Becoming a parent is a major milestone. Not only does it entail a significant change to your lifestyle, but it also brings a significant change to your finances. In addition to ensuring your own financial security, you’re now responsible for the financial security of someone else.
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This requires careful financial planning and the use of strategies you might not have had to tap into before. Here are some essential financial planning strategies every parent needs to learn.
If you have young children, protecting your income is crucial.
“Life insurance provides a death benefit to help cover expenses, like a mortgage and daily living costs, in the event of a parent’s passing,” said Christine Lam, CFP, an investment advisor representative at Financial Investment Team in Portland, Oregon. “Disability insurance, on the other hand, provides income replacement if a parent is unable to work due to a severe illness or injury. Both types of coverage are essential if your family relies on your earnings.”
Having an emergency fund is always a good idea, but it’s particularly essential for parents.
“Unexpected expenses can arise at any time, so it’s important to have an emergency fund covering three to six months’ worth of essential living costs,” Lam said. “Keeping these funds in an accessible high-yield savings or money market account helps avoid reliance on high-interest credit cards during financial emergencies.”
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Child care and college are two of the biggest expenses parents face. Fortunately, there are special accounts that can help you plan for both.
“Take advantage of tax-advantaged accounts like a dependent care FSA to set aside pre-tax dollars for child care expenses,” Lam said. “Start saving early for education using a 529 college savings plan or a custodial account to benefit from tax advantages and compound interest.”
Ideally, you should start saving for child care costs in advance.
“The average annual cost of child care in the U.S. in 2023 was about $11,500, and this number continues to grow thanks to inflation and the rising cost of living,” said Steve Sexton, CEO of Sexton Advisory Group.
“If you’re planning to have children in the near or long-term future, this isn’t an expense you want to catch you by surprise,” Sexton warned. “Planning, budgeting and saving for this cost upfront, whether through a sinking fund, shifting or cutting back on certain payments to make room for this expense, or searching for higher-paying jobs or positions that subsidize child care, will help soften the financial blow when it’s time to welcome your little one.”
Although you may want to stash all your money away for your kids, it’s essential to prioritize your own retirement savings.
“Many parents feel pressured to save for their child’s education first, but retirement should remain a priority,” Lam said. “Unlike retirement, college expenses can be covered through scholarships, loans and grants. Aim to save 10% to 15% of your pre-tax income for retirement to ensure long-term financial stability.”
Optimizing your taxes and taking advantage of available benefits can free up more funds to put toward your family’s goals.
“Claim available tax credits like the child tax credit and child and dependent care credit to reduce your tax burden,” Lam said. “Consider a health savings account (HSA) if you have a high-deductible health plan — it offers tax advantages for medical expenses.”
Once you have kids, it’s important to create an estate plan and regularly update it as your circumstances change.
“It’s critical to have estate planning documents in place,” Lam said. “A will should designate a guardian in the event of your passing. Additionally, review and update your power of attorney (POA), healthcare directives and beneficiary designations to align with your current wishes.”
You might also consider setting up long-term investment accounts for your kids.
“As most people know, time is the power behind compound interest,” Sexton said. “Take advantage of this and invest early on your child’s behalf by looking into a Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) account — investment accounts for minors that are controlled by a parent or guardian until 18 to 21 years old, depending on the state you live in.”
Looking to build a legacy? Check out our Life to Legacy guide for expert advice and smart moves you can make today.
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This article originally appeared on GOBankingRates.com: 7 Financial Planning Strategies Every Parent Needs To Learn
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