolster your emergency fund or start a college fund.
As you make your budget and plan future purchases, it’s important to ensure you can at least maintain your level of pre-child contributions to a retirement account, like a 401(k). As you begin to juggle multiple financial priorities, sticking with your investment strategy is essential. It may not seem like much to reduce your annual contributions by 1%, but given the power of compounding over a long time horizon, it could really impact your ability to reach your retirement goals.
It is no secret that college is expensive. According to the College Board, the average cost of one year at a public university was $23,410 in 2014. For private universities, it cost $46,272. If one of your financial goals is to help your child pay for college, you’ll need to start saving as soon as possible. One of the most effective ways to save is through a 529 plan because of its tax benefits.
A 529 plan is a type of investment account designed for college planning. Although your contributions aren’t tax-deductible, your investment will grow tax-deferred. When you take money out to pay for qualified college expenses, your withdrawals are federally tax-free so you don’t have to pay taxes on your investment gains. Some states also offer tax incentives.
Starting early gives you a long investment horizon which will help your college savings grow through the power of compounding. Looking to boost the balance of a 529 plan without breaking your budget? Consider suggesting that friends and relatives contribute to your 529 plan in lieu of buying toys or other gifts.
4. Tax benefits
After your child is born, you might become eligible for a few income tax benefits. Qualifying for a dependency exemption could lower your taxable income by up to $4,050 per child in 2017. If you need to hire someone to take care of your child while you’re at work, you may be eligible for the Child and Dependent Care Tax Credit. In 2017, the credit could be used for 20% to 35% of annual qualifying expenses, up to a maximum of $3,000 for families with one child, and up to $6,000 for households with two or more children. As with most favorable tax treatments, benefits start to phase out at certain income levels.
5. Update your will or establish a trust
It is important to name a guardian in your will in the event of a worst-case scenario. If something happens to both parents without an updated will, known as dying intestate, then the courts will be tasked with picking a guardian for your child.
Establishing a revocable trust can also be a good option. A revocable trust allows you to maintain control over assets, while also specifying the beneficiaries and disbursement schedule, when the time comes. This enables parents to stagger the payments to their children, if desired. Another benefit of setting up a trust is the ability to name an independent third party, known as a trustee, who has a fiduciary duty to manage the trust according to your wishes.
Growing or starting a family is an incredibly exciting time for many. But for some, the financial stress can seem endless. With proper planning, you can start your family on strong financial footing.