Expecting? Congratulations! Listen today to hear our 6 financial planning tips for when baby is on the way. Here’s our checklist with six essential steps to help you prepare financially for your baby’s arrival:
1. Review Your Health Insurance: Confirm that your health insurance provides the necessary coverage for both you and your baby once they're born.
2. Get Life Insurance: Secure life insurance to protect your growing family. You may need more coverage than you realize, as you now have dependents relying on your income.
3. Legal Planning: Ensure that your wills and powers of attorney are updated, so your wishes are clear if something happens to you or your spouse after the baby arrives.
4. Explore Tax Benefits: Take advantage of tax credits like the Child Tax Credit and Dependent Care Credit. Let your tax preparer know about your new arrival to maximize these benefits.
5. Understand the Costs of Raising a Child: The USDA regularly publishes data on the costs of raising a child in the U.S. Whether you're planning your budget or just curious, their survey can provide valuable insights.
6. Consider Saving for College: If you're already saving 10% of your income for retirement, consider putting aside additional funds for your child's future education.
Enjoy the excitement of expecting your little one, but take these steps to ensure your financial foundation is strong so you can focus on what matters most—your growing family!
Resources:
- Alliance of Comprehensive Planners: https://www.acplanners.org
- John's firm website: https://www.trinfin.com
-Find us on Facebook: www.facebook.com/friendstalkfinancialplanning
-Link to USDA cost of raising a child: https://www.usda.gov/about-usda/news/blog/what-does-it-cost-raise-child
TRANSCRIPT:
Bridget: You're having a baby. Congratulations! Now we got a list of stuff for you to do. Hi, I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois.
John: And I'm John Scherer. I've got a fee-only financial planning practice in Middleton, Wisconsin. Before we jump into the to-do list for when you find out you're having a baby, I just want to remind everybody to hit that subscribe button. That helps other people find this information on YouTube and helps grow our channel.
And with that, I'm looking forward to digging into these questions. It's exciting! You find out you're having a baby and then there's all this stuff. Reality hits. And I just like the idea of a checklist. Here are these things that need to be taken care of, and then you can knock off things on a list. Do you have a literal checklist that you use with clients, Bridget?
Bridget: Yeah, I do. The first thing I want people to do is check for life insurance. It doesn't sound that sexy, and it's certainly not as fun as figuring out baby names, but you want to make sure you've got enough life insurance. This is the time when people actually need life insurance. It drives me crazy that advertisers, and the life insurance companies seem to really hit people when I would say they don't really need life insurance.
But when you have dependents and they're going to be dependent on your income for the next 20 years, that's when you need life insurance. And so, make sure you get enough life insurance. We've got a whole other episode about how much life insurance to get, but make sure you check in with life insurance. One thing I would say is that for the person that's actually bearing the child, sometimes the life insurance people will say, “Hey, check back with us after your pregnancy is over.” That's totally fine.
John: Yeah. The only thing I'll just throw out there (as Bridget said, we got a whole episode, and there're other resources) is just keep in mind that you probably need more than you think.
Bridget: Right.
John: A million dollars sounds like a lot of money. Half a million dollars is a huge amount of money if you win the lottery, but not a lot of money if you have to raise a kid for the next 20 years on your own. So just be prepared that it might feel like, “Oh my gosh, I'm worth more dead than I'm alive.” That's almost never the case. You need a big chunk of money when you have a brand-new baby coming.
Bridget: And similar to life insurance, I also want you to check your medical insurance. So don't take it as a given that everything's magically taken care of. You want to double check. I know at least one case where the person was in the middle of changing medical insurance and what had been under their parent’s plan was no longer applicable. And it was something like they had the baby on the 15th of the month and the change happened on the 1st or the 3rd.
John: What a mess!
Bridget: But just make sure that you're all tucked away there. So call the insurance company, make sure it's on a recorded line and make sure you hear, “Yeah, you've got health insurance for this baby.”
John: Yeah, what a great thing, especially in times of transition. It's an easy call one way or another. Just do it and check it off the list. And this is especially important when you're getting off your folks’ insurance. For young people getting married and having a baby, that's the type of thing where making sure you’re covered is really important. Or if you're changing jobs, something's going on, your spouse is changing jobs, be aware of that. That's awesome.
Bridget: Cool. Oh, now legal up. So I've actually told people to get married when they were living together and having a kid. I said, “You know, it's going to be easier to just get married.” But even if you are married, make sure that you legal up to make sure that your wishes are known in case something happens to you. What are your thoughts there?
