You just found out you are having a baby. Congratulations! You are in for the most fulfilling and life-changing adventure of your life. Experienced parents know what to expect in the early years and how to prepare during pregnancy. But new parents might feel overwhelmed or panicked by the arrangements necessary for their first baby.
Experienced parents are also aware of how expensive and life-changing a child is for their finances. In 2015, the average American middle-income family spent between $12,350 and $13,900 annually on child care from birth to age 17 according to the US Department of Agriculture. Being responsible for another person requires parents to be responsible with their finances. New parents attempting to navigate massive life changes can take easy steps to financially prepare to minimize financial stress in the future.
Here are five pieces of financial advice for new parents:
- Budget for first-year expenses
- Revise tax forms
- Update insurance policies
- Increase an emergency fund
- Start saving for college
Budget for first-year expenses
The first piece of financial advice for new parents is to budget for new expenses related to your baby. If you don’t already have a household budget, they are useful for tracking spending and keeping you on course for your financial goals. Your budget must incorporate one-time expenses like a crib and ongoing expenses like diapers. New parents will quickly learn that child care products and services come at a variety of price points.
Depending on your parenting and lifestyle choices, you can avoid some optional purchases altogether and spend your money wisely. Stay wary of trendy baby products to impulse buy that you are not sure will be useful for your baby. Knowing ahead of time how much you plan to spend on childcare expenses will give you knowledge of how much additional income you will need to earn.
Revise tax forms
Now that a new person has joined your family, it’s time to revise your tax forms with accurate information. First, new parents need to apply for a Social Security card as soon as possible to claim their baby as a dependent. There are a few tax credits parents should be aware of to reduce their tax bills or increase their refund. The Child Tax Credit was revised by the American Rescue Plan in 2021 for parents to save up to thousands of dollars. Low to moderate-income parents may have a chance to qualify for the Earned Income Tax Credit which factors in your household income and number of dependents. New single parents can modify their taxes to file as head of household.
Update insurance policies
The first type of insurance to focus on before and after birth is health insurance. Health insurance coverage can influence a family’s birth options from a hospital to a birthing center. Within a given enrollment period, contact your insurance provider to enroll in a new health care plan. All qualified health insurance plans are required to cover routine prenatal care and childbirth.
The other type of insurance to shop for is life insurance. New parents are most likely not considering purchasing life insurance, but for dependants, life insurance is highly beneficial. Life insurance protects dependents and spouses from a loss of income from the death of a head of household. Term life policies can be a cost-effective option perfect for healthy and young adults.
Increase an emergency fund
Building an emergency fund is essential for all households, including households with children. Adding a person to your family will require parents to redefine their savings goals to be more realistic. Each month, contribute a portion of your income to the emergency fund until you surpass your goal. Ideally, an emergency fund can cover three to six months’ worth of living expenses. Whenever unplanned emergencies occur, you will have a safety net of saved income to fall back on. Experts recommend keeping an emergency fund in a separate savings account such as a certificate of deposit.
Start saving for college
Our last piece of financial advice for new parents is to start saving for your child’s college fund. The cost of attending college is increasing over time just like the cost of raising a child. If attending college is an important family value or tradition, then it’s fundamental to start saving as soon as possible. The 529 plan is a common college savings plan with its own tax advantages. Experts recommend saving what you can and prioritizing other financial goals before starting to save for your child’s education. The more money saved for college, the more options your child has for paying for and selecting their education after high school.
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