March 15, 2018
Mike Binnicker, CFP®
Relationship Manager, Balentine
Those Johnson & Johnson commercials were true: having a baby changes everything. My wife and I recently welcomed our second son, and while we quickly realized that all the “firsts” (from smiles to giggles) were just as wonderful the second time around, we somehow forgot about the exhaustion brought on by sleepless nights and endless amounts of diaper changes. As if that’s not enough, there are so many decisions that go into adding a new member of the family.
While there seems to be an infinite amount of books, blogs, and Pinterest boards about the topic of caring for a new baby—from what laundry detergent to use to the “best” ways to sleep train—there are not nearly as many resources dedicated to the financial aspects of adding to your family. As both a father and a wealth manager, I have counseled many new parents on ways to prepare. Below are our top five financial questions that expectant/new parents should ask. Feeling a little overwhelmed? Tackle the first two as soon as possible, and then save the rest for after the baby starts sleeping!
- Do we have a will? If so, does it include decisions on guardians and trusts with specifics for our child(ren)? This is the most important question a new or expectant parent should ask. If the answer is no, this needs to be at the top of your to-do list. Wills are scary because they force us to look at worst-case scenarios and have discussions about end of life. However, it is imperative that you and your spouse have this conversation and make these important decisions so that, if the worst were to happen, they wouldn’t be left to a state-appointed representative to make. While you are at it, make sure to also obtain advanced medical directives and powers of attorney. A trusted estate planning attorney can help you sort through all of the critical issues facing your new family.
- Is our insurance plan sufficient? Small children oftentimes mean big medical bills! What might have made sense for two healthy adults without a lot of medical expenses will probably not work for a new baby. Having a child is considered a Qualifying Life Event; therefore, you can make changes to your healthcare plans outside of open enrollment, up to 30 days after birth. In addition, it may be worth considering a Health Savings Account (HSA) to save tax free to pay for immunizations, doctor visits, prescriptions, etc., with a maximum contribution limit of $6,900 per family for 2018. Life insurance should also be examined as people often use the birth of their children as their first foray into the insurance arena. Term insurance while you are young makes sense financially while providing the surviving spouse and children with a windfall should something unforeseen happen to you. Some rules of thumb for the right amount of life insurance include the standard 10 times your annual salary or the total amount of outstanding debt carried, 2 years’ salary, plus the total cost of a college education per child. Try both calculations and consider using the higher amount to be more conservative.
- What childcare option should we pursue? Childcare options are often some of the most difficult conversations new parents have, as there are both emotional and financial factors at stake. According to NPR, childcare costs have risen more than 70% from 1985-2011 (the most recent data available from the Census Bureau). In fact, a 2016 study from the Economic Policy Institute found that the average annual cost of infant care across Georgia is nearly $7,700 per child. In reality, most families, especially those in the Metro Atlanta area, will attest that the cost is much higher—about 2-3x that amount. What’s more, families (not individual workers) can claim only $5,000 tax free through Dependent Care Flexible Spending Accounts. That is $5,000 total—not per child—to help defray day care or after-school care costs. The Tax Cuts and Jobs Act did double the child tax credit from $1,000 to $2000, helping offset some costs, though. For some couples, it may make sense to have one parent stay at home, especially once there are multiple children. However, there are longer-term costs associated with being away from the work force, which parents should factor into their decision.
- How do we plan to save for college? One of the most popular options for college savings is a 529 plan. Contributions to a 529 plan are subject to federal gift tax rules, which means an individual can contribute up to $15,000 a year (as of 2018) without it being considered a taxable gift. You also have the ability to front load a 529 plan with up to 5 years (!) of the annual exclusion amount. In English that means each person can contribute up to $75,000 ($15,000 x 5) to a beneficiary without paying any gift taxes as long as they don’t gift for another five years. Grandma and Grandpa can give little Junior a whopping $150,000 toward college instead of wipes and diapers! Furthermore, some states offer a state income tax deduction (please consult with your accountant) for residents who contribute to their state 529 plan. In Georgia, contributions up to $4,000 per year per beneficiary for those filing a joint return are deductible in computing Georgia taxable income. At 6% state income taxes for Georgia, that’s $240 per year per child, or almost $6,000 over the course of 12 years for two children.
- What do we want to teach our child about money? The United States, as a whole, is a financially illiterate nation. As Robert Balentine wrote in an op-ed for The Atlanta Business Chronicle, “We have spent too much, saved too little, and lived beyond our means.” Having a child is a great time for you to reflect upon your personal wealth philosophy and what you want to teach your children. According to Forbes, children as young as three years old can grasp financial concepts like saving and spending. Additionally, a report by researchers at the University of Cambridge revealed that kids’ money habits are formed by age seven. As my colleague John Maddison wrote late last year, knowing your own views on spending, saving, investing, and philanthropic giving will allow you to impart financial wisdom to your children and instill smart money values from an early age.
This list is by no means meant to be comprehensive, nor is it meant to overwhelm an already stressful time in your life. However, doing as much prep work before new baby joins the family will help provide peace of mind and more restful nights…eventually. Please contact me or any Balentine relationship manager if you have any questions.