Starting a Family? 10 Things New Parents Should Know About Money

Hey everyone, and thanks for joining me this week, you are listening to the money girl podcast. And my name is Laura Adams. I’m a personal finance expert. Who’s been hosting this show since 2008, and I’m also the author of several books, including my most recent title, which was an Amazon number one new release called money smart solo entrepreneur, a personal finance system for freelancers, entrepreneurs, and side hustlers. So check it out.

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This is a really important topic. I have a lot of young people who email me saying, starting a family, or I’m thinking about starting a family. What do I need to do? How can I prepare my finances? And even though I’m not a parent myself, I can definitely give you some you know, kind of objective guidance about things that you should cover with your finances. Before you start thinking about starting a family, adopting a child, or, you know, even if you’ve already got a family, just some things to think about that can make your lives a whole lot safer. Starting a family is definitely an exciting time. And I think a lot of people get really bogged down in, you know, the feeding, the diapering, the nurturing all the day to day things with kids that just keep you so busy, but I don’t want you to forget about essential financial and legal issues that you also need to address when you have a family.

So that’s what we’re gonna cover today. This podcast will review 10 financial things that new parents should know. And, you know, even if you’re not a new parent, you should still know them. You’ll learn how to reduce risk with insurance, how to make doctor visits and childcare more affordable, get ahead, start on college expenses and protect your child’s financial future. So let’s get started.

The first thing that every new parent should know is you must add your child to your health insurance. This is something that, you know, you might be so busy with a newborn at home that you just forget to do, but once your child is born or your adoption is final, you do have 60 days to add the new member of your family to your health plan. But if you miss that deadline, you’re gonna have to wait until the next open enrollment to get your child insured in most cases.

So, you know, whether you’re insured through work or you’ve got your own coverage, make sure that you go ahead and let the insurance company know that you’ve had a life change, that you’ve got, you know, a new dependent that you need to ensure you can contact your employer’s benefits administrator, to find out what paperwork you need to complete. And if you don’t have a job with health insurance or you’re self-employed, you wanna contact your existing health plan provider or shop and compare for some [email protected] or your state marketplace. The idea is that if you can get the paperwork started early, then you know, it’s one less thing you’re gonna have to think about after your new child arrives.

And as we go through the show, I’m gonna recommend some other podcasts that I think might be helpful. Um, so here I wanna recommend podcast number 646 called your guide to managing medical benefits when you leave or start a job that has a lot of great information about how to get health coverage.

All right, the second thing new parents need to know is that you need life insurance. Life insurance protects people who depend on you for financial support. It could be a spouse, aging parents, or your new child. So what happens is when you die, the beneficiaries that you’ve named on that policy will receive a lump-sum payment known as a death benefit. They can spend that money on anything they like such as a mortgage rent, auto loan childcare education, or your funeral expenses, literally anything.

And if you’re worried that life insurance is too expensive, don’t be there have been many studies showing that consumers regularly overestimate the cost of life insurance by as much as three times. So it might surprise you that if you are in your thirties or forties and in relatively good health, you can get an affordable policy. For instance, a 20-year term life policy that pays half a million dollars may cost less than $30 a month or $360 per year.

Now to know how much life insurance you should buy, here’s some questions to consider. What assets do you own such as bank savings investments in real estate that could be liquidated to cover expenses and how much debt do you have? How much annual income would your surviving family members need and for how many years would they need it? And what are your estimated funeral costs? Keep in mind that if you have a traditional funeral with a casket and a burial, it can cost more than $10,000. So these are all things to consider. When you’re trying to figure out how much life insurance coverage you should purchase. And it’s worth noting that if you have a child with special needs, you may need a type of policy called permanent life. It covers you no matter when you die. So that’s different from a term life policy that covers you only for a set period, such as 10 or 20 years.

There are many sites where you can shop and compare life insurance offers for free, including quick quote.com. And for more information on this, you might wanna check out podcast number 680, called six ways to save and invest money for kids. All right? The third thing new parents should know about money is that you should not skip disability insurance. So if you’re somebody who’s thinking, well, I don’t need disability insurance. I’m gonna be just fine. I want you to think about this very shocking statistic. The statistic says that you are more likely to suffer a disability than to die before age 65, which I think is really shocking. And long-term disabilities result in an average absence of work of two and a half years. That is a very long time to be without an income. So the best way to protect your income and prevent a major strain on your family, finances is to have a disability policy.

