Being a new parent brings new challenges along with special joys. Another thing that emerges are new things to consider when it comes to your finances. Below are six items to think about as your family grows.
Know your tax return
Your adjusted gross income or AGI is an important number because everything on your tax return revolves around it. If you’re eligible for child care credits, your AGI is factored in. Focus on the first two pages of your tax return along with any line that has a number on it. AGI is the most important one on the first page. The second page shows your child tax credit, dependent care credit and retirement savings credit.
What type of 401(k) contributions are you making?
Your AGI affects whether you should be doing a pre-tax or Roth 401(k) contribution. One theory is that everyone should contribute to a Roth. For some individuals, that is correct. If you have several children, you will naturally have additional credits for child care, so perhaps it’s better to make a pre-tax contribution. Your effective tax rate is much higher if you’re earning credits on top of the tax deduction.
Understand your health insurance coverage and deductibles
As basic as it seems, it’s important to know your health insurance deductible and required co-pay. If you have a high deductible health plan and go to the doctor for a regular visit, you can expect anywhere between $100-$150 per appointment. Some health care providers have a video chat for triage care. This usually does not include children younger than 2. Fast care clinics are another alternative. It’s wise to consider your options prior to an emergency situation. If your child has a medical issue and it’s 3 p.m., consider taking action before the end of the workday, otherwise you may find yourself in the emergency room, which makes for an expensive evening.
Also, if your employer offers a Health Savings Account (HSA), take advantage of it as the benefits are numerous. An HSA is the best of all worlds because it reduces your taxable income, it’s tax-free when used for qualified medical expenses, and if you were to change jobs, it is portable and goes with you.
I believe many folks are underinsured. Most workers think that the life insurance offered through their employer is sufficient which is typically two or three times salary. A good rule of thumb is 10 times salary. I have had life experiences that speak to the importance of this valuable financial tool.
When shopping for life insurance, it is wise to work with someone who you know or who has been referred to you from a friend or family member. It’s also important to make sure the insurance company has earned a high rating and reputation in the marketplace.
Estate planning is best to do many months before the new bundle arrives. I remember during our Lamaze class, the instructor asked us who had a will. Eight of the nine couples did not have a will.
Once you select a trustworthy guardian, it’s important to talk with that person or couple to make sure they understand the scope of the responsibility. This is where comprehensive life insurance coverage will give you peace of mind. If you’re asking a sibling, for example, to take on an extra child or multiple children, you want to provide them sufficient resources should they need a larger home or an addition to a current home in order to accommodate your children.
Be frugal — shop garage sales
In today’s world, do we really need brand new everything? It’s fun to go online and search garage sale finders and other Facebook groups announcing garage sales for parents. We even find items in sales that still have original tags. If you keep the items in good condition, you can also resell them at your own sale.
We do all of this planning and yet it’s unlikely that it will be needed. However, taking time to plan offers peace of mind to new moms and dads when things get chaotic in the day-to-day events of family life.
Eric Flick, a certified financial planner for Summit Planning Group, can be reached at email@example.com or at 920-884-9000.