Feed, Burp, Save: 6 Money Steps for New Parents | American Funds

College Savings

Six Steps to Baby-Proof Your Finances

A middle-income, two-child family can expect to spend $233,610 to raise a child from birth through age 17, according to the USDA. A well-thought-out financial strategy can help keep your family on secure financial ground.

Even the most organized parents-to-be can encounter financial challenges. Having carefully researched all the baby gear they would need and calculating the costs involved, Scott Brewster and his wife thought they had everything in order before the birth of their first child.

But after an unexpectedly difficult delivery, the couple suddenly found themselves buying items they hadn’t counted on, including formula to supplement the baby’s feedings. The formula alone cost hundreds of dollars a month.

“Parenthood is an interesting journey,” says Brewster, a certified financial planner. “It’s never what you think it’s going to be.”

While it’s impossible to prepare for all the curves parenthood might throw you, these six steps will put you on firmer financial footing.

1. Review your budget

With a baby on the way, it’s time to revisit your budget to cover your higher expenses.

As they planned for the arrival of their first child, financial advisor Lucas Casarez and his wife agreed that she would put her career on hold to be a full-time mom. After doing the math, they felt confident they could manage on a single income if they trimmed some of their expenses. Not surprisingly, they decided to put future vacation plans on hold and curb their visits to Starbucks.

They’ve been careful not to overspend, even when it comes to the baby. For instance, they resisted the urge to buy expensive furniture.

“We were realistic. Other furniture looked a bit more majestic than what we bought,” Casarez confides, “but I don’t think our baby will care.”

2. Set up an emergency fund

This is sound advice for anyone, and it’s especially important for new parents. Experts recommend setting aside enough to cover six months of living expenses in an account that is easily accessible in the event of a setback such as an illness or a job loss.

One of the best ways to boost your financial safety net is to treat your savings like any other expense. Schedule automatic transfers from your paycheck into your emergency fund.

3. Open a dependent care flexible spending account (FSA)

You might be familiar with health care flexible spending accounts, which allow you to set aside pre-tax dollars to pay for qualified health expenses. Some employers now offer a similar perk to help cover the cost of child care.

A dependent care flexible spending account works in much the same way, only the account is used to pay for qualified dependent care services such as a nanny, day care, summer day camp or an after-school program. The maximum amount that eligible employees can put into a dependent care FSA this year is $5,000 (for married couples filing jointly).

That’s a meaningful savings, when you consider the tax benefits. Parents in the 30% combined federal and state tax bracket who put $5,000 in an FSA would save $1,500 in taxes.

4. Start saving for college with a 529 college savings plan

Before you know it you’ll be teaching your child to count, but here’s a number you need to familiarize yourself with first: 529.

Named after Section 529 of the Internal Revenue code, 529 plans are tax-advantaged education savings plans that can be powerful tools to help you save for college.

Your investment has the opportunity to grow, and those earnings are not subject to federal tax — and generally are not subject to state tax if the funds are used for tuition and other qualified educational expenses. In addition, a number of states allow a deduction from, or a credit against, state taxes for all or part of a contribution to certain 529 plans.

In spite of the advantages, only 37% of parents open 529 accounts for their children, according to private student lender Sallie Mae. “Most parents aren’t utilizing 529s and are therefore potentially foregoing important tax benefits,” reports Kris Spazafumo, vice president and senior product manager of Investment Services Wealth Management at Capital Group.

If you need an incentive to start saving for your newborn’s college education, consider this: Currently the average new graduate carries about $37,000 in student loan debt. “Every dollar saved for college now is money that parents or students will not have to borrow — and then repay with interest — later,” she emphasizes.

5. Purchase life insurance

The purpose of life insurance is to take care of the people you provide for in the event of your death.

A common rule of thumb is that your insurance benefit should equal seven to 10 times your annual salary.

Even a stay-at-home parent should have a policy. “You still need life insurance on that parent because you might have significant child care costs in his or her absence,” says Greg McBride, chief financial analyst at Bankrate.com. “You also need to compensate for future earning power.”

6. Write a will

While it’s probably not on your list of immediate concerns and may be the last thing you want to think about, you should prepare a will.

A will not only specifies who will inherit your estate, it enables you to designate who should care for your children in the case of your death.

“Estate planning is so important, regardless of your income or your assets,” Casarez stresses. It’s something people avoid, but why would you leave that choice in someone else’s hands? “You want to be able to decide who will care for your child if you’re gone. Put it down in writing, and hope it doesn’t happen.”

Preparing for the birth of a child is exciting, and you’re going to have your hands full. Getting your financial matters in order may help you relax and focus on the joys of parenting.

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