NEW YORK (MainStreet) — Having your first child can be a joyful but overwhelming experience. Besides dealing with sleep deprivation, crying outbursts and diaper duty, moms and dads also have to navigate a completely new financial reality.
"Becoming a new parent is an exciting time, but it also brings to light the financial challenges you may face when you start a family," says Laura Knolle, a certified financial planner for Ballou Plum Wealth Advisors in Lafayette, Calif. "Now in addition to saving for retirement, home projects and vacations, you have new expenses for your little bundle of joy."
Although financial planning is probably the last thing you feel like thinking about when caring for an infant, money experts say it's best to get your ducks in a row as soon as possible to help manage costs and prepare for your child's future. In fact, new parents should start discussing and evaluating their finances as soon as they find out they're expecting (or better yet, before they even begin trying to get pregnant).
From understanding which doctor's visits will be covered to taking advantage of generous tax breaks, here are six essential money tips for new parents.
1. Review Your Health Coverage
It might not be as exciting as picking out baby names and shopping for onesies, but expectant parents should take a close look at their health insurance plan.
"Review your health insurance benefits to understand what is covered and what may not be covered," says chartered financial analyst Marina Hayes, an investment advisor for PNC Wealth Management in Orlando. "You'll want to go ahead and prepare yourself for the cost of your prenatal visits, childbirth and hospital stay."
It's a good idea to check whether your plan requires a copay for doctor's visits or if you're expected to pay 100% of each visit until you reach your deductible. If you do have a deductible, you should also check whether you're still required to pay a percentage of your bills after the deductible is met (called "co-insurance").
"A great way to save for those expenses is through a health savings account (HSA), which is tax-free savings that you can put toward medical expenses," says Hayes. "If you have an HSA account, you can choose to save up to $3,350 for an individual and $6,650 for a family in 2015."
Another reason to review your plan carefully: "Big-ticket items like breast pumps and even some baby formulas may be covered under your health insurance," says Lisa Hutter, a regional wealth planning manager for Wells Fargo Private Bank.
As soon as your baby is born, contact your insurance company to enroll him or her in your health insurance plan. If you're on an employer-sponsored plan, you may be required to contact your employer to add your baby to your insurance.
"Most plans allow 30 to 60 days from the birth of the child for this addition, but you don't want to forget," says David Henderson, a certified financial planner with Client One Securities in Greenwood Village, Colo. "Nobody wants a surprise doctor bill for a 90-day checkup when you thought it was covered by insurance."
2. Start Saving for College Early
When it comes to saving for your child's education, it's a good idea to start socking away money when they're still in diapers.
"Education expenses can be substantial, and by the time your baby reaches college age, tuition for a private university could be $100,000 or more," says CFP Paul Jacobs, chief investment officer for Palisades Hudson Financial Group in Atlanta. "That may sound ridiculous, but so would today's tuition prices to people 20 years ago."
Consider opening a 529 college savings plan, a tax-advantaged investment account designed to make it easier to save for college. You can choose from among several investment options, and your money grows tax-deferred. When your child is ready to start college, withdrawals are free from federal tax and often state tax if you use the money to pay for qualified education expenses (such as tuition, fees, books and room and board). Although contributions to your 529 plan are not deductible on your federal taxes, many states offer an income-tax deduction on contributions.
"Establish a 529 plan as soon as your child gets a Social Security number and sign up for direct deposit," says Hutter. "Even an amount as small as $50 a month can make a big difference. We did this for my 7-year-old at birth and have already built up a respectable balance."
3. Update Your Estate Plan
Thinking about your own death isn't exactly pleasant, but getting your estate plan in order is necessary to make sure your child is well cared for if you pass away.
"Review all of your life insurance and investment accounts and update all of your beneficiary forms to ensure your wishes are carried out," says Kyle Jones, a financial planner for Wamhoff Financial Planning & Accounting Services in St. Charles, Mo.
Perhaps most important, be sure to appoint legal guardians for your child in your will.
"Children of parents who die without wills often are appointed to guardians by local courts," says Jacobs. "Rather than letting a judge decide who would take custody of your children, it's much better to spell out your wishes in your will instead."
4. Go Easy on Baby Products
You might be tempted to buy your little one designer clothes and pricey baby gear and equipment, but your child probably needs a lot less stuff than the baby industry would like you to believe.
"There's a lot of pressure to spend and buy the best of the best and have everything ready to go before the baby arrives," says Farnoosh Torabi, financial correspondent for NerdWallet.com. "Instead, get just what you need like the stroller, the car seat and basic newborn items, but ease yourself into all the other purchases. Or better yet, have others supply them for you via hand-me-downs and through your baby registry."
Torabi, who has a baby son, also advises against stocking up on too many baby supplies before you have a chance to see which items work best.
"We learned that in the first couple of months you really need to experiment with different types of bottles and diapers, because your baby decides what he likes," Torabi explains.
Other ways to save money include choosing generic diapers over name brands, making your own baby food and purchasing baby items secondhand (just make sure any used equipment you buy meets current safety standards).
5. Take Advantage of Tax Benefits
Your sweet newborn can help you qualify for some pretty sweet tax benefits.
"With the addition of the newest member of the family, you will be able to now claim one additional dependent on your tax return and pick up an additional $4,000 reduction in your taxable income from claiming their personal exemption," says Gary Plessl, a certified public accountant and co-founder of Houser & Plessl Wealth Management Group in Allentown, Pa.
While it may sound obvious, don't forget to get a Social Security number for your baby; you'll need to enter it on your tax return to claim your child as a dependent. It's a good idea to request a Social Security number while you're still at the hospital at the same time that you apply for your baby's birth certificate.
As a parent, you might also qualify for several other tax breaks and credits that the government offers to offset the cost of raising a child. For example, "up to $1,000 per child in Child Tax Credit is available to couples filing a joint return with a combined income of less than $110,000 and individuals whose income is less than $75,000," says MaryAnn Monforte, professor of accounting practice at Syracuse University. "Also, qualifying daycare and day camp costs may be eligible for a tax credit of up to 35% of $3,000 for one child or dependent, or up to $6,000 for two or more children or dependents under the age of 13."
It's a good idea to set up a meeting with your accountant or visit the "Tax Information for Parents" page on the IRS website to determine how your child might impact your taxes.
6. Allow for Flexibility
No matter how much financial planning you do before your baby is born, your money goals can completely change during the first few weeks and months of parenthood.
"You are never fully prepared for how you'll feel after bringing home baby," says CFP Laura Nasca, assistant to the CEO at TrueWealth Management in Atlanta. "You may have identified your big-picture financial goals, carefully considered your options and developed the best 'baby budget' on the block, but you may still find yourself reconsidering everything you thought you knew before baby arrived."
For instance, you might have initially thought that you wanted to go back to work, but later decided that you'd prefer to stay at home with your child—or vice versa.
"Don't beat yourself up—a good plan is only as good as it is re-evaluated," says Nasca. "If you allow for some flexibility in your plan and budget, you can ensure that everyone's needs will be met."