Becoming a parent is an exciting phase in life’s journey. Suddenly, you’re responsible for another tiny human being. Amid the countless decisions and preparations for this new adventure, taking some time, even before the little one has arrived, to plan and understand the financial challenges ahead can greatly ease the inevitable chaos. As a new parent, you can use this 5-point checklist to help you organize your financial priorities.
1. Add Your Newborn to Your Health Plan
One of your first responsibilities as a new parent is to ensure your newborn is added to your health plan. While you may assume that your healthcare provider automatically knows about the new addition, it’s crucial to take proactive steps. Fortunately, having a baby qualifies as a life event, allowing you to make changes to and update your health coverage. It is also important to remember to add your child within 30 or 60 days of birth to ensure coverage applies retroactively.
2. Consider Increasing Your HSA Contributions
For those with high-deductible health plans, Health Savings Accounts (HSAs) offer a valuable opportunity. HSAs allow you to contribute pre-tax dollars from each paycheck, reducing taxable income and providing funds for various medical expenses. Unlike Flexible Spending Accounts (FSAs), HSAs don’t have a “use it or lose it” policy. Any contributions not used during the year will roll over, growing tax-free. With the increased health expenses that come with a newborn, maximizing your HSA contributions can be viewed by many as a worthwhile goal.
3. Evaluate Your Life Insurance Needs
Like all forms of insurance, life insurance transfers a risk of loss away from your resources and onto an insurance company. Most people will only ever need term life insurance, which can be incredibly affordable, and is typically offered in 10-, 20-, and 30-year increments. You should match your coverage to your long-term financial needs, ensuring you don’t obtain more coverage than necessary. Generally, the younger you are, the more coverage you may need, as life insurance acts as an income replacement and you have a longer working life potential the younger you are. In the unlikely event that you do pass away, the death benefit from the life insurance will help provide stability to your family, enabling them to continue living the life you envisioned for them.
4. Explore Potential Child Tax Breaks
Be aware of tax benefits available to parents. The Child Tax Credit (CTC) provides a $2,000 per child tax credit, with phase-outs starting at $200,000 for individuals and $400,000 for joint filers. The CTC directly reduces your tax liability and can be claimed even if you don’t itemize deductions. Additionally, if you are planning on using childcare services, consider the Child & Dependent Care Credit and a dependent care FSA. These options can further reduce your tax liability and provide tax advantages for eligible childcare expenses.
5. Review Your Estate Plan & Beneficiary Designations
With the added responsibility of parenthood, it’s crucial to have a plan in place in case of unforeseen circumstances. A comprehensive estate plan includes the following:
- A Will outlines your wishes for your assets and recommends a legal guardian for your minor children.
- A durable power of attorney appoints someone to handle financial transactions if you become incapacitated, while a health care proxy designates a person to make medical decisions on your behalf.
- A Living Will helps clarify your preferences for medical situations, serving as a guide for your health care proxy.
- A Revocable Trust may be appropriate for some parents to enable proper management and appointment of trustees. This can be advantageous especially in situations of unfortunate “simultaneous death”. A Revocable Trust will not only outline the ongoing management of the inherited assets but it will also help avoid probate for the parents who passed.
You should regularly review and update your estate plan to make sure it aligns with your new parental responsibilities.
While this checklist covers some of the essential financial moves for new parents, there are many other considerations to explore, such as college savings and home purchase planning. Consulting with a financial advisor is highly recommended to navigate your unique financial situation effectively. Remember, taking proactive steps now will provide you and your growing family with greater peace of mind in the long run.