Money Moves to Make for First Child
If your first child is on the way, there are money moves you should make to set them up for success.
The USDA projects the cost of raising a child just under a quarter million for their first 17 years. If you include college costs, this amount can easily double.
While this can all sound very overwhelming, the goods news is there are moves we can make today to prepare for this onslaught of expenses.
Here are the money moves I’m making today to plan for our first child:
- Start a 529 plan
- Max out HSA
- Add additional term life insurance
- Complete estate planning
- Consider budget impacts
- Receive $2k child tax credit
1. Start a 529 College Savings plan
The cost of sending a kid to college could be the highest of all child-rearing expenses. This cost is especially frightening when you consider college expenses have gone up 5-6% per year on average.
The college costs could change with the pandemic, causing many students to rethink paying such exorbitant fees, but it will always be a significant expense.
That’s why the first thing I’m doing is starting a 529 college savings plan.
You can read my full post on the 529 plans here, but they provide an excellent opportunity for your investments to grow tax-free, and qualified distributions are also tax-free.
Using a 529 can save tens of thousands of dollars, and many states provide tax incentives. You can get money out if your kid gets a full scholarship or if they don’t go to school, but check out my 529 post for all the details.
2. Max out our Health Savings Account (HSA)
My second money move with a kid on the way is to max out our health savings account.
We previously upgraded our health insurance plan, knowing we’d have many expenses with the birth, but we made sure to keep an HSA-eligible plan.
The HSA is the only “triple-tax advantaged” account that allows tax-free free contributions, tax-free growth, and qualified tax-free distributions.
I took a deep dive into HSA’s in this post, but just because you have money in the account doesn’t mean you have to spend it.
You can reimburse your qualified healthcare costs (which are pretty flexible) at any time, including years after the expense occurred.
If you can cashflow your medical expenses, and the birth specifically, it might work out better for you to pay for them out of pocket and let the HSA investments grow for decades and decades.
The family contribution maximum is $7,100 ($3,550 for single), which we’ll max this year, save taxes on, and reimburse our medical expenses if needed.
3. Add additional term life insurance
There’s nothing like adding a kid to the mix to make you realize the importance of life insurance. If something were to happen to me, I wouldn’t want my wife not to have enough money to take care of the family.
It’s terrible to even think about, but term life insurance is so dang cheap that it’s foolish not to have.
I have a 20-year term plan I’m halfway through, so I’ll add another 20-year term, which would cover my income if anything were to happen.
Policy genius is great for quotes as it compares multiple companies and gives you the best price.
If it’s your first policy, it can take a little while to work through the process, and some plans require a nurse visit to assess your health.
The general rule for how much insurance is 10x gross income, but others will use 10x expenses.
4. Complete estate planning
Estate planning is another money move with our first kid on the way. The estate planning process can be challenging and quite expensive, but some “disruptors” make it much more manageable.
I’m partnering with one of these online companies to complete our estate planning. We’re creating a trust instead of the will because a trust allows you to define your wishes and skip any state probate process.
In addition to the trust, we’re defining guardianship for our kiddo, creating a trust as they’ll be the beneficiary to our estate, and creating rules for when they can receive the money and how.
Our estate plan also includes our medical directives (living will) and burial wishes. There are some challenging questions to answer (guardianship), but the entire set up process can take 15 – 30 minutes.
5. Consider budget impacts
Children cost money. That’s what I hear at least. We’ve already experienced an uptick in spending as we prepare our world for the new little one.
It seems they’re probably cheapest the first couple of years when they don’t need much, but I guess I’ll have to keep you updated as I go!
6. Receive $2k child tax credit
While most money moves for a first child fall into the “expense” category, there is one that lands on the income side – the child tax credit!
I still think it’s crazy our government incentivizes having children at the expense of working adults who don’t have children, but that’s how it’s designed.
The $2,000 child tax credit is quite powerful because it’s a credit rather than a tax deduction.
That means if we have $10,000 in taxes, the child tax credit will lower it by $2,000. You get to claim it the year your child is born, so even though we’ll have a September baby, we still get the “full” credit amount.
These are the money moves we’re making now with our first kid on the way.
I’m sure there will be lots of trial and error on the money side and the parenting side, so I’ll let you know if we come up with any other money moves.
