Having a child is a wonderful experience, but it can also be a lot of work. From raising your child and covering the additional living expenses to saving for their college education, you have a lot of new financial responsibilities.
But it’s not too late to prepare financially for your child. By taking a few steps, you can create financial security for your family and enjoy being a parent. This article will dive into five financial moves to think about to protect your family after having a baby.
1. Get a life insurance policy
LIMRA’s 2022 Life Insurance Barometer Study found that around 33% of Americans say a major reason they have life insurance is that their employer offers it as a benefit. The problem is that many employers only offer $50,000 of coverage for tax reasons.
Many families need more than that.
So, even if you have group coverage through work, getting a policy privately from an insurer may be a good idea.
You can’t name children as beneficiaries, but you can help financially protect them by making your partner a beneficiary so they can use the death benefit to replace your income and pay for living expenses.
You could also consider getting life insurance for children so that you can receive added financial protection if your child passes away.
Here are two types of life insurance for new parents to consider:
Term life insurance: These policies have term lengths of 10 to 30 years, depending on your choice. Premiums are cheaper than permanent life insurance, but you must renew coverage if you outlive the policy.
Permanent life insurance: These policies charge higher premiums but last for life. They also come with cash value. Part of each premium goes into the cash value and grows tax-deferred at a certain rate, depending on the policy type.
You can withdraw or borrow from it at great rates and terms when it grows enough.
You can also get the cash value minus surrender charges if you surrender the policy.
2. Prioritize retirement savings
Having a child will add more expenses to your budget, and you’ll have to think about saving for their college.
But don’t let that take away from your retirement savings. Your child will likely have many ways to pay for colleges, such as grants, scholarships, and federal student loans with good rates and terms. On the other hand, you can’t make up for lost retirement savings.
Keep contributing at least as much as you were before, and increase your contributions if you can afford to.
3. Increase your emergency fund
Emergency funds exist to help you cover your living expenses and the costs of emergencies, such as car crashes, job losses, and unexpected medical bills. The emergency fund helps you stay out of debt while covering these expenses.
Many experts recommend having three to six months of living expenses in your emergency fund. Now that you have a new child, your living expenses will increase, so you’ll need to add more to the fund.
Consider keeping your emergency fund money in a high-yield savings account, so it earns more interest than a traditional savings account. This will help mitigate inflation and grow your fund when you need it.
4. Open a college savings account
College savings accounts can help you save more for your child’s college education through tax advantages like those offered on retirement accounts.
For example, every state has a 529 Plan that you can open an account with and contribute to. Contributions are not tax deductible, but earnings grow tax-deferred, and withdrawals for qualifying educational expenses — like tuition and fees — are tax-free.
5. Update your estate plan
Your estate plan is critical for dictating how your assets are distributed and stating your wishes for end-of-life circumstances. A good estate plan prevents the court from deciding how these matters will be settled and potential family fights.
A new family member means you’ll have to update certain pieces of the estate plan:
- Last will and testament: This states how you want your assets distributed. If you want your new child to receive some of your assets, you will have to update your last will and testament.
- Guardianship designation: This lets you select a guardian for your child if you pass away while they are a minor. Name a backup guardian in case the primary guardian can’t care for the child.
- Funeral instructions or wishes: This lets you tell your family how you would like to be buried if you pass away. It is important to update this to give to your partner and child.
Protect your new family member
Parenthood can be busy and stressful, but taking a few steps can help you feel more at ease in terms of your financial situation.
Start by looking for life insurance policies to protect your partner and children. Don’t let retirement savings fall by the wayside, though — keep those up and increase them if possible.
If you’re on track for your retirement goals, open a college savings account and invest in your child’s future education. Meanwhile, boost your emergency fund so that you have enough in case of the unexpected.
Finally, update your estate plan. Speak with an attorney or estate planning professional.
It’s not the most fun topic, but it creates peace of mind that your affairs are all in order. Knocking these out as soon as possible can reduce your financial stress and allow you to enjoy the best aspects of parenthood.