Having a baby is so exciting, but the checklist of things you need to do can be daunting. When you are pregnant, your body is working hard when you are just sitting. Then, with a newborn, even making sure all family members are wearing clean clothes can be a struggle.
Despite these obstacles, there are several important steps you can take to set you and your growing family up for financial success.
To help you get a good financial start as parents, here’s a financial checklist for when you are becoming first time parents.
I’ve split the list into two sections. One set you can do before the baby is born and the other section you can do after the baby is born.
Before Baby is Born
Revisit your health insurance.
Newborn care is often either the least expensive or the most expensive medical care depending on if there are complications. As a result, you should make sure that the mother has health insurance prior to delivery. After your baby is born, the newborn is covered for the first 30 days of life on the mother’s health insurance policy. However, on the 31st day of life, the baby needs to have his or her own health insurance for coverage to continue.
Luckily, birth (and adoption) are eligible for a health insurance special enrollment period for the 60 days after the child’s birth. This means that you can switch health care plans even if your baby is not born during open enrollment.
Before you give birth, pick out the health insurance you would want your newborn to have in the event that they need critical care and which insurance you would want to have in the event that they are born without complications. This way once your baby is born, you can easily buy the right plan without having to do more research during what might be a trying time.
One of every 10 patients in the United States consumes 60% of the health-care costs. That one often benefits from high quality health insurance plans with lower deductibles which cover more costs. The other nine benefit from having a Health Savings Account or catastrophic health insurance.
Update your estate plan.
Make an appointment with an estate attorney and get your affairs in order.
This is for multiple reasons. First, childbirth, while natural and common, is still a dangerous event. Second, after the baby is born you will likely be too tired to want to do this. Third, you should have your affairs in order even now and childbirth is a good excuse.
The checklist here is:
Make a guardianship appointment. This is as simple as making an appointment with an estate attorney and getting your estate plan updated. If making an appointment with an estate attorney is too expensive or too much of a hassle, you could use an online legal service. If even that is too much, then at a minimum write out on a piece of paper a guardianship appointment and sign the bottom. For example, when my daughter was born, I wrote the following:
The following is an addendum and update to my previous will. I made this amendment upon the expected birth of my first child.
In the event that at any time it may be necessary to appoint a legal guardian for the person of any child of mine, I name my husband, [NAME], to have custody and be guardian of the person of each child of mine while the child is a minor.
If he is not able to serve, I name [NAME] and [NAME], if they are still married at the time of my death, to have custody and be guardian of the person of each child of mine while the child is a minor. If they are not still married, I name [NAME] individually to have custody and be guardian of the person of each child of mine while the child is a minor
Then, I wrote the date and signed my name. While signing in the presence of two witnesses and a notary is recommended to avoid anyone challenging the will, a handwritten signed Last Will and Testament is accepted as a legal document and sometimes a more easily attainable goal for expectant or new parents.
Make sure your power of attorney is up-to-date. If your recovery from childbirth is long or complicated, having an active power of attorney may be useful so that your agent can keep the household running while you recover.
Update your beneficiary designations. If your new child is part of your estate wishes, then update your beneficiary designations to reflect those desires. This means updating your beneficiary designations on, among other places, your Roth IRA, traditional IRA, employer retirement plan(s), life insurance, Health Savings Account, and in your estate documents.
When Baby is Born
Get a Social Security Number.
To open an account for your child, you will need their Social Security Number.
After giving birth, the attendant will ask for information to put on your baby’s birth certificate. When you give that information, you’ll also be asked whether you want to apply for a Social Security number for your baby. If you say “yes,” then you’ve applied for a Social Security Number . Each state varies in how long they take to process your application. The average time is about four weeks (two weeks of processing and two weeks for the mail). To look up your state specifically, you can see a list of processing times by state on the Social Security Administration’s website here .
If you don’t apply for a Social Security Number with the birth certificate, then you will need to complete an application for a Social Security card. This can be done at a local Social Security office. Applying for a Social Security card after the fact can be a bit of a hassle. In addition to that, you run the risk of someone else trying to steal your child’s identity and applying for a number for you. Best practice seems to be to simply apply for a number while filing the birth certificate.
Consider a 529 Plan.
Saving for college requires time and money. The more you have of each, the better. Time puts the miracle of compound interest on your side. The more money that is earning money, the less you need to continue contributing. In this way, there is no such thing as saving for college too early. We recommend that you start saving for college the day that your child is born.
