For a lot of young adults, financial planning can seem like a pretty simple game. If you manage to earn a decent paycheck and save a little for retirement, you’re pretty well set. That all changes with the arrival of your first kid. Suddenly, you have a lot more bills to pay and what-ifs to ponder.
The key to avoiding undue stress is to get your financial priorities in order. Here are some of the first things you’ll want to do to make sure you and your family are on solid footing.
Budget. Budget. Then, Budget Some More
Between diapers, infant formula, and pediatrician visits, expenses pile up quickly in parenthood. More than ever, it’s important to have a budget and stick to it. Apps like You Need a Budget try to make belt-tightening easier, but some people swear by the ol’ paper and pencil method. The best system is whatever works for you.
Build a rainy day fund.
The prospect of falling seriously ill or losing your job is always pretty scary. When you have a spouse and kids to support, it can be downright petrifying. Having some emergency savings in place is the best antidote.
The standard advice is to have enough in the bank to cover at least three to six months’ worth of expenses. Unfortunately, this is an area where a lot of young parents fall short. According to a recent survey by Bankrate, roughly half of Millennials have little or no savings to fall back on during hard times.
Rethink your health insurance.
Once that new baby enters your life, you’ll probably be spending a lot more on medical bills than ever before. And it’s not just the cost of labor and delivery. You also have to think about potential emergency room visits, medications, and lab tests, too.
Run the numbers from your current insurer and see if bumping up to the next level of coverage might be worth the additional premium.
Another thing to consider: some families will see a huge jump in costs when they add everyone to the same plan. In some cases, you can end up paying less when one parent selects the “employee/children” option and the other gets their own coverage. It’s worth doing a little research.
Take advantage of tax breaks.
Fortunately, the tax code has a number of provisions that can take some of the financial strain off mom and dad. The Child Tax Credit, for example, now provides up to $2,000 of relief for each eligible child.
If you hire someone to look after your son or daughter while you work, you may be eligible to utilize the Child and Dependent Care Credit as well. Parents can claim a credit worth up to 35 percent of their care-related expenses.
Prepare for the unexpected.
When you become a parent for the first time, you’re probably not thinking about your mortality. But if your wife and kids depend on your income, planning for a worst-case scenario is an absolute must. That means taking out life insurance.
Whole life policies offer an investment component as well as a death benefit, but it can be cost-prohibitive. Term coverage is more straightforward, and usually a lot cheaper, for young parents.
It’s also a good idea to safeguard against an injury that could keep you out of the workforce for an extended period of time. Some employers offer disability insurance as part of their benefits package, but it doesn’t hurt to double check and make sure you don’t need supplemental coverage as well.
Put a will together.
One of the most important things you can do as a new parent is put together your will, if you haven’t already. It’s not just about helping your family avoid disputes over your possessions. It’s also the document where you can designate a guardian should something happen to you and your significant other.
One option is to purchase will-writing software and do it yourself, which is probably fine if you have a relatively simple estate. For more complex needs, it’s well worth the time and money to see an estate planning attorney who can guide you through the process.
Don’t make yourself house-poor.
What parent doesn’t want a spacious new house where their family can grow? If upping your square footage means straining your budget, though, you might want to think twice.
The advice on this varies from one expert to the next. But as a general rule, keeping house payments under 30% of your income is a good way to avoid budget woes. And if you have a lot of other debt, it should represent a slightly smaller size of the pie.
Start saving for college.
Even at public colleges, the average tuition these days is $9,410 for in-state students and a whopping $23,890 for out-of-staters, according to The College Board. Of course, it’s likely to be way higher by the time your little one heads to school.
The earlier you start saving, the better off you’ll be. State-sponsored 529 plans are the gold standard for college savings, allowing students to make tax-free withdrawals for tuition and other related expenses. Some states give parents and grandparents a tax break on their contributions, too.
Just make sure your child’s college fund doesn’t come at the expense of your retirement. Your son or daughter will have other options to pay for school, like grants and loans. You won’t have those options when you leave the workforce.