Financial Planning For New Parents
By the Financial Planning Association
Dramatic changes in one's life often require a
reassessment of one's personal finances. And few
events have a more profound impact on one's life and
finances than the arrival of a first child.
The estimated cost to raise a child through age 17 is
$127,080 to $254,400 for an average-income family,
according to 2002 figures from the Department of
Agriculture. This cost doesn't include college
education, or the forgone wages and benefits one or both
parents might incur while raising a child. So if
you're expecting a child, or one was just born,
it's time to do some serious financial planning.
Get that Social Security number. You'll want to
get a Social Security number for your child as soon as
possible – not because he or she is going to work
soon, but because the number will entitle you to several
tax benefits that will help defray some of the
child-rearing costs.
For example, unless your taxable income is too high, you
can claim the new $1,000 child-tax credit. (By the way, if
your child was born during 2003, you didn't receive
one of the $400 checks the government mailed out early to
taxpayers who claimed the old $600 tax credit in 2002;
you'll have to wait until you file for 2003 to receive
the $1,000 credit.)
For tax year 2003, you'll also be able to take a
$3,050 tax deduction for your new child as a dependent.
Qualifying low-income families may receive a higher earned
income credit with the addition of the child. You may
qualify for a tax credit for child-care expenses. And a
single parent may be able to file as head of household,
which can provide additional tax benefits.
Review employer benefits and paychecks. Consider
increasing by at least one or two the number of allowances
you check off on your W-4 form at work. This will increase
the amount of your take-home pay in response to the
increased deductions you'll receive for the child.
Add your child to your health insurance plan and review
possible plan changes. (Is your pediatrician on your
current plan? Does it cover well-baby visits?) Most
employers allow such changes even though it may not be
during the open-enrollment period.
Revamp insurance. Increase your life insurance to
provide for the future needs of the child in your absence.
If you don't have adequate disability insurance, and
many people don't, beef that up.
Write or review your will. You'll want to
designate in your will a guardian for your new child in
the event you and your spouse die. Discuss who you would
like to care for your child, and then talk it over with
the person to be sure they're willing and able.
You also may want the will to establish a trust to manage
estate assets for your child should both of you die before
your child is old enough to manage the inherited assets.
Start saving. If you weren't saving or
budgeting before, definitely start now because big-ticket
expenses will grow with a new child – a larger home,
a bigger car, medical expenses and so on.
Start saving for college. Like any form of
investing, the sooner you start the less you need to
invest in order to reach a specific target. That's
because the power of compound earnings grows stronger the
longer the time horizon.
On the other hand, don't save for college at the
expense of saving for retirement. First, your child might
not go to college and you've thus wasted all those
years the money could have grown inside a retirement
account. Second, if you haven't saved enough by the
time the child reaches college age, there's always
financial aid, a less expensive school, scholarships or
work. But nobody gives financial aid for retirement.
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This column is provided by the Financial Planning
Association (FPA). FPA believes that everyone needs
objective advice to make smart financial decisions and,
when seeking the advice of a financial planner, the
planner should be a CFP® professional. For more
information on financial planning, visit www.fpanet.org or call FPA
toll-free at 1-800-647-6340.