John: To me that kind of ties into life insurance. Listen, you don't really need life insurance until somebody's dependent on you. Now you got a baby that's dependent for the next, hopefully only 20 years. We'll see how that stuff goes. But the same thing with the legal work. Not that it's not a good idea to have it. We have a whole episode on this where we talk about powers of attorney and things. What happens if you're in a car wreck and both parents are gone and now who takes care of your child?
I mean, it’s a tiny chance that happens, but these things do happen. And having that stuff laid out is just one of those things that a friend of mine calls the “adulting stuff.” It's part of adulting. Oh yeah, you got to think about that. And it's not enjoyable to think about life insurance. Oh, how fun! What happens when I die? Well, same thing with the will. Just get that stuff knocked off and then you probably don't have to think about it for quite a while.
Bridget: It's a good point. Don't have it hanging over your head. Just get it done and then it won't be hanging over your head. Great, you can move on to thinking about other things. I want to bring this one up because I think it's a concern that most people have and that is: how much is this going to cost?
John: Yeah.
Bridget: What do you tell people about that?
John: A lot. That's my answer. The expense is certainly there. I'm not sure why it falls under their purveyance, but the USDA puts out a survey, I think, every year, or certainly every couple of years. And we can put a link in the show notes to it. But the survey asks how much does it cost to raise a child to age 18? And there're some really interesting demographics. They break it down based on where you live and what your income range is and how much of it goes to housing versus entertainment versus education.
So there're some interesting breakdowns. And of course, it's nationwide or region wide, so your specifics are going to vary, but it is interesting to look at what it costs to raise a child long term. But I'll tell you, and I don't know if you have the same experience, Bridget, it's scary and it's a thing, but people just make it happen.
Bridget: Right.
John: It works out. It just has a way of working out. And that ties into one of the things on my checklist, and I think yours as well, thinking about saving for college.
Bridget: Right.
John: And one of the things I look at with that is I use this USDA study. These costs of college can be scary. I think $28,000 or something is the sticker price of UW Madison. Or if you go to Northwestern down by you, that price doubles, or triples for all I know these days. And you go, “Holy mackerel, how are we going to pay for college?” And one of the questions I ask folks is, “Well, how did you pay for daycare when your baby came around?” And they’ll say, “Oh, yeah, that was super expensive.”
And then I’ll ask, “And how did you save and plan for that?” Usually they’ll reply, “Well, geez, we didn't. We just made it work.” You just made it work. And some of the messaging that we hear can be, “Oh, here're the things you have to do,” these sort of scare tactics. That happens. But when you can step back and go, “Hang on a second.” My kids are 12 and 13. They're not free right now. Check that USDA study. When they go to college, is it going to be a big cost increase?
Yep. But we're not going from 0 to $28,000. We're going from whatever it costs us now. And there's an incremental cost, but it's not a full 180-degree change sort of thing. So sort of blending this concern in with, “Hey, what does it cost to raise a kid?” you can find out what the averages are. And to me, that ties into the whole idea of saving for college. It's not that you shouldn't do it, but it's not as critical perhaps as we might feel.
Bridget: Yeah. And I encourage people to save for their own retirement first. So once that's accomplished, then we start saving for kids’ school. And then last but not least is tax opportunities. This can save you big money on taxes. First is child tax credit, and that's worth $2,000. Right now, as we speak, that's worth about $2,000 for each kid if you're making less than $400,000 a year, so that includes a lot of people.
And another one that a lot of people miss, I think, is what's called dependent care credit. And that's for reimbursing you for expenses so that you can work. This includes daycare, etc. or camps in the summer when your kids are little, so that you can work. Basically, it's a reimbursing so that you can work. It's not 100% reimbursement, but it chips in.
John: Yeah. And I'll just throw out there that on those tax things, that's not like something that you need to do. Rather, it's something you qualify or are eligible for. The action item though is making sure that your tax preparer knows that you have dependents. Sometimes you have a baby late in the year, and it doesn't come up, or you don't fill out their little form sort of thing and things like dependent care can get missed.
Know that there are some credits that are out there. Let's make sure that our tax folks are in tune with that and then taking advantage of those things. You have to go out and investigate life insurance and get enough coverage, you have to check on your health insurance, you have to get a will. But in this case, you just need to make sure that your tax folks know that there's a new head in the household.
Bridget: Sounds great! It's a great time to wrap it up. I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois.
John: And I'm John Scherer. I've got a fee-only financial planning practice in Middleton, Wisconsin. And both Bridget and I are taking on new clients. We'd love to hear from you. If you like what you hear on our show, but you want to find an advisor that's local to your area, we're both members of the Alliance of Comprehensive Planners. You can find a planner in your area who thinks like us by going to acplanners.org.
Bridget: And please subscribe.
At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.
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