It’s essential for every breadwinner because social security only pays after you’ve been out of work for a year and suffer a total disability. And worker’s compensation is only available. If you get injured on the job, also remember that while health insurance covers a portion of your medical bills, it does not pay your ongoing living expenses. If you can’t work, disability, insurance pays part of your income such as 60 to 70% of what you were making before you have the disability. Now you may get disability insurance through your employer. However, if you don’t have benefits at work or you’re self-employed, you’re gonna need to shop and compare [email protected] or through a disability insurance broker. And remember that the coverage you have through work may not be enough. Just take a look at what you’ve got. You may need to supplement it. And another podcast to check out is number 616, called three affordable financial safeguards to protect your health and income.

All right, the fourth thing new parents need to know is that you need a healthy emergency fund. If you’ve been listening to this show for any length of time, you have heard me talk about an emergency fund, probably a lot. And that’s because it’s just so fundamental to being financially healthy, unexpected financial challenges are just a part of life. Things like your car breaking down or losing your job or your business income. Having an emergency fund is essential for managing all of these unexpected life things without going into debt. So I recommend keeping a minimum of three to six months worth of your living expenses in an emergency savings in an D I C insured bank account. Now, even though you’re not gonna earn much interest in your emergency savings account in a bank, that’s not the goal. The goal is to keep your emergency money safe and liquid.

You don’t wanna invest it because the value could plummet, right? When you need it the most to determine how much emergency savings you need, you can add up all of your monthly living expenses like housing, utilities, insurance, groceries, loan, payments, and transportation. Then multiplying that number. By how many months you could need your emergency money. If your job isn’t stable, or maybe you’re planning on purchasing something big, like a new home or a car or paying for college, you may need to add 10% to your emergency cash estimate, even though it may take years to accumulate enough emergency money. That’s okay. All you have to do is commit right now to getting started little by little you’ll get there. And I talk a lot more about this and podcast number 668 called the right amount of emergency money to keep in cash. All right. The fifth thing new parents need to know is that you must update your financial account beneficiaries.

So whenever you have a life change, whether it’s a birth, death, marriage or divorce, review the beneficiaries on your accounts, like your bank accounts, retirement accounts, life insurance, health savings accounts, 5 29, college savings plans, brokerages, and cryptocurrency exchanges. Any financial account you have needs to be reviewed. Most parents will name their spouse as the primary beneficiary and children as secondary beneficiaries. However, since minor children can’t take ownership of assets until they reach the age of majority in your state, you wanna be sure to appoint a trusted guardian who could manage those assets for them. Now, another option is to set up a trust and that allows you to communicate how you want money for your heirs to be managed from a legal perspective. This can get a little complicated. So I would recommend that you get advice from an estate attorney to understand the best way to protect your children after your death, especially when they’re minors are all right.

The sixth thing that new parents need to know is that you need to create emergency documents. When you become a parent, you should create or update your emergency documents. These might include your last will. A living will a healthcare proxy and a power of attorney. Now, most people know what your will is. This explains your wishes after your death and where you want your assets to go. As I mentioned, it’s also critical to name a guardian for any minor children. You wanna include that in your will. Additionally, make sure you and your spouse have a living, will a healthcare proxy, and a power of attorney. Those will all keep you safe in the event of a medical emergency or other hardship that may come up. You can check out these forms using a site like legal zoom, or you can speak with an estate attorney who can help you create the emergency documents that you and your family should have.

I know it’s a lot of work getting them set up, but believe me, once you have them in place, you’ll have a big sense of relief. And you know, you won’t have to think about it for a while. A great podcast to listen to as a follow-up is number 642 called five legal documents you need during a pandemic. The seventh thing that new parents need to know is that you should consider using an FSA when possible. So an FSA is a flexible spending account. It’s a tax advantage savings plan offered by some employers. Your contributions must come from your payroll and they’re never taxed. As long as you spend them on qualified medical and childcare expenses. The main thing to know about an FSA is that it’s a use it or lose it plan, which means there is an annual spending deadline. You’ve got to empty the account each year, or just carry over a small amount, like $500 into the next year.