529 plans, or Qualified Tuition Programs as the federal government calls them, are specialized investment accounts to give tax-advantaged savings for education expenses. 529 plans are typically the best vehicle to save for college.
They are also fairly flexible accounts. You can reimburse for college tuition as well as expenses required by the enrollment such as room, board, supplies, and more. What is more, the qualified expenses of 529 accounts have been expanded to include elementary and secondary education tuition. This opens up the usefulness of 529 accounts to families who are enrolling in private school as well as children who attend college.
Additionally, if your child ends up not going to college, graduate school, trade school, or another accredited educational institution, you can change the beneficiary of that account to a different family member with a bit of paperwork. This means you can reassign 529 plan funds to a child who ends up needing them.
We provide asset allocation design and ongoing investment management services for managing 529 accounts hosted at College America.
Consider a custodial account (UGMA or UTMA).
If your new baby has received cash gifts from others and you are looking for where to save the money, a custodial account is a good runner-up to a 529 plan.
A custodial account is money that is legally the child’s property, but where you are the caretaker for the assets. You can withdraw to reimburse or pay for expenses that are for the benefit of the child or you can pay for your child’s expenses yourself and let the money grow for the child later. When the child comes of age (you pick 18 or 21 on account set up), the money becomes theirs outright and free of your control.
Because your child owns the account, the interest, dividends, and capital gains generated by the UGMA or UTMA are your child’s unearned income. If that unearned income exceeds certain limits, then regardless of their age, your child will need to file a tax return. Currently in 2021, the rule is if your child has a gross income of more than $1,100, then they need to file a tax return.
The $1,100 limit for unearned income is from the so-called kiddie tax or Form 8615 “Tax for Certain Children Who Have Unearned Income.” This tax makes the unearned income of a child taxed at the parent’s tax rates if it is over certain thresholds. To keep your child’s unearned income below those amounts, you can use the table in “Generational Financial Planning Within The Kiddie Tax Limits.”
Prioritize your own retirement.
Although in the ideal situation, you would be able to save sufficiently for both your retirement and your child’s college costs, not all families have that luxury. If you must choose between either saving for your retirement or saving for your children’s college education, you should choose your own retirement. You can help your children pay back their student loans at those favorable interest rates a lot easier than you can replace your lost retirement savings late in the journey.
Although most debt is bad debt, there are two important exceptions: home mortgages and student loans. Diligent savers can use these types of debt to their advantage. The worst recorded undergraduate interest rate is 6.8%, which is not that bad. Even at this rate, students would do best to pay the minimum fee and invest the difference. Most student loans have even lower rates thanks to government subsidies. On top of that, income based repayment plans allow students to stretch their payments even longer than 10 years. If they have a public service or teaching job, those students can often take advantage of student loan forgiveness.
Meanwhile, when it finally comes time for you to stop working and retire (and you will likely have to stop working one day), no one is going to give you a loan for retirement. If you haven’t saved enough, you will likely fall onto welfare and onto hard times.
Furthermore, while many parents are struggling to fund their retirements adequately, many grandparents find themselves with an excess of savings. And while a grandparent would love to write college fund birthday checks to a 529 account, they will be unlikely to so generously and joyously fund your lifestyle needs in retirement.
For all these reasons, you need to take care of yourself first. If you have to choose between your retirement or your children’s college savings, choose your retirement.
Tell your tax preparer or financial planner.
There are several tax implications to having a new baby, so be sure to tell your tax preparer and financial planner so they can include those new benefits in your projections and filings.
Learn to ask for help.
You do not need to do everything for your child or your house. If someone offers to help you, see if you can let them.
If someone said, “Let me know if there’s any way I can help.” I always had a hard time asking for what I wanted. For example, I might want my laundry done, but we’re standing on the street corner of the neighborhood and I’m not really sure if you’re willing to do that for me.
So I found it easiest to take people up on their offers if I simply replied, “That sounds great! I’d love to take you up on that because I do need a lot of help. What are you willing to do? Would you text me some ideas of ways you are willing to help?” Then, if they didn’t text me, I would assume they were just being polite. If they do text you a list, you can take them up on what they are offering.
A 2017 international study found that “the time famine of modern life can be reduced by using money to buy time.” In other words, people would be happier if they spent their money to outsource tasks to others. They call this the “route from wealth to well-being: spending money to buy free time.” In this way, if hiring a household cleaner, outsourcing to a laundry service, getting dinner delivered, or other convenience service would improve your life, you could consider seeing if you have the budget for it.
Photo by Mon Petit Chou Photography on Unsplash