Financial Checklist After Having a Baby
Written By: Ryan Rink, CFP®, EA, ChFC®, CLTC®
Welcoming a newborn into your family is an incredible and life-changing experience! My wife and I had the pleasure of welcoming our first child into the world earlier this year. Not only was it a big change to our overall lifestyle, but there were many financial planning-related changes, as well. As you navigate the joys and challenges of parenthood, it’s crucial to ensure your financial house is in order. We’ll run through some of the planning items to be aware of when having a baby.
Obtain a Birth Certificate and Social Security Card
Upon our arrival in the delivery room, the hospital had the necessary forms for us to complete to obtain our son’s birth certificate and Social Security card. I highly recommend completing both forms before leaving the hospital since they are able to take care of submitting each of them to the government on your behalf. It usually takes up to a couple of months to receive the Social Security card in the mail. Regarding the birth certificate, I received a letter in the mail about two weeks after leaving the hospital. I had to mail back to the state with payment, then received the physical certificates a couple of weeks later.
Add Baby to Your Health Insurance
This can be an easy one to forget. You just had the baby and taking care of that bundle of joy is your primary focus. However, it’s pertinent you don’t delay this step to ensure the hospital expenses are covered by insurance. Having a child is considered a ‘qualifying life event,’ which permits health insurance coverage changes during a plan mid-year, but only for a limited window. Each plan is slightly different, but to be on the safe side, I suggest adding the child to your health insurance within 30 days. Most married couples are on the same health insurance plan, however, in the instance you’re on separate plans, you’ll want to evaluate whose plan makes the most sense to add the child.
Review Your Cash Flow
Hopefully you’ve reviewed your cash flow plan before having the baby, but if not, make sure you review/create a budget to factor in additional expenses. By having a baby shower, you’ll be able to get a lot of the ‘one-time’ purchases as gifts, however, here are some ongoing baby expenses to keep in mind:
1) Diapers/Wipes: My wife and I did a ‘diaper raffle’ at our baby shower, which provided us with a tremendous starting supply of diapers. Depending on the brand of diapers and wipes you buy, I’d estimate the cost to be somewhere between $20-40 per week.
2) Day Care: This will likely be the biggest expense you encounter for your newborn. Mom will typically be off for the first 3 months, but if she plans on returning to work either full or part-time, you’ll need help with day care. Do your research ahead of time, as the day care centers fill up fast and often have waitlists. See if your company offers a dependent care FSA, as this account allows you to use pre-tax dollars to pay for childcare. I’d estimate the cost to be anywhere between $50 per day to well over $100 per day, depending on the day care center.
3) Formula: The money you spend on formula can vary greatly, depending on if you breastfeed. If you’re exclusively formula feeding, I’d anticipate spending approximately $200-300 per month.
4) Increase in Medical Expenses: Babies will have frequent doctor visits, especially in the first year of life. You’ll want to review your health insurance to see what is all covered. Consider increasing contributions to your FSA or HSA account to pay for these expenses with pre-tax dollars.
5) Education Savings: We’ll touch on this more in the next section, but you’ll want to consider starting a fund for future education expenses.
Expenses are important, but also keep in mind any potential changes in income. Does one spouse plan on going part-time or stopping work altogether? Also consider a change in income due to maternity or paternity leave. Even though this may only impact a few months of cash flow, it’s important to know what to expect. Review mom’s short-term disability coverage to see what the policy will pay.
Consider Opening a 529 Plan for Education Savings
It’s important to first have a conversation with your spouse to discuss what each person’s goals are regarding funding your child’s education. From there, you’ll want to put together a savings plan to help meet your goals, whether that be 5 years from now when they go to private school, or 18 years when they start college. The earlier you can start saving, the more you’re able to take advantage of growth and compound interest.
529 plans are a great way to help save and pay for education. The earnings within the account can be taken out tax-free when used for qualified education expenses, such as tuition, books, etc. Keep in mind these accounts are not solely for college. Up to $10,000 annually (per student) may be used towards K-12 tuition expenses.
In most states, you receive a tax deduction on state income taxes for making contributions to a state-sponsored 529 plan. For example, Wisconsin taxpayers who contribute to an Edvest 529 account, are able to deduct up to $3,860 annually (per beneficiary) from their 2023 Wisconsin state income taxes ($1,930 for married filing separately and divorced parents of a beneficiary).
Revise Your Estate Plan
Now is a great time to create and/or review your estate plan. At a minimum, you’ll want to meet with a qualified estate attorney to review or draft wills, as well as financial and health care powers of attorney. In some instances, a revocable living trust may make sense to create additional protections for your child’s inheritance. Having a will is crucial, as it allows you to designate a guardian for your child in case something happens to both of you. The last thing you want is the state appointing a guardian on your behalf. The powers of attorney designate someone to make financial and health care decisions in the event you become incapacitated.
You’ll also want to review and update the beneficiaries on all bank/investment accounts, as well as any life insurance policies.
Review Your Life Insurance Coverage
If you don’t have life insurance already, this is the time to start thinking about it. You or your spouse may have a small amount of group coverage through your employer, such as 1x salary, but oftentimes this is not adequate coverage to replace lost income if something were to happen. Now that you have a little one in your family, your need for life insurance has greatly increased. Give some thought as to the amount of income you’d need to replace if something happened to you or your spouse. Do you own a home and have a mortgage? What are your goals for paying for your child’s college? These are all things to think about when determining the amount of insurance coverage to buy. We often find term life insurance is a great option for younger individuals, since it provides the highest amount of coverage for the lowest cost. We recommend working with an independent life insurance agent to purchase coverage, since they’re able to shop the market and find the best carrier for your needs.
The checklist below is a great starting point to review and complete as you go. If you recently had a baby, feel free to reach out to your Shakespeare Financial Advisor at (262) 814-1600 with any questions you may have.
What-Issues-Should-I-Consider-When-Having-Or-Adopting-A-Child-2023