Welcoming a new baby into the world can change almost every aspect of your life, not to mention your finances. There are the immediate costs such as hospital bills, diapers, cribs, etc. that affect your budget. However, there are also some less obvious tasks to consider besides creating a new budget.
Meeting with an estate planning attorney to prepare documents stating your final wishes should be high on your to do list if you are planning for a baby. In addition to naming beneficiaries for your belongings, estate planning documents also may name legal guardians for your children in the event of your death. This is a very important decision that you might not want to leave to the courts to make for you. Religious views, disciplinary methods, and lifestyles are just a few of the characteristics that are important in choosing the right person to name as the potential guardian of your children.
Tragic things happen, and you want to ensure your child is taken care of in the event that one or both parents die. Choosing a guardian is a huge part of that, but also making sure there is adequate money available to take care of your child is crucial. A term life insurance policy is generally the most cost-efficient option for achieving this. Talk to your advisor to determine the amount and duration of life insurance that you need.
College is costly, but you can make it more manageable by starting to save early. There are several options to choose from when it comes to educations savings. A 529 savings plan is a tax-advantaged account designed specifically for education savings. Earnings on contributions grow federal income tax-deferred, and withdrawals taken to pay for qualified higher education expenses such as tuition, fees, and room and board are free from federal income taxes.
Another option is the Coverdell Education Savings Account. These accounts work very much like a 529 plan, offering tax-free investment growth and tax-free withdrawals when the funds are spent on qualified education expenses. However, the annual contribution limit is only $2,000 per beneficiary, and higher income households may not be eligible.
A third popular option, UGMA/UTMAs, are custodial accounts that let parents (and others) make an irrevocable gift to a minor that can be used for college or any other purpose. These types of accounts don’t allow the tax deferral like the other two mentioned. When the minor becomes an adult, he or she obtains total control of the money and may or may not spend it on education.
If you are expecting a new baby in your household, there must be a million thoughts running through your mind about things to add to your task list. Preparing the nursery, buying the car seat, and planning a baby shower may be just a few. But don’t forget to take care of some of the less obvious – yet very important – topics listed above and to set your child up for financial success as well.