The arrival of a new child, whether by birth or adoption, is an exciting time. However, it also brings new financial responsibilities that require careful planning. To help you smoothly navigate this life change, here are seven essential financial tips to consider as you prepare for your newborn.

1. Build an Emergency Fund
Having a child increases your need for a “rainy day” fund. Aim to have three to six months worth of expenses readily available. This can be spread between your savings account, CDs, money markets or other relatively conservative, liquid investments.

2. Secure Term Life Insurance
Life insurance is crucial for ensuring your family’s financial security in your absence. Term life insurance is an affordable option that can help cover significant expenses like your mortgage, your child’s tuition, and more.

3. Review Health Insurance Coverage
Typically, you have 30 days following the birth or adoption of a child to add them to your health care plan at work. If both spouses are working, review coverage options with each employer and determine which provides the most cost-effective, comprehensive services.

4. Start Saving for Your Child’s Education
It’s never too early to begin saving for your child’s education. The cost of college can easily exceed $200,000 at a public university. By contributing $500 per month now, and assuming a 7% return, your savings could grow to around $215,000 by the time your child turns 18.

Consider opening a 529 plan, which offers tax-efficient savings for qualified K-12, college, or apprenticeship expenses. Up to $35,000 of unused funds can be rolled over into a Roth IRA.

5. Evaluate Your Estate Documents
Your estate plan is an essential part of your overall financial plan. Without an estate plan, a court will determine the legal guardianship of your child and the management of any inheritance should you both pass away. To help safeguard your family’s future, consult with a qualified attorney to ensure your estate plan is up to date. This should include your will, trust, powers of attorney for financial and healthcare decisions, and updated beneficiary designations.

6. Understand Tax Benefits
The Child Tax Credit is one of the most well-known tax benefits, offering $2,000 per dependent child under 17. This credit reduces your taxes on a dollar-for-dollar basis. To qualify, income thresholds are $200,000 for single filers and $400,000 for married filers.

Additionally, you may be eligible for other credits, such as adoption credits and child and dependent care credits. Partner with your accountant to ensure you maximize these benefits.

7. Prioritize Retirement Savings
If you need to choose between saving for college or retirement, choose retirement. There are no loans for retirement, whereas there are numerous ways to finance college, including scholarships and student loans.

Bottom Line
Welcoming a child is an exciting milestone. Each family is unique and must make financial decisions that suit their specific circumstances. By understanding these key financial considerations early, you can create a plan that best supports your family’s future.

George Maroudas, CFP®

George Maroudas, CFP®

Twitter @ChicagoAdvisor

Disclaimer / Sources

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

This information is not intended to be a substitute for specific individualized tax advice.