15 Financial Tips for Parents
When my wife and I arrived home from the hospital with our newborn daughter, cradled and sound asleep in her car seat, we put her on the floor in front of the couch and sank down onto the cushions. We stared at her, then looked at each other and said, “Now what?” As first-time parents, this was the beginning of a lifetime of “Now what?” questions.
Thankfully, my wife and I have navigated the six and a half years since that first “Now what?” moment with few mishaps. Four years ago, we had twin boys, which added to the chaos. We’ve made good and bad decisions, all with the best of intentions. Between using our intuition, my own experience as a wealth adviser, listening to experts and learning from other moms and dads, we’ve learned a lot about parenting – and how best to handle our finances as a growing family. Here’s my list of 15 financial tips for new parents.
1. Make sure to read all of the fine print in your employer’s policy about maternity and paternity leave. My wife got pregnant with our twins just as she started a new job, which meant her maternity leave was unpaid. We had to plan for that by putting money aside to use during those months she stayed home with them.
2. Get a Social Security number for your child. You will need it to claim your child as a dependent on your tax returns, to open a bank account or to receive government-related services for your child. You will be able to add them to your health insurance initially without one, but try to get the Social Security number as soon as possible. Many hospitals will assist with this at the same time you are filling out the birth certificate, and usually within six weeks of the birth you will receive the Social Security card in the mail. Otherwise, call 800-772-1213 to find the nearest Social Security office.
3. When doing your taxes, keep in mind that you get an exemption that year for having a child! It goes a long way. We had our twin boys in mid-December and got the exemption for the full year.
4. If your child will be in daycare, there are two important things I suggest: First, sign up for a spot (or a few) as soon as you know you are pregnant. There is nothing worse than finding out that there is a waiting list that is months longer than you expected. Second, start a Dependent Care Flexible Spending Account, which will allow you to be reimbursed on a pre-tax basis for up to $5,000 (depending on relationship status and how you file your taxes) for daycare expenses.
5. If you are hiring a nanny, be aware that you could be viewed as an employer in the eyes of the Internal Revenue Service. If you go through a service, they might take care of all of the paperwork. However, if you hire a nanny on your own, you will be responsible for withholding taxes (Social Security, Medicare, unemployment, etc.) from this person’s paycheck. For information on calculating the withholding, speak with an accountant.
6. Make changes to your benefit selections through your employer. Your family’s health plan and beneficiaries on insurance policies may need to be updated. Additionally, you may need to change your tax withholding from your paycheck and fill out a new W-4 to claim an additional withholding allowance.
7. Make a will if you don’t already have one or update it if you do. A will specifies who will inherit your assets, bank accounts and house after you die. Also, while you are having the will drawn up, take the time to figure out who your children’s guardians will be, in case you pass away before they are legal adults. Make sure to include that in the will. If you do not have a will, upon your death, the government will figure out who should get your money and assets, and where your children should be placed.
8. Make sure that you have enough life insurance. Just because one of you might be a stay-at-home parent doesn’t mean you should have less insurance than the parent who is working outside of the home. In the event that something happens to the stay-at-home parent, the working parent will need to arrange for dedicated childcare, which can be expensive. Similarly, if the income-producing parent dies, the stay-at-home parent will have to rely on the insurance money to make up for lost income going forward.
9. Consider getting disability insurance. Not a lot of people think about this, but if something happens to you and you don’t die but are unable to work, your life insurance will be of no help. In that case, you would need a buffer to get through this time so you can focus on healing and worry less about income. You might have savings, but a family can go through that quickly, just for diapers and food alone.
10. Live within your means. For some people this is easy, for others it isn’t. We can rationalize with the best of them when we say things such as, “My son needs a new crib” or “I want my twins to visit their grandparents in Florida.” These expenses are fine – and some are necessary. But before you put it on your credit card, ask yourself if it is absolutely necessary. It’s OK to make exceptions to this rule, just try to be as honest with yourself as possible. And make sure that you pay it off as soon as possible.
11. Start a college savings plan. When your child comes into the world, you’ll create a bond unlike any other you have experienced. Of course you’ll want the best for your child, and even though college is 18 years away, it’s a good idea to start saving for it now. Even if you put away just a little bit every week or month, get into the habit of doing it regularly. Bank accounts now are so much easier to deal with than for our parents’ generation. We can direct monies to go into different accounts just by logging into our bank’s website. When it comes to saving for your child’s education, you have additional opportunities:
• With a 529 plan, money is put into an account, generally invested in stocks and bonds, and withdrawals are tax free. Note: Money invested/saved in a 529 plan must be used for college. If not, there will be a 10 percent penalty when you withdraw the money.
• With a Coverdell Education Savings Account, money is put into an account and generally invested in stocks and bonds. Distributions used for qualified education expenses are not subject to Federal tax. Any family member can contribute to the Coverdell account, but the contributor does not get a tax break. Additionally contributions into the account are capped at $2,000 per year.
12. Don’t put off setting up a retirement plan for yourselves. It’s easy to say, “We’re young, we’ve got time.” It is imperative that you start saving for your own retirement at the same time that you start saving for your child’s education. No one knows if Social Security will be around when we retire. Your company might have profit sharing or a 401(k) plan, but neither are meant to be your only income once you have stopped working. You will need additional investments to bridge the gap.
13. Get a financial adviser or wealth manager. Don’t be put off by the term wealth manager – even if you’re still accumulating wealth, you have to start somewhere. A good independent adviser will be beholden to no one but you, the client, and will be able to help you with many of the ideas mentioned above. Find an adviser you trust and like, and you will have a long-term partnership that benefits you, your child and, eventually, your grandchildren.
14. Keep communication lines open – with each other, with your financial adviser, your accountant and your attorney. The more everyone knows, the better off you will be.
15. Get used to talking about money. Most of us don’t do this based on how we were raised. If you follow these tips and get a financial plan in place, you will have dealt with one of the biggest stressors on any marriage – kids or no kids. If you communicate, deal with issues as they come up and ask for help when you don’t know how to do something, you will lead a far easier life than most of your friends.
My wife and I still stare at our kids, then look at each other and say, “Now what?” But we continue to be thankful, not only for the gift of being parents, but for all the little things we’ve done that add up to make a huge difference in our lives, personally and financially. My hope is that you will, too.