Baby Makes Three: Financial Planning for New Parents


For most new parents, focusing on the big picture isn’t easy. You’re sleep-deprived, juggling naps and feeding schedules, and excited about the new little person in your life. But milestones are on the horizon, and you’ll want to prepare for them while keeping your own finances on track.

Here are five tips for new parents:

Tip #1: Consider insurance—both life and disability. Adequate health insurance is crucial, but you’ll also want to consider life and disability insurance. Life insurance can pay for the things you’d like your family to have, such as a paid-off mortgage, school tuition, or money for a future wedding. Life insurance can help protect your growing family by making sure financial resources are available to them if you’re no longer there and can provide peace of mind for your spouse and loved ones.

Disability insurance can also be a major help if one or both parents becomes unable to work due to a disabling illness or injury. While you may have employer-provided disability insurance, make sure that it will be enough to cover essential expenses like your mortgage, debt, child care, and household expenses for a reasonable length of time. Otherwise you may want to consider supplementing your existing coverage. While you shop around, keep in mind that some policies may pay benefits only if you can't perform any work at all, rather than being unable to do the specific type of work you currently do.

Tip #2: Increase your emergency fund. Having a child raises the stakes for “rainy day” planning. You’ll want to be sure you can keep your household running smoothly in the event of job loss, illness, or a large unexpected expense. As a rule of thumb, most financial experts recommend keeping three to six months’ worth of essential living expenses readily available for emergencies. This money doesn’t have to be in a single account, but can be spread between interest-bearing checking or money market accounts, certificates of deposit, short-term U.S. Treasuries, or other relatively conservative, liquid investments

Tip #3: Take advantage of tax breaks. For many working parents, child care can be as expensive as a second car payment or mortgage. Fortunately, tax breaks can help. If you meet certain criteria, the Child and Dependent Care Credit can cover 20% to 35% of eligible expenses, depending on your income,1 with a limit of $3,000 for one child or $6,000 for two or more.

A flexible spending account (FSA) is another option. This is an employer-sponsored program that allows you to set aside up to $5,000 per year tax-free for qualified childcare expenses for couples filing jointly with one or more dependents. You typically enrol in or renew your election in your Dependent Care FSA through your employer during your Open Enrolment period each year, but certain changes in status of “qualifying events” during the year -like having a new baby -allow you to make changes. Your human resources department or benefits administrator can tell you when employees in your organization can enrol in a Dependent Care FSA and help you get started.

You can use the dependent care FSA to pay for eligible Pre-K child care expenses tax-free including nursery school, pre-school, or similar programs below the level of kindergarten. Expenses to attend kindergarten or a higher grade aren't eligible FSA expenses, but, down the road childcare expenses for before- or after-school care of a child in kindergarten or a higher grade up to age 13 are eligible. The care provider just can’t be your spouse or another dependent child.

Generally speaking, high-income families will benefit more from an FSA than from the Child and Dependent Care Credit (you can’t use both). A potential drawback is that the IRS requires money contributed to a FSA to be spent during the plan year (or a grace period extension). If the money isn’t used, it’s forfeited. Check with a tax advisor to see what works best for your situation or review IRS Publication 503 – Child and Dependent Health Care Expenses for more information.

Tip #4: Start saving for college now. By the time a child born on January 1, 2017 packs his/her bags for college, four years of tuition and fees are projected to be roughly $110,408 at a public university (in-state resident).The earlier you begin saving, the better off you’ll be. For example, if you begin contributing $500 per month for college savings at birth, assuming a 6% rate of return, the amount would total about $191,000 by the time your child reaches age 18. If you postpone saving until your child is 10 years old, the final amount will be roughly $61,000.

Tip #5: Prioritize retirement savings. If you must choose between saving for college and saving for retirement, choose retirement. Your child will likely have more than one way to pay for college—including scholarships, loans, and grants—but you can’t make up lost retirement savings. It’s great to care for your kids, but not if it means potentially burdening them financially for your care later on.