As my husband and I recently learned, there is no singular piece of advice that truly prepares you for your first baby. It is a beautiful, terrifying, and exciting time. It can also be a costly and financially confusing time for your family. There are a few fundamental financial areas to review as first-time parents to help prepare your family for your new bundle of joy. Financial moves for first-time parents will be divided between addressing the immediate financial costs and planning for your family’s future.
Childcare for families with both parents working is one of the most significant costs during a child’s years before they begin school. According to Care.com, 59% of families planned to spend more than $10,000 on child care in 2021. Costs range wildly depending on your location and the model of care you select. As you shop for childcare, you have to weigh your financial ability with the model that best suits your family. In-home nanny care tends to be the most costly but also the most customizable. Daycare can be a home-based model in a caregiver’s home or in a formalized daycare center. The two daycares that are closest to our home are $1,350 and $1,340 a month, respectively, for five days a week of infant care. Both cost over $16,000 a year.
Deciding on the childcare model that works best for your family and beginning to save for that cost is a financial move you should make before the baby arrives. Begin shopping for daycare as soon as possible; you need time to ensure waitlists aren’t problematic. Some daycares will provide more amenities and flexibility than others. You will need time to dig into the details to make sure you are comparing apples to apples. While you are finalizing this decision, you can get a head start on preparing for the cost by saving a bucket of funds dedicated to childcare costs.
By starting your saving plan early, your accumulated bucket of funds will help mitigate the dent that daycare puts on your cash flow. You should also look into your employer benefits. Some employers have relationships with local daycares to offer discounted rates. Another benefit to look into is a dependent care FSA. A dependent care FSA (DSFSA) is a saving option through your employer. It is a pre-tax account that you may use for costs like preschool, daycare, and summer day camps. If you are married filing jointly, you may contribute up to $5,000 a year. Your DCFSA savings will not cover all of your childcare expenses, but it will help. Plus, you will have the tax benefit of the funds not being subject to payroll tax.
Daycare expenses are not eligible expenses for other types of employer-sponsored savings accounts such a health savings accounts (HSAs), flexible spending accounts (FSAs), or health reimbursement arrangements (HRAs). You may also be considering saving into a 529 plan; however, these funds are not eligible for daycare expenses either.
If you are lucky enough to have family support to care for your child, that is wonderful. As we have learned in the past two-plus years through the global pandemic, have a backup plan to your backup plan. I would recommend becoming familiar with other childcare options and the expenses, even if you are going to rely primarily on family support.
Health insurance review
The second area of significant potential costs is health care. In anticipation of your bundle of joy’s arrival, you should review your health insurance coverage. Understand what is covered and create an estimate for your out-of-pocket expenses for labor and delivery. You should call your health care insurance contact directly to have a thorough conversation about potential costs and their additional benefits to new parents.
Having a baby is a life event that allows you to change or update your health insurance coverage. As expecting parents, you should research what changes you would like to make to your health insurance coverage and understand the logistics of making those changes. Include the details on a ‘to do’ list for yourself once the baby arrives, with dates of when you need to call and who you need to speak with to make the changes. There is typically a limited window of time after the baby is born to make these changes, and you do not want to miss that window. It is also a good idea to research pediatrician options within your health insurance network. Again, understand what your health insurance covers and what you may expect out of pocket.
If you are electing a high-deductible health insurance plan with an HSA, plan to save at the very least your deductible in the HSA. We often discuss HSAs as excellent savings tools in preparing for retirement. HSAs are also beneficial during life events such as expanding your family to cover ancillary costs that add up quickly. Our blog, ‘7 Ways an HSA Can Help you Now and in Retirement‘, is a good resource to review HSA benefits.
HSAs can be used for the run of the mill medical expenses. Babies come with all kinds of interesting health-related expenses that can add up quickly. HSA funds can also be used to purchase items like diaper rash ointment, baby sunscreen, even monitors in some cases. Check with your HSA provider for a list of approved expenses and continually review your receipt; often, stores will notate if an item is HSA eligible.
Saving for the future
You will have many more financial goals and expenses to consider when a baby comes on the scene. In addition to daycare and health care expenses, another area that first-time parents will consider what financial moves are appropriate is future education expenses. This is tough because there is no correct answer for your approach. Some parents want to plan for their children to take on the debt associated with college costs. Others want to carry that burden entirely for the child, and most fall somewhere in between. The first place to start is discussing your goal to provide for your child’s college costs. Then, you can create a saving plan that is appropriate for your goal.
529 plans are an account type that will allow you to save funds. The qualified distributions for educational purposes will be tax-free. There are no limits on how much you can save in a 529. Don’t forget that if you contribute more than the annual gift tax exclusion amount, $16,000 in 2022, you will be eating into your lifetime estate and gift tax exemption amount. 529 plans have been expanded to allow you to use the funds for kindergarten through 12th-grade costs and even homeschooling expenses. Our blog ‘Know the Rules When Using a 529 Plan‘ outlines the various ways you can spend 529 funds.
Saving enough to foot the bill of your child’s entire college education is a monumental goal on top of your own retirement saving. Many 529 plans make it easy to share your 529 plan to your registry if family and friends would like to contribute. Once family and friends realize you have a 529 plan established, it may be something they would like to contribute to for holidays and to commemorate special events.
Covering your risks
Your cash flow is going to look very different once a baby arrives. As first-time parents, you will need to consider what financial moves you will need to make when reviewing child care, health insurance, and future education costs. You should also consider what financial actions you need to make to cover the unexpected. Is your current life insurance coverage adequate? Once a baby arrives, you will need to consider if your coverage is sufficient to provide for your newly expanded family. You will likely receive life insurance solicitations for coverage on your new baby. It is very rare for there to be a financial need to purchase life insurance on a child. Instead, focus your attention on ensuring the insurance coverages on the parents are appropriate both in type and the coverage amount.
Your estate plan will need attention once your baby arrives. You should ensure that all pieces of your estate plan, including your will, POA, and living will document, are updated. Your estate plan should also include provisions for guardians for your new baby. Make sure you have a discussion with the people you will be naming as guardians; that is not a responsibility you want to be a surprise!
Entering parenthood for the first time is a steep learning curve. Befor you officially become first-time parents, make a list of the financial moves you’d like to make and outline the timing. Many of these moves you can get started before the baby even arrives. You will have plenty on your plate as new parents. If you need help deciding what financial moves are right for your family, we can help.
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