Financial changes needed when a family expands
KENNESAW, Ga. (Aug 24, 2017) — Having your first child is an exciting time. Your lifestyle will fundamentally change, which means your financial plan will have to adapt. Now that you’ll be responsible for a new life, you’ll need to take a look at several financial areas, including your taxes, financial strategy, insurance coverage and estate plan.
The IRS gives parents an additional personal exemption for each dependent. The personal exemption is $4,050 for 2017, but phases out as your adjusted gross income reaches $313,800 for married filing jointly. Married couples with modified adjusted income less than $110,000 can also take advantage of the Child Tax Credit. Furthermore, if you pay for someone to care for your child while you work, you may be eligible for the Child and Dependent Care Credit.
When adjusting your taxes, you will also want to look at your household budget. A family needs to weigh the costs associated with both parents working. Consider the costs of child care; the need for additional household help for cooking, cleaning or lawn maintenance, and commuting costs. If one spouse is working solely to pay for child care, it may be a better economic decision to be a stay-at-home parent. If you decide to stay home with your child, you should consider increasing your emergency reserve. Generally three to six months of living expenses is recommended; however, a single-income family situation typically lends itself to having a larger emergency reserve.
A growing family also needs to evaluate their insurance needs. Term life insurance should address the needs for both spouses, but it is equally important to have disability coverage. Becoming disabled can be a costlier drain on a family’s finances than a premature death. Car accidents, health problems and unfortunate occurrences can leave one unable to work and earn an income. Remember, if the premiums are paid by an employer and were not included in gross income, any proceeds from the policy are taxable as income, leaving less money during a time when it may be needed most.
Your health insurance premiums will likely increase when you add a dependent. The plan you choose needs to fit your family’s medical history and current health care concerns first. The “Summary Plan Description” explains which medical conditions are covered or excluded; deductibles, co-payments, co-insurance and out-of-pocket maximum; maximum lifetime benefit amount, and many more important plan details you need to understand.
Even if you do not have a sizeable estate, you still need a Will to legally name a guardian, successor guardian, custodian and successor custodian for your children. If you and your spouse were to die, you do not want your state of residence deciding how your child will spend the next 18 years of his or her life. The second part to estate planning is to update your beneficiary forms. Beneficiary forms for life insurance, annuities, IRAs, 401(k)s and pensions, in addition to accounts with titles, such as Joint with the Right of Survivorship, Payable on Death, Transfer on Death, and assets already titled in a trust bypass probate and trump a Will.
You’ll notice that “saving for college” is not on this to do list. You need to understand there are external sources available for college funds. There are no such programs to fund your own retirement. In my opinion, you should not become a drain on your children during their peak earning years because you did not plan for your own retirement. With these priorities in mind, you can focus on maximizing your family’s wealth, and in turn, introduce an element of financial stability into your child’s life.
William G. Lako, Jr., CFP®, is an Executive in Residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial and a co-host on Atlanta’s longest running, most respected financial talk radio show “Money Talks” airing Saturdays at 10 a.m. on AM 920 The Answer. Mr. Lako is a CERTIFIED FINANCIAL PLANNER™ professional.