Becoming a parent for the first time is one of the most exhilarating and joyful, yet equally terrifying, moments in any person’s life. In an instant, you gain a whole new perspective and set of responsibilities, especially in the area of finances. But with careful consideration and preparation, you can set your new family up for success.
Here are a few financial planning suggestions for new parents:
1. Start saving for college – now.
It might be hard to imagine your children one day leaving the nest, especially when she/he can’t even munch on solid food yet, but you need to set up an education savings plan as soon as possible. A 529 Plan, known also as a Qualified Tuition Plan, is a savings plan designed to help parents save for future costs related to their child’s education. Earnings on these plans are generally exempt from federal and state taxes, and this vehicle provides the added advantage of allowing additional family members to contribute. Benefits vary by state, so make sure you check with your financial advisor to understand the implications. You’ll also need to choose either a Prepaid Tuition Plan, which allows you to purchase credits for tuition at participating colleges or universities, or an Education Savings Plan. The latter allows you to save for a variety of the beneficiary’s school-related expenses, and can be used at most colleges and often elementary or secondary schools, as well. Start saving now to avoid last-minute sticker shock or saddling your child with student loans.
2. Don’t forgo your own retirement savings.
With countless additional expenses, from diapers to daycare, many new parents go into financial survival mode and focus only on covering the day-to-day costs of baby bliss. However, forgoing retirement savings is a big mistake. Unless you want your children to support you later in life, you need to put away a set percentage of your income every month. There is no magic number that equates to the perfect contribution amount for every household; you need to evaluate how much you make, your intended retirement lifestyle, the age you want to stop working and a contingency plan if you are forced to quit earlier than expected. Although there are quite a few programs online that can give you a general guideline, it’s advisable to schedule a one-on-one session with your advisor to develop a plan that is personalized to your unique situation and needs.
3. Bump up your emergency fund.
As long as we’re talking about savings, let’s discuss emergency funds. Money can be tight with a new baby on board, but you’ll feel better if you have an accessible chunk of money you can use for surprise expenses — baby-related or not. Prepare for the unexpected by putting aside at least 5 percent of your income designated solely for emergencies. Ideally you eventually should have enough saved up to cover several months of expenses, including those for your child.
4. Cut out unnecessary expenses.
With a new family member, and often a decrease in income due to one parent’s staying at home, how do you fund additional savings and cover daily expenses? The simple answer is to cut costs. As soon as you emerge from the cloud of having a newborn, sit down with your partner and go through your monthly budget. For instance, while your daily coffee run to Starbucks may be sacred and keep you sane, the extra spending on takeout might need to go. Track everything and be brutally honest. Saving for your child’s education, your own retirement and emergencies will be much more helpful in the long run than the latest model of iPhone.
Babies are expensive, but with careful planning and saving you’ll be on the road to financial peace of mind. Call us today to set up a game plan that will help secure your future.
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