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, Smart question. And smart to be thinking about this now. According to a 2015 report from the U.S. Department of Agriculture, raising a child is a costly proposition. The USDA estimates that a child born in 2015 will cost the average middle-income family about $233,610 through age 17 (you can also check the USDA website to do your own calculation). That's before college!
From everyday budgeting to ongoing expenses, before the baby comes is the time to do some planning. So sit down together and put some things on paper.
—Review your monthly spending. Start with the basics. Estimate ongoing costs for things such as diapers, formula and baby clothes. If both of you plan to work, be realistic about the substantial financial impact of childcare and look into your options in advance. Factor in additional medical costs, both in insurance premiums and out-of-pocket expenses. With the numbers in front of you, look at your current budget and see if you need to reprioritize expenses. If you can start setting aside money to cover these costs in advance, and also increase your emergency fund for the inevitable unexpected expenses, so much the better.
—Make sure you have the right insurance coverage. Health insurance is crucial. Whether you have an individual policy or insurance through an employer, make sure you have the best combination of deductibles and coverage. You'll also want to consider life insurance and examine your disability insurance to cover your income in case you become ill or injured and unable to work
—Create an estate plan to protect your child. An estate plan isn't only about money. It's also about making sure you designate someone to care for your children if you're unable. At the very least, have a will in which you name a guardian for your minor kids. Without it, the state can be involved in choosing a guardian. Don't let someone else make this important decision.
Even though you'll have your hands full with the new baby, 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 and to obtain medical coverage for your child. You can easily apply for a number at the hospital when you give the information for your child's birth certificate. Average processing time is about 2 weeks but it depends on your area.
—Add your child 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.
—Check the beneficiaries on your 401(k)s or IRAs. Your spouse is usually the primary beneficiary. You can add your child or a trust for the child as a secondary beneficiary.
College may seem way in the future, but it's never too early to start saving. Consider opening a 529 account and making monthly contributions. Even a small amount contributed regularly can add up. Plus, earnings grow federally tax-deferred and there's no tax on distributions if used for qualified educational expenses. The plan offered by your state may have additional tax advantages. A 529 also makes it easy for grandparents, other relatives or even friends to contribute to this important goal; you can consult your plan sponsor for more details around contributions.
While your child will soon be a primary focus, don't forget about your own financial needs. Keep contributing to your 401(k), IRA, or other retirement account. Prioritize your savings to include other long-term goals like buying a house or buying a new car. And while you're at it, remember to put aside a little for some personal R & R. A night out once in a while can be a welcome break — even if you spend most of the time talking about your new bundle of joy!
Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER(tm), is president of Charles Schwab Foundation and author of The Charles Schwab Guide to Finances After Fifty, available in bookstores nationwide. Read more at http://schwab.com/book. You can e-mail Carrie at [email protected] The Charles Schwab Foundation is a 501(c)(3) nonprofit, private foundation that is not part of Charles Schwab & Co., Inc., or its parent company, The Charles Schwab Corporation. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers are obtained from what are considered reliable sources. However, their accuracy, completeness or reliability cannot be guaranteed. 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.
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