Tips for New Parents from Houston Area Financial Advisors
If only an infant came with an instructional manual, right? Well, while we may not be able to help new parents with advice on the various day-to-day tasks that babies need, a well-qualified, Houston area fiduciary financial advisor can help you with their future.
As you enjoy the blissful days and sleepless nights that come along with a newborn, high finance and estate planning might not be a priority. But really, they should be. In some ways, you can’t afford to wait to begin putting certain financial wheels in motion when it comes to your new child. In fact, starting early with this planning yields significant advantages.
For example, the earlier you begin to save for your child’s college education, the more time your contributions will have to accumulate, earn returns and grow. And not having a well-planned and up-to-date estate plan that names your new child as a beneficiary, and designates a guardian and trustee for him or her, can be devastating. Before long, it won’t be just midnight feedings and diaper changes that are keeping you up at night.
Here are 6 important financial tips that new parents should think about as soon as possible. Once you know that your planning is in order, and your new child is protected should something happen to one or both parents, imagine the peace of mind you'll feel … or at least you can return to concentrating on those day-to-day challenges of parenthood!
ONE: Buy or Update Life Insurance Policies
After having a baby, it’s typically advisable for both parents to carry life insurance policies. While a stay-at-home parent may not contribute significant income to the household, that parent provides valuable services – childcare, cooking, cleaning, laundry – that a surviving parent would probably have to pay for if something were to happen to the stay-at-home spouse.
How much insurance? For working parents, when trying to calculate how much life insurance you need, a shorthand rule of thumb is to estimate six to 10 times your annual salary. A better approach is to work with a fiduciary financial advisor and do the more detailed modeling that produces a precise answer to this question.
Generally, inexpensive term life insurance will be the optimum choice for a need like this. The younger and healthier you are, the less expensive your premiums will be, and you will sleep better at night knowing that your family will be taken care of if the unexpected happens. Discuss your needs with a financial advisor who can help you navigate the various types of life insurance and determine which options are best for you and your family.
TWO: Start a 529 College Fund
A 529 college savings account is a great way to save for your child’s college education, and the earlier you start, the better – the balance will grow, tax-deferred, as your child grows. There are no annual contribution limits, but the plan balance cannot exceed the expected cost of the beneficiary’s expected college expenses (these limits range from $235,000 to $529,000). If you live outside Texas in a state with state income taxes, you may be able to deduct annual 529 plan contributions from your state taxes.
Each state offers its own 529 plan, either pre-paid tuition plans or college savings plans. And they’re all a bit different, with different options, features and fees. You are not required to enroll in your own state’s 529 plan, however, it’s wise to talk with a financial advisor in the area in which you live before establishing an account. (Houston area financial advisors, for example, may have insight about plans in that area that you may not be aware of.) Based on the information you gather, you can shop around and compare 529 plans in different states to see which one is best for you, and your child can eventually use the money in his or her 529 account to attend an eligible school in any state.
THree: Create or Update Your Estate Plan and Beneficiary Forms
Updating your beneficiaries after having a child should be a priority. Drafting or updating the estate-planning documents of both parents, including wills, powers of attorney, advanced medical directives and healthcare proxies, is important. You will also want to make sure your beneficiary forms are up-to-date (i.e. add your new child, or a trust for his or her benefit, as a contingent beneficiary) and that you name a guardian to care for your child if both parents should die unexpectedly at the same time.
Setting up a revocable living trust or family trust is something else you may want to discuss with your financial advisor. A trust designates how you want your assets and your estate to be handled in the event of your death or incapacitation. This allows someone you trust – hence the name "trust" – to oversee finances for you and your children until the time that they are old enough to manage their inheritance on their own.
Having a well-considered estate plan in place can spare your estate and your heirs the expenses, time and unpleasant experience of having to go through probate. It may also have tax benefits.
Four: Open a Savings Account
Money management is an important tool to teach your children, and the lessons can begin when they’re young. Opening a custodial or joint savings account is a simple, but effective, way to begin teaching your child financial responsibility.
Look for a specific children’s savings account, because this type of account often charges no maintenance fees, doesn’t specify a minimum balance requirement and has a high annual percentage yield.
A basic savings account can help your child learn basic math skills, and it teaches the value of money, and the idea of saving to achieve a goal. It can also also teach your children the concept of compound interest.
FIVE: Contribute Pre-Tax Dollars to a Dependent Care Account
If both parents are working, find out if one of your employers offers a dependent care Flexible Spending Account (FSA). If this benefit is available, you can contribute pre-tax dollars to help cover the costs of eligible childcare expenses, like daycare, preschool, summer camp and before- and after-school care.
By funding the dependent care FSA account with a portion of your paycheck before taxes, you can reduce your overall tax burden. For example, if your average pre-tax paycheck is $4,000, and you contribute $300 toward dependent care and healthcare savings accounts, your taxable wages for that pay period are reduced to $3,700.
SIX: Put Your Financial Worries in the Hands of an Expert
Having a baby is a huge milestone in life, and there are many new things to do, learn, think on and worry about. What is the safest car seat? When can you expect your baby to sleep through the night? When is a fever worth a call to the doctor?
Make adding your new addition to your financial life one less thing to worry about. Meeting with a financial advisor early on can help you prioritize what needs and changes are important to focus on and make the financial transition to new parents as simple and painless as possible.