Your bundle of joy has arrived. It’s the most special time full of such happiness.
And then at some point you started thinking about the financial responsibilities of being a parent. This often hits a high stress level just before you get on a plane, right? Don’t panic of you didn’t get everything done before your baby arrived — get motivated to take care of the essentials.
Here are six things to do:
Update your tax withholdings (on form W4). Now that you have a dependent, you may not have to pay as much tax. Updating this form allows your employer to reduce how much tax is withheld from your paycheck, resulting in a little bit more to take home.
Shore up your cash reserves. Set a goal to build a safety buffer in a cash account so you can handle unexpected expenses that may come up — a good target is three to six months worth of essential living expenses.
Wills and other important legal documents. Not a fun topic, but so important you should not put it off. See an attorney experienced in drafting estate documents. As parents, you need to have Wills and powers of attorney that make sure your wishes will be met in case you are incapacitated or die. It is also important to “have the talk” with whomever you would want to raise your child if you are gone. Make sure they are on board with your plan.
Life insurance. Generally, term life insurance is the most cost effective way to make sure that there will be sufficient funds to take care of your family if you die too young. Think about how much money your family would need to replace your income, the loss of your annual college and retirement savings and if there would be other needs. If anyone tries to sell you “permanent” insurance (whole life, variable life or universal life), make sure you understand the difference in annual costs, and death benefits. Term life insurance allows you to buy a bigger death benefit for a term of 10, 15, 20 or 30 years for a lower annual premium than permanent insurance. Permanent insurance may be the right choice for specific circumstances, but for many parents, term policies are an effective and cost efficient way to protect their families.
Retirement account beneficiaries. Check to see who you have listed as the primary and secondary (or contingent) beneficiary on your IRA, Roth IRA and Employer-sponsored retirement plans. Are these the people you want to own your accounts if you die? Check with your attorney to make sure these beneficiary designations match your Will and or trust — and don’t name your minor child as a beneficiary.
College savings plans (529s). College is expensive, and saving for college should really start as soon as possible when your baby is born. You can open a 529 College Savings account (or prepaid account in some states) with as little as $50 and add to it each month. 529 accounts allow you you invest using mutual funds, generally allow a state tax benefit in the years you contribute (check your state laws), allow tax-free growth and tax-free withdrawals for eligible educational expenses. They are flexible — your child does not have to attend a college or university in the state sponsoring the plan, and you do not need to invest in your own state’s plan (though most states offer a tax benefit if you do). Parents can now withdraw up to $10,000 per year to pay for private school before college.