As a new parent, you may feel both excited and overwhelmed. It's natural to worry about your newborn's well-being and future. However, through financial planning, you can make informed decisions about your family's finances. It's never too early to start saving for the future, so let's take a look at some financial tips for new parents.
1. Plan for College
According to Business Insider, for the 2024 to 2025 academic year, the average cost for a four-year, in-state college tuition was $11,610 per year, with out-of-state tuition running a breathtaking $30,780 yearly. This means that new parents' financial planning must include a college fund.
The sooner you plan for your child's college, the more prepared you'll be. Even if you only have $200 a month to put into savings, this money can grow over the years. In fact, without interest and a monthly increase, as your salary grows through the years, your $200 a month would be $43,200 at the end of 18 years.
2. Plan for Retirement
Although retirement is even further away than your child's college years, it's time to start planning and saving so you can enjoy your Golden Years. While you may receive Social Security payments after retirement, more is needed to live how you want. Many retirement plans offer tax savings, and you want to get as close as possible to the maximum amount each year for tax purposes.
3. Increase Your Emergency Fund
With a new child, you want to ensure your emergency fund is robust. It needs to be ready to include the additional costs of a child if anything happens to your source of income or you are faced with a significant, unexpected expense. A healthy emergency fund should be able to cover all of your expenses for four to six months. The good news is that your emergency fund doesn't need to sit in a low-interest savings account. You can diversify with a money market account, certificate of deposit, and other accounts that offer higher interest rates with lower risks.
4. Explore All Available Tax Breaks
Depending on your income, you'll enjoy a wealth of tax breaks and credits as a parent that you didn't have before. Your new child will need daycare services once both parents return to work, which can be costly. The child and dependent care credit (CDCC) allows you to write off 20 to 35 percent of your child care costs, up to $3,000, until your child reaches the age of 13. A second child allows you to claim childcare costs up to $6,000.
The other major tax break for new parents is the earned income tax credit (EITC). However, there are limits on how much money you can make and still qualify for the credit. This is a refundable credit, so even if you don't owe taxes, you'll get the EITC back as a refund. As part of financial planning for new parents, you should work closely with your tax professional to ensure you get all the tax breaks you qualify for as a new parent.
As a new parent, financial planning is crucial for securing your family's future. At Caldwell Trust, our team works closely with you to make smart decisions that benefit your family in the long run. Contact us today to learn more.
Frequently Asked Questions About Financial Planning for New Parents
When should new parents start financial planning?
Ideally, financial planning should begin as soon as possible after welcoming a child, or even before the child is born. New expenses, long-term savings goals, insurance needs, and estate planning considerations can all affect a family's financial strategy. Starting early gives parents more time to build savings and adjust their plan as their family grows.
How much should new parents have in an emergency fund?
Many families aim to keep enough in an emergency fund to cover approximately four to six months of essential expenses. New parents may want to revisit that target after accounting for additional costs such as childcare, healthcare, food, and other expenses associated with raising a child.
Should new parents prioritize retirement savings or college savings?
Both goals are important, but parents should be careful not to neglect their own retirement while saving for a child's education.
There are several ways to help pay for college, while retirement generally must be funded through personal savings, employer-sponsored plans, Social Security, and other retirement assets. A financial professional can help families determine an appropriate balance based on their goals and resources.
What are some ways parents can start saving for their child's education?
Parents can consider education-focused savings vehicles, traditional investment accounts, and other long-term savings strategies. The right approach depends on factors such as the family's timeline, tax situation, risk tolerance, and overall financial plan. Starting early can give savings more time to potentially grow.
What financial documents should parents update after having a baby?
The arrival of a child is a good time to review important financial and estate planning documents. This may include:
- Wills and trusts
- Beneficiary designations
- Life insurance policies
- Retirement account beneficiaries
- Powers of attorney
- Healthcare directives
- Guardianship provisions
Keeping these documents current can help ensure that a family's wishes and financial priorities are properly reflected.
Do new parents need life insurance?
Life insurance can be an important part of financial planning for families with dependent children. Coverage may help provide financial support for expenses such as housing, childcare, education, and everyday living costs if a parent dies. The appropriate type and amount of coverage will depend on the family's individual circumstances.
Are there tax benefits available to new parents?
Parents may qualify for certain federal or state tax credits, deductions, or other tax benefits depending on their income and circumstances. Because tax rules and eligibility requirements can change, families should consult a qualified tax professional to understand which benefits may apply to them.
How can a financial advisor help new parents plan for the future?
A financial advisor can help parents evaluate how goals such as building an emergency fund, saving for education, preparing for retirement, managing investments, and preserving family wealth fit together. A coordinated financial plan can help families make informed decisions today while preparing for future milestones.
