How Does Having a Child Impact Your Financial Future?

The top five questions every new parent should ask

Having children changes everything. In addition to the sleepless nights and year of amazing “firsts,” there are so many decisions that go into adding a new member of the family. While there are endless books on the topics of caring for a new baby–from the type of laundry detergent to use to the “best” ways to sleep train–there are not nearly as many resources dedicated to the financial aspects of a baby. At Balentine, as part of our comprehensive wealth management services, we have counseled many new parents on ways to prepare for a baby. Below are our top five financial questions that expectant/new parents should ask.

  1. Do we have a will? And 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. And if the answer is no, this should be at the top of your to-do list. Wills are scary because they force us to look at worst-case scenarios. However, it is far better for you and your spouse to have this conversation and make decisions instead of a state-appointed representative.
  2. What childcare option do we want to pursue? As the election draws near, childcare is one of the “hot button” topics both candidates are reviewing. According to NPR, childcare costs have risen more than 70% from 1985–2011, the most recent data available from the Census Bureau. For some couples, it may make sense to have one parent stay at home. However, there are longer-term costs to being away from the workforce, which parents should factor into this decision. Dependent care Flexible Spending Accounts allow up to $5,000 pretax per household (not per individual) to help defray qualified childcare costs such as daycare, preschool, summer camps, and before- or after-school programs. Finally, for those who choose a nanny or other in-home care, there are tax implications that should be considered.
  3. 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 $14,000 a year (as of 2016) without it being considered a taxable gift. Many states axed the state income tax deduction offered for residents who contribute to their state 529 plan, which effectively ended the tax advantages of staying close to home. We recommend shopping around for plans that offer diversified and low cost investment options, such as index funds and passive Exchange-Traded Funds (ETFs).
  4. Is the insurance plan we have sufficient? Little babies oftentimes mean big medical bills! What might have made sense for two healthy adults without a lot of medical expenses might not work for a new baby. Having a child is considered a Qualifying Life Event; therefore, you can make changes to your health care 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, and more.
  5. What do we want to teach our child about money? As a whole, the United States 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 this Forbes article, 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 commissioned by the United Kingdom’s Money Advice Service revealed that kids’ money habits are formed by age seven. 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.

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