Financial Planning for the New Parent

Financial Planning for the new parent

A look into the near future for N and I

As you may know if you’ve read any of my previous blogs, “N” and I are having a baby.  Well…technically she is having a baby, and I am here for the 9 month ride.

“N” has been a champion about this whole pregnancy thing, and I’ve had little to do.  She’s been doing really well.  Staying active with running and practicing yoga (don’t worry both are doctor approved-“N” has been running for years).  She’s completed the registry and picked out the nursery “stuff.”  Did you know there are literally 50 different types of bouncing items for babies? Well I do now….

I’ve pitched in around the house where I can.  I painted the nursery (“sweet orange” for those who are interested), and put together the crib.  But at the end of the day, she is the one doing the heavy lifting.

So this is where my financial brain means something.  Finally, I get to put into place all the things I mentioned to clients over the years.  As I like to call it, the “New Parent Package.”

The “New Parent Package” consists of the following:

  1. Life and disability insurance
  2. A will
  3. A college savings account

Life and Disability Insurance

Guess what, you’re not going to live forever.  Do you really even want to?  Some people have a really hard time talking about this, and I get that.  But it’s bigger than you now, and you need to address the risk, however small it may be, that you may die.  If you do, you need to be sure your family will be taken care of financially.

So what should you look for when getting life insurance?  Two simple tips:

  1. Buy a term policy – It’s the least costly, and most simple type of life insurance to buy and understand.  It leverages your annual premium most efficiently (for the lowest annual premium, you get the most death benefit).
  2. Buy a personal policy –  Once you have a personal policy in place, it can’t change.  As long as you pay the premium each year, the insurance company cannot take it away.

How much life insurance do I need?

This is a tough one.  Think about what you want for your family if you die.  What is your wish for them?  What are you looking to protect?  Some of the key questions to ask yourself are the following:

  • Do I expect my surviving spouse to ever go back to work, or am I looking to protect a transition period for a few years?
  • How much do I make annually, and what do I need to replace?
  • Do I have any debt that I want paid off (i.e. mortgage)?
  • Do I want to fund my kids’ college education?

What about disability?

Have you thought about where your income will come from?  Do you have disability insurance through your employer?  If not, have you considered a personal policy? Statistics show it is much more likely you will become disabled than die.  Make sure you have adequate short-term and long-term coverage.

Estate Planning

As a new family (or an existing family who has procrastinated too long), you should meet with an attorney.  It’s too important to overlook.

  1. Get a will –  What will happen to your baby if something were to happen to you and your spouse?  Who is going to care for them?  Provide for them?  This single-handedly might be one of the most important decisions you make as a parent.  Yes, its unlikely.  But could you imagine?
  2. Don’t do it online – Feel the pressure from the statement above?  Understand how important it is?  Good, now I suggest you pay and expert to do it.  Don’t do it online because you’re looking to save a few bucks.

College Savings

Crazy right!  Wasn’t this baby just born?  Regardless, you should start saving for college immediately.  Have you seen how expensive college is these days?  As much as we all hope to raise the next Tom Brady or David Beckham (do I see stage parenting in my future?) chances are you aren’t that lucky.

One of the most common choices of saving for college is the 529 plan.  Some of the key highlights of the plan are:

  • You are the account owner – It’s your money.  You are in total control of the account funds and how they are used.  This means books and tuition, NOT late night beer runs.
  • It grows tax deferred – As long as the money is used to pay for qualified higher education expenses (in most cases, college), you will not have to pay tax on any of the earnings.  For non-qualified withdrawals (withdrawals not used for college) earnings will be subject to federal income tax, a 10% penalty, and possibly a state penalty.
  • It’s invested in the market – You have control over the investments in the 529 plan.  If you wish to have it invested aggressively, you can.  Safer?  Suit yourself.  Most of my clients end up somewhere in the middle.  Remember, all investing involves risk, including the loss of principal.  Meaning it is possible you will receive less than originally invested.

Now there certainly are other options of saving for college (sounds like a blog for another time), but the 529 plan is one of the most common.

Great – now you’re ready to get it all together!  Go head and put this at the top of the list.

 

Required disclosures

Participation in a 529 College Savings Plan (529 Plan) does not guarantee that contributions and investment return on contributions, if any, will be adequate to cover future tuition and other higher education expenses or that a beneficiary will be admitted to or permitted to continue to attend an institution of higher education.  Contributors to the program assume all investment risk, including potential loss of principal and liability for penalties such as those levied for non-educational withdrawals.

Depending upon the laws of the home state of the customer or designated beneficiary, favorable state tax treatment or other benefits offered by such home state for investing in 529 college savings plans may be available only if the customer invests in the home state’s 529 college savings plan.  Consult with your financial, tax or other adviser to learn more about how state-based benefits (including any limitations) would apply to your specific circumstances. You may also wish to contact your home state or any other 529 college savings plan to learn more about the features, benefits and limitations of that state’s 529 college savings plan.

For more complete information, including a description of fees, expenses and risks, see the offering statement or program description.

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