Saturday, 25 May 2019

Five ways new parents can make sure they are financially prepared for their first child

Preparing for your first child can be an overwhelming and somewhat daunting task. There seems to be an endless number of checklists filled with “Do this, not that”. These “new parent” duties often force many to forget some basic, but fundamental, personal finance decisions. To combat that, here is a compilation of five personal finance tasks that my wife and I tackled leading up to delivery and post-birth. I’m only 100 days in — but becoming a dad has been the greatest experience of my life. Best wishes as you embark on the journey of parenthood.

Organization is key in preparing for baby #1 — and it’s an ongoing task. Here are a couple items recommended for every household:

A. Get a Social Security number and birth certificate: Most often, the hospital will offer you the necessary forms to fill out. If not, here is a quick FAQ on how to complete the process. Without a Social Security number, you won’t be able to claim your newborn as a dependent come tax time.

B. Review and update your health insurance: You’ll need to add your newborn to your or your spouse’s health insurance as soon as possible—some companies even require a “pre-authorization.” Most health care plans will have a deadline (mine was 30 days post-birth). Make sure to compare options with your spouse and learn the difference between a low and high deductible plan so your newest addition is effectively and efficiently covered.

C. Update your beneficiary info: Be sure to update your beneficiaries for all your various assets—IRAs, employer retirement plans (401[k], SEP, etc.) and existing life insurance policies. Most of the have beneficiary forms and are not covered by a will/trust. (In fact, most people even forget to add their spouses after they get married.)

The cost of having a child is something that every family should budget for. Various factors will determine the amount a new family will pay: location, health insurance plan, the type of care, etc. The nonprofit organization FAIR Health reports that the national average delivery charge is $12,290, but $16,907 for C-section delivery, which make up about 33% of births. That’s a $4,000 cost difference that one-third of American families will incur. Now, many expectant parents say, “Oh, my health insurance will cover it — I work for XYZ.” But consider this: According to a USDA report, the first-year, out-of-pocket costs (health care, food, transportation, etc.) for a newborn in 2018 are estimated to be $13,600 for a middle-income family making between $59,200 to $107,400. Make sure your cash levels are at an appropriate level to meet your upcoming expenses and new budget.

A. Create a 529 plan: The first tuition bill may be 18 years away, but with the rates at which tuitions are rising, establishing a 529 might be a good idea. Some states even provide a state tax deduction on your contribution ($4,000 in Ohio). I created a 529 plan as soon as I got married, as you don’t need to wait for the birth of your child. Doing so extended my investing time horizon by almost two years. The tax laws allow you to change the 529 plan’s beneficiary, within IRS gift limits, from you to your child. A bonus of a 529 plan is that under the new tax laws, 529 funds can now be used for private high school and grade school expenses up to $10,000/year.

B. Start a Roth IRA: One downside to a 529 plan is the penalties on any nonqualified withdrawals: earnings taxed as ordinary income plus a 10% penalty. If you’re not 100% sure you want to allocate dollars exclusively to college savings, there are several alternatives. One strategy to consider is a Roth IRA. Most people see a Roth IRA as a way to save for retirement but don’t understand the tax benefits that it provides. First, contributions to a Roth IRA are made after tax (they are nondeductible), so they can be withdrawn at any time with no tax or penalty. Second, should any earnings be used to pay for qualified education expenses, the earnings would be subject to ordinary gains tax, but not the 10% penalty. This provides the owner with flexibility—should the funds never be needed for education, they can continue to grow and become a source of tax-free income in retirement.

According to a 2017 study, more than eight of 10 Americans believe life insurance is necessary, but only 41% carry it. Further, among those who are insured, nearly a third are covered by a basic group policy through their job. Life insurance can be a morbid topic, which is most likely the reason most Americans neglect to address the issue. Any life event — marriage, birth/death, job change — is a great reason to review your insurance coverage. Do your homework, take the time to understand the different types of insurance (e.g., term, whole life, universal, disability), and make the decision that best fits your budget and family’s needs. According to Protective Life Insurance, the average amount of life insurance coverage for an American adult is $167,000. Ask yourself: Will that be enough to pay off your debts, help cover your children’s college tuition and supplant the loss of your current earnings and future savings?

An estate plan answers some of life’s most important questions. For instance, the last will and testament appoints your children’s guardians. This alone should be enough motivation to establish an estate plan. Failing to effectively determine your children’s guardians leaves the decision to the hands of the probate court. The adage is true: “Failing to plan is planning to fail.” While death itself is tragic, the unintended results may be entirely avoidable. Regardless of your income or the size of your estate, the following documents comprise a basic estate plan:

1. Last will and testament

2. Medical power of attorney

3. Financial power of attorney

4. HIPPA authorization

5. Advance directive/living will

“The most important thing a father can do for his children is to love their mother.” — Fr. Theodore Hesburgh

“Don’t worry that children never listen to you; worry that they are always watching you.” — Robert Fulghum

“I cannot think of any need in childhood as strong as the need for a father’s protection.” — Sigmund Freud

“We never know the love of a parent till we become parents ourselves.” — Henry Ward Beecher

“Being a parent means loving your children more than you’ve ever loved yourself.” — Unknown


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