Some FSA accounts allow that to learn more, check out podcast numbers, 685 called eight money saving health and fitness tips. The eighth thing that new parents need to know is that you should open an HSA when possible a health savings account or HSA is another tax advantage medical savings account that you can fund. If you have an HSA eligible health plan, like an FSA, it allows you to pay for various healthcare expenses on a pre-tax basis. And that can result in maybe a 20% or 30% savings depending on your income tax rate. And unlike an FSA, your HSA has no spending deadline. So that allows you to just roll over the funds from year to year without penalty. And an HSA is different from an FSA also, because if you change your job or you become unemployed, it stays with you. Even if you lose your HSA eligible health insurance, you can continue spending your HSA balance.

However, you just won’t be able to make any new contributions to the account. And once you turn 65, you can even spend HSA funds on non-healthcare expenses. That makes it a great way to build wealth for retirement. However, don’t put any money in an HSA that you might need before retirement that’s because taking money out for any non-qualified expenses will result in you having to pay income tax on those withdrawals, plus an additional 20% penalty on those non-qualified withdrawals. HSA contributions are deductible. Even if you don’t itemize on your tax return, and you can allow your balance to grow by investing it in a menu of options, such as mutual funds, that’s typically allowed with most HSAs. And in some cases you can have both an HSA and an FSA at work. For instance, there’s something called a limited expense FSA that allows you to save for certain costs, such as dental, preventative care, and vision expenses.

There’s also a DC FSA that is designated for childcare expenses, including daycare, preschool, and afterschool programs. So make sure you understand what your FSA is at work and find out if you can also have an HSA, as long as you’ve got an HSA eligible health plan. And if you wanna learn more, check out podcast number 701 called your guide to saving money with an HSA now and in retirement. The ninth thing that new parents should know is that you should not neglect your retirement plan while you might attempt to sacrifice your retirement for a child’s college or other expenses. Be careful by the time you’re 20 years away from retirement. It’s critical for you to have reached 80% of your savings goals. So you don’t wanna get behind, be sure to contribute as much as possible to tax-favored accounts like a 401k at work or an IRA.

Even if you can’t max them out, just put in as much as you can. And if your employer offers matching funds always contribute enough to get that full match. Otherwise, you’re just leaving free money on the table. If you’re struggling with this, a really good podcast is number 352 while it’s kind of an older show. It’s still relevant. It’s called a parent’s dilemma saved for college or retirement. All right, the 10th and final thing for new parents to know is that you should plan early for college expenses if, and only if you can afford to set aside money for a child’s future education again, without jeopardizing your retirement, you should start as early as possible. The cost of college just seems to rise faster and faster every year and rises faster than inflation with no signs of slowing down. So one way to get ahead of education expenses is to open and regularly fund a 5 29 college savings plan.

You can use it for any college university vocational school or postsecondary Institute that is recognized by the U.S. department of education. Qualified 5 29 expenses include reasonable room and board tuition, books, fees, and equipment. And if your plan allows it, you can also use up to $10,000 per year for public or private schools for younger kids that are aged kindergarten through 12th grade. And you can also invite your friends and family members to make five twenty nine contributions for your child’s birthday or holiday gifts. Be aware that 5 29 contributions are not deductible on your federal tax return. However, if you live in a state that collects income tax, it may offer a deduction or even a tax credit. If you participate in an in-state 5 29 plan. So you wanna shop around before you choose a plan, that’s right for you. You can actually choose plans that are outside of your state.

If you wanna learn more about that, check out podcast number 647 called how to use a 5 29 plan to manage education expenses. All right. I hope this has given all you parents. Some things to think about. I know it’s a lot, but you know, just try to take it a little bit at a time and prioritize. That’s really, you know, all you can do prioritizing your resources, um, and making sure that you’re not sacrificing your own retirement for your kids. Otherwise they’re gonna be taking care of you and your retirement. All right, before I let you go, if you haven’t joined my free private Facebook group called dominate your dollars, I would love you to join. It’s an amazing group of people who are asking great questions, helping others and reaching their financial goals. Just search for dominate your dollars on Facebook. That’s all for now. I’ll talk to you next week until then here’s to living a richer life. Money girl is a quick and dirty tips podcast. It’s audio engineered by Steve Ricky Berg with script editing and management by Adam Cecil. Our new advertising specialist is Morgan Christensen. Welcome Morgan. Our assistant manager is Emily Miller and our marketing and publicity assistant is Tomlin.