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Baby, Death, & Finances
* unsexiest newsletter ever *
I was born and raised in Perú, and in true Latin fashion finances were not a topic of conversation. It was considered tacky to even bring up money, let alone if you were a woman. In a way, you trusted that everything was handled, and hoped for the best. So naturally when I got married and my husband presented me with budgets and Excel charts, I almost had a heart attack. At the time, I was 8 months pregnant and had grown obsessed with an Eastern European nanny company that promised to sleep train my baby in one month, for the hefty price tag of $20K. Sure it was expensive but, could you really put a price tag on sleep? *More on the nanny sagas later*. The Point is that my husband sat me down and forced me to look at a pie chart of our baby budget (I didn’t know we had one). That’s when I saw the HUGE chunk of money that this Romanian Mary Poppins was going to take and decided to calm my tit*s.
Up to this point, my idea of savings was my vintage old Celine Collection - I guess this was my rude awakening: I am a grownup now. (Insert the scariest horror movie soundtrack here).
I wish I could tell you that I have gotten better, that at 40, the idea of money (let alone death) was a lot more comfortable. But the truth is that it isn’t, and the only way to make it more comfortable is by talking about it.
So I decided to sit with my dear friend Juanita de Castro, a financial advisor, to guide us through the process of when & how to prepare for the arrival of the baby financially, and to better understand the tools we have at our disposal to make better choices.
Continue reading for our unsexy but much-needed conversation about Baby, Death, & Finances
ZT: What are some of the key financial changes we should expect when planning for a new baby?
JC: “A new baby impacts every aspect of a family’s life. Particularly for women, choosing between a career and being a parent is a real consideration. It is important to budget for childcare, education, and healthcare when planning for a child. According to a recent survey by care.com found that slightly more than half of parents say they’re spending 20 percent of their household income on child care.
On the flip side, Unless you make more than $200,000 as a single parent or $400,000 as a married couple, a child is worth $2,000 to you come tax time. And that’s a credit, not a deduction, so you can knock $2,000 off your federal tax bill.”
ZT: When and How can we best prepare financially for the ongoing costs of raising a child?
JC: “As soon as you know you know children might be in your future is a good time to start preparing. The first step is to update your budget. A new baby comes with expenses that you likely haven’t had to factor in before. You’re going to want to revisit your existing budget or, if you don’t have one, create one from scratch. You’ll need to plan for recurring costs like diapers and child care. That can make it easier to stick to the necessities while also leaving room for fun expenses, like that mom-and-baby yoga class you’ve had your eye on. If you’re part of a two-income household and you or your partner plans to cut back on work hours, your revamped budget will need to account for the decrease in take-home pay. To prepare yourself, consider doing a test run of your reduced income before your baby arrives. If possible, put the second income into an emergency fund to give your savings a boost.
While more and more companies are offering paid maternity and even paternity leave, the reality is that in many cases, you’re likely to take a pay cut during leave. The Family and Medical Leave Act (FMLA) allows mothers to take up to 12 weeks of leave following the birth of a child if she meets certain requirements. However, the leave does not have to be paid. Many employers offer some assistance with salary during a leave, either through paid maternity leave or through employer-provided short-term disability coverage. It’s a good idea to check with your employer sooner rather than later and begin to make a plan for how you’ll cover any loss of salary.
While costs can vary greatly depending on a number of factors, according to the Peterson-KFF Health System Tracker, the average cost of care associated with pregnancy, childbirth, and post-partum care is $18,865, with out-of-pocket costs totaling $2,854 for women enrolled in large group health plans. It’s a good idea to prepare for the hospital bill as soon as possible. That’s because it often arrives around the same time as you’re going to have to start paying for childcare.”
ZT: What's the best approach to saving for our child’s future education expenses, and when should we start?
JC: “A tax-advantaged plan like a 529 education savings plan can be a smart way to save for college. It is unique because it can be used to cover college costs, as well as any qualified education expense, including K-12 school costs. An Education Savings plan grows tax-deferred and has a $2,000 yearly contribution limit that is subject to certain restrictions.”
What to consider: Higher education is costly, so the earlier you start saving, the longer the funds will have time to grow. And while it’s impossible to predict where, or even if, your new bundle of joy will attend college, a 529 account is still worth creating because of its flexibility. For example, if your child’s path doesn’t end up including college, you can make another person the beneficiary of the funds, including yourself. And thanks to the recently passed SECURE 2.0 Act, even more flexibility is coming in 2024 when qualified “leftover” 529 account funds can be transferred to a Roth IRA without incurring any taxes or penalties.
