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Your Investing Life: Becoming a parent

September 12, 2014

Congratulations on the new addition to your family! As your family grows, your expenses will probably grow too (as your income seems to shrink). You won't be able to predict how your priorities will shift after the arrival of your child, but there are a few steps you can take now to prepare your finances for the future.

Paint a picture—it's worth a thousand words

Creating a realistic image of what you want your family's future to look like is the first step to making your dreams a reality. To help you determine where to focus your investing efforts, think about the goals you have for your family. Some questions to consider:

  • What are your child-care needs?

    Questions to ask

    • What are your child-care needs?
    • Are you comfortable raising your child in your current home?
    • What experiences do you want your child to have?
    For some couples, it's important (financially, professionally, or otherwise) for both parents to work outside the home. On the fence about what to do? Try comparing your household's current take-home pay to your future take-home pay—post child-care expenses. You may find that the cost of quality child care outweighs the financial benefits of both parents working.
  • Are you comfortable raising your child in your current home?
    Your four-story walk-up in the city may be perfect right now, but will you still love it when you're carting a stroller, groceries, and a child up multiple flights of narrow stairs? Although kids aren't the only consideration in your real estate needs, where you want your child to grow up—including where he or she goes to school—is worth factoring into your long-term plan.
  • What experiences do you want your child to have?
    Is it more important to have a family vacation each year or to give your child the opportunity to try various extracurricular activities? Of course, most parents want their children to have endless opportunities, but when it comes to paying for them, you may have to prioritize and make some compromises.

Put pen to paper

It's generally a good idea to update your paperwork after any major life change—including the arrival of a new child. Shortly after your child arrives, update your beneficiaries on your banking and investment accounts.

When it comes to naming children as beneficiaries, you have a few options: You can name each child individually, choosing how much to allocate to each child. Or you can choose to leave your assets to your descendants who survive you per stirpes—meaning that all children (not including stepchildren) will receive equal allocations of your assets upon your death.

At the very least, draft a will and designate a guardian for your child. You may also want to consider creating an estate plan. Estate planning can seem a bit complicated, so you may want to consult a professional to help you come up with a plan. (Vanguard has financial planners available to assist you no matter how large or small your assets are.)

While you're sorting through your paperwork, consider evaluating your health insurance options as well. To what extent will your family's take-home pay be impacted by increasing your insurance coverage to include a child? If you have more than one option when it comes to choosing a plan, visit ehealthinsurance.com for tips on understanding the features and lingo associated with health insurance.

Spend wisely

Kids start small, but the expenses associated with raising them don't. That's why now is the perfect time to begin (or maintain) a savings habit. Saving for multiple goals with limited money makes it more important than ever to prioritize. Some things to consider:

Remember retirement
When your child arrives, you'll probably be focused on meeting his or her immediate needs. But as you settle into a routine, the importance of your long-term goals—like saving for retirement—will resurface.

If you can, automate your retirement savings before your child arrives. Signing up for payroll contributions to an employer-sponsored plan or automatic contributions to an IRA will ensure that your retirement savings continue without interruption during what's likely to be a hectic time in your life.

Chuck Riley"It's okay to slow down your savings temporarily," said Chuck Riley, a financial planner with Vanguard Advice Services. "Slowing down for a while won't derail your financial future. As you try to balance the financial demands of a new child with your long-term investment goals, make sure you have a plan in place to eventually get back on track. Try to return to your regular saving level (or a higher one, if possible) as soon as you can—but until then, don't completely stop saving."

Pay off debt
In the ABCs of your investing life, "d" doesn't have to stand for "debt." Consumer debt, such as credit card balances and personal loans, generally has a high interest rate and isn't tax-deductible. Although you may be juggling multiple demands on your dollars, creating a plan to take control of your debt—and improve your credit score in the process—can benefit your whole family, especially if you're contemplating a move (and a new mortgage) in the future.

Boost emergency savings
Kids are full of surprises. Be prepared for anything by creating an emergency fund that's robust enough to cover 3 to 6 months' worth of your family's living expenses. If your short-term stash doesn't provide a substantial financial safety cushion, don't panic—start saving now.

Save for college
Just like saving for retirement, saving for college requires a long-term mindset. If helping your child through college is important, make a plan to start saving as early as possible.

Wondering where to start? Consider a 529 college savings plan, which is an investment account that offers tax benefits to families as they save for higher education. In a 529 plan, the money your investments generate isn't taxed until you withdraw it—and if you withdraw it to pay for qualified higher-education expenses, it isn't taxed at all.*

Sarah Hammer"Many states provide income tax deductions for 529 plan contributions," said Sarah Hammer of the Vanguard Investment Strategy Group. "In addition, 529 plans offer a lot of flexibility—you maintain control over your account, and if the child you're saving for doesn't end up needing or using all of the money you've saved, it can be transferred to a member of the child's family without incurring any tax penalties."

*Earnings on nonqualified withdrawals may be subject to federal income tax and a 10% federal tax penalty as well as state and local income taxes. The availability of tax or other benefits may be contingent on meeting other requirements.

Take advantage of tax breaks

When you think of the perks of parenthood, opportunities for tax savings may not immediately come to mind. But qualifying for one or more tax breaks may help you make up for lost ground (as a result of a leave of absence, child-care expenses, or reduced income) in your budget. Here are some tax breaks to look into:

  • The child tax credit may reduce your federal income tax by up to $1,000 for each child under age 17, provided you fall within the income guidelines and meet other requirements.
  • The earned income tax credit may reduce the amount of taxes you owe—and even give you a refund—if you have "low to moderate" income.
  • The child and dependent care credit may entitle you to a credit (up to $3,000 for one child or $6,000 for two or more children) if you paid work-related expenses for the care of a child during the tax year.
  • A flexible spending account (FSA) is a benefit offered by some employers. It allows you to contribute up to $5,000 before taxes to pay for eligible out-of-pocket health care and dependent-care expenses. For example, contributing $1,000 to an FSA could save you $250 on your federal taxes if you're in the 25% tax bracket. Keep in mind that the IRS doesn't allow you to file for a child-care credit and use an FSA at the same time, so you'll have to assess which option makes more sense for you.

You can also add your new child to your list of dependents on your tax return, as long as his or her birth date was on or before December 31 of the tax year for which you're filing.

Enjoy your new addition

The whole world won't revolve around your child, but your world will. It's natural for your financial life to take a back seat to your parenting life while you're in the throes of adjusting to parenthood. But when you come out of the haze—and you will!—the consideration you give your finances today will make you feel confident about your family's financial future tomorrow.

Notes:

  • All investing is subject to risk, including the possible loss of the money you invest.
  • For more information about any 529 college savings plan, contact the plan provider to obtain a Program Description, which includes investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing. If you are not a taxpayer of the state offering the plan, consider before investing whether your or the designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program. Vanguard Marketing Corporation serves as distributor and underwriter for some 529 plans.
  • We recommend that you consult a tax or financial advisor about your individual situation.
  • If you have specific questions regarding taxes, you should consult a qualified tax advisor. The rules around federal, state, and local taxes are complex. How they affect your personal situation can vary, so we can't give you individual tax advice.
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