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Starter Pack for Starting a Family

Starter Pack for Starting a Family

March 11, 2024

I often draw on personal experience or client experience for material I think is useful to share. My wife Lauren and I recently welcomed our 3rd child, Miles, to our family. Having a kid is hard work for moms and dads alike (more credit due to the women for the endurance of pregnancy and childbirth). There's the lack of sleep, trying to figure out why this little person is crying, the time and expense of diapers, and the inability to keep up with cleaning or eating.

There are also (you should have seen this coming a mile away) financial implications of starting a family! Some of those things are just to be endured, other things need to be proactively worked on. We may have to endure the cost of childcare, diapers, perhaps formula for some. Other new costs and changes like saving for college, estate planning, taxes, newly available accounts, etc. can and should be planned for and proactively addressed. 

So, that's what I'm sharing here.  A comprehensive, though not all-encompassing, list of financial considerations when starting a family. 

Financial Position

You immediately have to make some basic changes to your financial position when you add a family member.

  • Increased Emergency Fund
    • Normally we recommend 3-6 months of expenses in a short-term savings account for emergencies.  Well, those expenses may be going up by hundreds if not thousands per month.  Make sure to increase your emergency fund accordingly.  For most people, this may take making some sacrifices, and this should likely be started long before the birth of a child as it may be nearly impossible after.
  • Decreased Living Expenses
    • Most folks who aren't earning at a very high rate will have to lower discretionary expenses to accommodate new expenses from having a child.  I often tell people to practice these changes before the baby comes.  It may take a while to develop the discipline and habits. Side note: practicing new expenses is a useful exercise before retirement as well. 
  • Know Your Workplace Benefits! 
    • How long is your workplace leave? 
    • How much do you get paid while on leave?
    • Does your employer or insurance withhold taxes from taxable benefits? 
    • How much will your health insurance cost if adding a new dependent? 
    • Have you done an analysis of life and disability insurance needs and what your employer offers? This is a qualifying event allowing you to make changes outside of open enrollment! 
    • Do you have a Flexible Spending Account you can use to defray taxes on money used for childcare?
    • If you or your spouse has a High Deductible Health Plan, can you increase contributions to your Health Savings Account? 
    • Do you have optional legal benefits for estate planning? (more on this below)
  • Taxes
    • Do you have access to new tax credits? 
    • Are you married? Does that change how you should file? 
    • Should you reconsider contributions to retirement accounts? 
      • If your taxes are lower, should you change to Roth contributions?  If your budget is tight, should you change to traditional pre-tax contributionsto save more?  

College Planning

Each state has a different 529 program.  I'll cover Connecticut here since that's where Bergenn Financial Group is based. If you have questions about other states feel free to reach out and we can help you get answers. 

  • 529 College Savings Plan
    • In CT we have CHET (Connecticut Higher Education Trust). CT residents who open an account before their child's 1st birthday will have $100 added to their account by the State of CT and can have the next $150 of contributions matched as part of the "Baby Scholars" program. 
    • This money can only be used for higher education, but with costs of education rising so quickly over the past 20 years and seemingly no end in sight, it likely make sense to get a head start on this savings. 
    • The difference between a Uniform Transfer to Minor Act account and a Uniform Gift to Minor Act account has to do with the type of assets that can be held, but let's leave those details for another day.
    • These accounts are custodial accounts.  The money belongs to your child (or the minor receiving the gift - family relation not required).
    • Any growth in these accounts is taxed at more advantaged rates before the minor reaches the age of majority and the account is transferred.
      • The first $1,100 of income is tax-free, and the next $1,100 is taxed at the child’s rate. Any income over $2,200 is taxed at the parent’s rate.
    • There are fiduciary rules that you must understand. Please familiarize yourself with these rules and speak to your advisor and accountant before opening an account. 

Estate Planning

Estate planning is important before having kids, but now it's imperative! If the worst were to happen and you were to die prematurely or become incapacitated or otherwise unable to care for your kids, you have to put certain things in place to ensure the life you're planning on providing for them is still realized. I should say I am NOT a lawyer.  You should discuss this with a qualified attorney before drafting anything.  Everyone's goals are different, but here are some basic things to consider.

  • Last Will & Testament
    • This helps direct your assets upon your passing and decides who will settle your estate. It should include a designation of caregivers and trustees if applicable.
  • Powers of Attorney
    • These documents can be durable (immediate and permanent unless revoked) or springing (take effect based on a trigger like incapacitation). They give other people the ability to make financial or healthcare decisions on a person's behalf. 
  • Trusts
    • There are many types of trusts and reasons for using them.  From controlling how assets are used, to protecting people from leaks (taxes, creditors, liability) and perils (divorce, immature beneficiaries, self-destructive behavior), to simply avoiding probate and many other reasons. Probate is public, time-consuming, and can be very costly. 
    • Revocable Trusts
      • Helpful to avoid probate. Can be changed and assets are generally still considered owed by the grantor.    
    • Irrevocable Trusts
      • Used for many different reasons. Can only be changed if the provisions of the trust allow it. The grantor cannot take back assets from an irrevocable trust, only a trustee can make those decisions.

As I mentioned in the beginning, this is not an all-encompassing list of things to address.  Starting a family is a fantastic time to reach out to a financial advisor to see if they can help.  You now have someone else relying on you to make the right financial decisions so that they can thrive.  

What do you think, is there anything I missed? Send us an email if there's anything you'd like to see included!