With all the excitement of becoming a new parent, it is also important to be prepared financially for when you decide to start a family.
Life Insurance & Disability
Life Insurance is a necessity for building a safety blanket for your family. It can alleviate the stress in supplementing income or paying for large expenses if you were to pass away. The insurance can pay for your mortgage, your child’s college tuition, or even your child’s wedding.
Disability is another great opportunity to consider in case you become unable to work due to a disabling condition or injury. This policy will protect your family in the interim whether short-term or long-term disability coverage. Most companies will offer a short-term disability policy, however, you may have to ask for information on long-term disability options. If you are the primary provider for your family, this will cover essential expenses such as a mortgage payments, debt, or childcare. Take note that while you look into policies, they specify will specific criteria you must meet in order to enact the policy. Some policies will state it enacts if you can no longer do your specific job, others if you can’t work in a specific field, and lastly policies that state when you cannot work at all.
You should always be working towards a solid emergency fund if you don’t already have one in place. It is important to consider that your child will add expenses to your overall monthly budget. This means the budget you and your partner formed could not be enough. The rule of thumb is 3-6 months of expenses depending on how many streams of income are in the household. This has likely increased, so it is time to audit your emergency fund. If you haven’t started yet, now is the time to start. Kids bring unexpected expenses and you want to be prepared.
College Planning Begins Now
Your child may go off to college in 18 years. If you are wanting to provide a base of college funding for them, then now is the best time to allocate funds to a state’s 529 plan, Coverdell Education Savings Account (CESA), or Uniform Transfers to Minors Act account (UTMA). The biggest difference between these three is their allocation and applicable taxes. A 529 and CESA are specifically earmarked for education expenses. Whereas a UTMA account is a custodial account that your child will get access to at 18 for any expenditures they would like to make, not just college related. In 529 and CESA accounts, they grow tax-free. But, a UTMA account can be taxed on its earnings at their parent’s income rates.
Estate Planning Documents
Now that you have added an addition to your family, updating or drafting your will is important. You can put your child as a contingent or primary beneficiary in your will and investment accounts based upon if you would like it to have someone else as the primary before they will receive the assets. Oftentimes, your partner is the primary beneficiary and your children are the contingent beneficiaries based upon your partner’s death. While you are drafting your will, it is important to also create Power of Attorneys and Medical Directives if you don’t have them already.
Since you have a child, you are now considered a family for HSA contribution limits. For 2023, the self-only coverage limit will increase to $3,850, and the annual family limit will increase to $7,750. You can directly contribute to your HSA pre-tax from your paycheck and the withdrawal is not taxable either. This is a great way to save for health expenses should your family run into any health issues. It is a popular misconception that HSAs do not roll over funds into the next year. That is incorrect as HSAs can accumulate wealth from year to year.
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Financial Planning Associate