ZT: Can you explain the benefits of setting up a trust fund for our child and how to go about it?
JC: “One of the first recommendations we give our clients is to establish a will and trust. This is important for anyone who has assets: properties, insurance policies, accounts, businesses etc. However, this is particularly important when there are children in the mix. While an estate plan may sound like something from Downton Abbey, the reality is that an estate plan spells out what happens to your child if something happens to you. While it’s not fun to think about, if you don’t have an estate plan, a court will decide things like where your child will live and who will manage his or her money. An estate plan allows you to specify your wishes.”
ZT: How can we protect our family financially in case of unexpected events or emergencies?
JC: “Life insurance. The least sexy topic is the most important topic for parents to discuss. Not only can it be a tool used for protection, but it can also be an interesting tool for leaving behind a legacy, and as a tax mitigation strategy for loved ones.
ZT: What tax advantages or deductions are available for parents that we should be aware of?
JC : “Apart from taking deductions for dependents, tools like a 529 plan, and juvenile life insurance policies help parents set up their children for the future while they save on taxes. For business owners, once a child is a little older, one strategy is to put them on the payroll for a part-time role, which allows them to open their own retirement plans at an early age.”
ZT: How can we budget effectively for baby-related expenses such as healthcare, childcare, and supplies?
JC: “Before your baby arrives, review your health insurance plan and compare it with your partners to determine which is the best option for your growing family. When comparing plans, run some numbers on deductibles, copays, and out-of-pocket maximums to see if there is a discernible difference between your plan and your partner’s plan. If you currently have separate plans, sometimes it can make financial sense to switch the whole family to one. You’re usually only able to make changes to your health insurance plan and coverage during open enrollment. However, because having a baby counts as a qualifying life event, you can make changes outside of the enrollment period when your baby is born. You typically have 30 to 60 days to name your baby on your policy after he or she is born, so check with your insurance provider to ensure you don’t miss the deadline.
In terms of healthcare, I always encourage clients who have the option, to enroll in their company’s FSA/HSA plan. For parents of young children, the FSA is particularly attractive. It is a flexible spending account, which can be used to pay copays, prescriptions, over-the-counter medications, and more. The best part is that whatever you contribute to your FSA plan is tax deductible.”
ZT: What types of insurance (like life, disability, health) should we consider or reevaluate now that we are planning for a child?
JC: “All these types of insurance are key. Life is very important, and I am always shocked to see how many people are underinsured. Most people I meet think they are covered because they have insurance through work. It’s not only having the coverage that is important, it’s having the right amount. While there are different types of life insurance, the two most basic types are permanent and term. In a nutshell, permanent life insurance never expires so long as premiums are paid and accumulate a cash value over the course of your lifetime, while term insurance covers you for a finite period of time. Because the two types tend to serve different roles in a financial plan, many new parents opt for a mix that includes a small permanent policy and a larger amount of term insurance.
Disability is also misunderstood. Most people think that you have to be in a wheelchair and fully immobile to need disability. Everything from an accident to cancer, to post-partum depression can lead to a long-term disability. I think it should be rebranded to income protection insurance. There is no faster way to deviate from your financial plan and draw down assets than becoming ill and not being able to work.”
ZT: Can you explain how adding a child to our family will impact our retirement planning strategy?
JC: “Inevitably, expenses will increase with the arrival of a child. This means saving less and spending more. Without planning, parents can find themselves contributing less money to their retirement accounts. Additionally, circumstances have changed, and rarely are adult children financially independent by age 18. Blame student debt, the cost of living, a lack of jobs, and even parents trying to avoid an empty nest: More adult children than ever before are living with their parents. It’s important to have an open conversation about how much you want to help your children out financially and start planning for that as soon as possible.”
ZT: How can we educate our children about financial literacy and responsibility from a young age?
JC: “I think the most important thing is to have an honest conversation about money. In our society, finances, and money are still taboo. The sooner a child feels comfortable speaking about finances and understanding the importance of saving the higher the probability that they will be financially responsible in the future. There are some wonderful tools out there, like the podcast Million Bazillion that kids can listen to. Banks are now offering accounts tailored to children that can be very useful. More and more of our clients are leveraging the juvenile whole life policies, as a way to familiarize their children with savings, growing an asset, and borrowing against themselves to pay for larger purchases in the future.”
Hope today’s newsletter was as helpful for you, as it was for me!
On a very different note, sorry I have been MIA. I have good reasons I promise. I will tell you all about it in my next newsletter - just gathering up some courage