Whoa Baby!

While the birth or adoption of a baby brings blessings and joy in many ways, a whole host of financial issues are born along with them.  If you’re a new mom or dad, you no doubt are buried (maybe literally) in diapers, toys, and feedings, and taking care of household business can fall to the bottom of the pile.

But now that you have that precious little one, you’re going to need to take care of a few things.  First on your list is a will- especially naming a guardian should something happen to both of you.  There’s a great book called Wear Clean Underwear by Alexis Martin Neely that can help you think through what can be a difficult choice and guide you in the process.  I urge you, if you don’t have a will, make that a top priority, right now.

Life insurance may be something you haven’t thought much about, but it’s time to get some coverage, or review what you may have already- ideally a policy you own outright.  Life insurance through your employer is a good bonus, but owning your own policy gives you the security of knowing you have that insurance even if leave your job, regardless of any future health issues.   If you are young and healthy, term coverage is a cheap way to give your family priceless protection.  We’ll cover the how-to’s of purchasing life insurance in a later post.

Your new addition may change your health insurance or other employee benefit needs.  Normally changes can only be made during the open enrollment period, but the birth or adoption of a child is considered a “qualifying event” in the eyes of the IRS, which opens a window to allow you to change your benefits mid-year (getting married, divorced, or a change in a spouse’s employment are examples of some other qualifying events).  Typically the window is 30 days and in the case of birth or adoption coverage is retroactive to the effective date.  You may wish to use this opportunity to change your level of coverage, enroll in your dental plan, or begin participating in a flexible spending account for instance.

Flexible spending accounts (FSA’s) allow you to designate dollars on a pretax basis to use for qualified out of pocket medical or dependent care expenses.  Dollars designated for health care FSA’s are deducted from your pay before federal, Pennsylvania, Social Security, and Medicare taxes are applied.  Without a health care FSA, you may still deduct out of pocket medical expenses on your federal tax return, but only in excess of 7.5% of your adjusted gross income.  The trick is you’ll have to choose an amount to defer to the FSA account ahead of time, and you will forfeit what you don’t use.  Dependent care FSA’s are also free from federal, Social Security, and Medicare taxes.   On your federal tax return, you may use up to $3,000 of expenses for the care of one qualifying dependent or $6,000 for two or more for a dependent care tax credit.  The amount of your credit depends on your adjusted gross income.  The FSA account, however, allows you to use up to $5,000 per household.  You’ll need to analyze if the dependent care FSA or the dependent care tax credit is more beneficial to you; you can’t use the same expenses for both.  As an example, if you have one child with expenses of $5,000 and you are eligible for a 20% credit on your tax return (on a maximum of $3,000 of expenses for a credit of $600) but you are in the 25% tax bracket, the flexible spending account may yield a greater savings (could be more than $1,500, when adding in Social Security and Medicare savings).  Note that both spouses must be working or looking for work (and have earned income from wages, taxable compensation, or net self-employment income) in order to use these benefits.  One spouse can be considered to have earnings if he or she is going to school full time or physically or mentally unable to care for himself or herself (there are other rules as well; consult your tax advisor for specifics).

Most parents think of saving for college as something they should do right away.  While I don’t discourage saving for college, your first priority should be to make sure you have an emergency fund for your family, maximize your retirement savings, and then start saving for college.  It’s the old “put your oxygen mask on first” theory.  It’s much easier (practically and emotionally) to draw from your own funds to pay for college than it is to use college funds to pay for a family emergency.  That said, there’s nothing wrong with suggesting family and friends contribute to a college account instead of buying toys for birthdays or holidays.

Think long term when it comes to how you define your child’s standard of living.  What I mean by that is:  will you be able to keep your child in the lifestyle to which she has become accustomed when she is a teenager?  A parent of any teen will tell you, the cost of their “care and feeding” increases exponentially as they get older.  Be careful what habits you instill; a dozen pair of Nikes costs a whole lot more than a dozen pair of cute toddler shoes.

Finally, network with other parents and share ideas for creative ways to save money.  For instance, you may want to form a babysitting co-op, trading child care hours for a night out or for regular working days, or create a toy library to keep things fresh in your playroom.  I learned how to make environmentally friendly baby wipes from a friend, got the very best play dough recipe from our preschool, found out when the snow boots and baseball cleats were on clearance (and stocked up years ahead) from moms on the playground, and learned about many free and low cost places to take my kids from my playgroup.  I am very grateful for Playgroups, Inc., who connected me with my playgroup when I was new to the area.  I highly recommend finding a parenting group or playgroup that fits your family and your schedule.  Besides the money saving ideas, my kids and I made wonderful friends and felt at home in no time.

PS- that’s my handsome grandson Joshy in the picture  🙂

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Part 2A & B of Form ADV: Firm Brochure