Dear Carrie: We're expecting our first child soon and are trying to get financially prepared. We know college is high on the list, but that's so far in the future. What about now? What should we focus on first? — A Reader
Dear Reader: Having a baby brings up a lot of financial questions — for the present, for the future and for all those years in between. Because there's no doubt about it: Raising a child is a costly proposition. The latest figures from the U.S. Department of Agriculture estimate it will cost the average middle-income family about $233,610 to raise a child to age 17 ($284,570 if you adjust for 2.2 percent estimated annual inflation) — before college! Think that's over the top? Check the USDA website to do your own calculation.
Of course, certain expenses such as housing and transportation are part of everyone's budget. And the new tax law actually includes a few positive changes to give parents a bit of a break. But the bottom line is that having kids will likely not only increase your monthly expenses but also shift the way you spend both your essential and discretionary money. While saving for college is a top concern, the sooner you determine the impact of both day-to-day costs and extras — from diapers to daycare to family vacations — the better off you'll be.
Before the Baby Comes
From everyday budgeting to ongoing expenses, now's the time to do some planning. So sit down together and put some things on paper.
— Review your monthly spending. Estimate ongoing costs for things such as diapers, formula and baby clothes as well as for extras like family outings. If you both plan to work, be realistic about the substantial financial impact of childcare and explore your options in advance. Factor in additional medical costs, both insurance premiums and out-of-pocket expenses. With the numbers in front of you, review your current budget and reprioritize if necessary.
— Update insurance coverage. Health insurance is essential. Whether you have an individual policy or insurance through an employer, make sure you have the best combination of deductibles and coverage. Also consider life insurance, both for a working and a nonworking spouse. Your employer may offer a variety of plans, but an individual or private plan can provide coverage that's a better fit for your situation. Term policies are generally affordable and provide a high amount of coverage for a low premium over a fixed time frame (say, one to 30 years). Get enough to cover your mortgage, debts, childcare, household expenses and your child's education. Also consider disability insurance to cover your income in case you become ill or injured.
— Create an estate plan to protect your child. At the very least, have a will to name a guardian for your minor kids. Without it, the state can choose a guardian. Don't let someone else make this important decision.
— Increase your emergency fund. More things can happen with an addition to the family. Having a bigger emergency cushion can help smooth some of the unexpected expenses that are likely to come along.
Soon After the Baby Is Born
Even though you'll have your hands full, there are some administrative things you should take care of right away. Decide in advance which one of you will handle them.
— Get a Social Security number for your child. You'll need this to claim your child as a dependent on your income tax return, to obtain medical coverage, and to set up a bank account for your newborn. Provided that you have named your baby, you can generally apply for a Social Security number at the hospital at the same time that you apply for a birth certificate. An application is also available online at ssa.gov, at your local Social Security office or by calling 800-772-1213, but that process is more complicated.
— Add your newborn to your health insurance policy. Do this right away to avoid any delay in coverage. Some companies require you to enroll your newborn within 30 days of birth.
— Check the beneficiaries on your 401(k)s or IRAs. Your spouse is usually the primary beneficiary. You can add your child as a secondary beneficiary. Work with an attorney if you have special assets or specific goals in mind.
Planning for Education Costs
It's never too early to start saving for college. Consider opening a 529 account and making monthly contributions. Even a small amount contributed regularly can add up. Plus, earnings grow federal tax-free, and there's no tax on distributions if used for qualified educational expenses. Your state plan may have additional tax advantages. A 529 also makes it easy for grandparents, other relatives or even friends to contribute to this important goal.
And under the new tax law, you can use up to $10,000 a year from a 529 for private elementary and high school tuition costs. However, making withdrawals early gives your money far less time for growth potential.
Ways Uncle Sam Can Help
Speaking of the new tax law, there are a few things you should be aware of and possibly discuss with your tax advisor. On the negative side, because personal exemptions have been eliminated, you can no longer claim an exemption for your child. However, that loss is offset somewhat in a couple of ways.
First, the standard deduction has effectively doubled to $12,000 for single filers and $24,000 for married filing jointly. That amount may be more than the combined personal exemptions for your family would have been under the old tax law.
Also, the Child Tax Credit has increased from $1,000 to $2,000 per child. Plus, $1,400 of this credit is refundable, which means even if you don't owe any income tax, you could get a $1,400 refund. Another bit of good news is that while eligibility for the CTC is tied to income, those levels have been raised considerably: to $200,000 for single parents and $400,000 for married couples.
Taking Care of Yourself
Lastly, don't forget your own financial needs. Keep contributing to your 401(k) or IRA. Prioritize savings to include other long-term goals like buying a house or taking a family vacation. And while you're at it, remember to put aside a little for some personal R and R. A night out once in a while can be a welcome break — even if you spend most of the time talking about the new tiny person in your life.
Carrie Schwab-Pomerantz, Certified Financial Planner, is president of the Charles Schwab Foundation and author of "The Charles Schwab Guide to Finances After Fifty." Read more at http://schwab.com/book. You can email Carrie at [email protected] The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.