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June 6, 2010

New Parents – 10 money mistakes

June 6, 2010

New parents’ top 10 money mistakes

A tiny new baby comes home with a mountain of money issues for its overjoyed, overtired parents. Here are the most common ways parents go wrong, and why these financial flubs can be so costly in the long term.

By Karen Hube

To most new parents, getting settled with a new baby means figuring out how to function on three hours of sleep and finding what detergent will best minimize spit-up stains.

Financial issues rarely get the time of day, even though numerous important issues crop up once you have a child.

As a result, many new parents put their family’s long-term financial security at risk by making rash decisions or avoiding issues altogether.

Here are 10 of the biggest mistakes that new parents make when it comes to their finances:

Skimping on life insurance

Once you become a parent, having enough life insurance is essential. “If one or both parents dies, you have to make sure your dependents will be provided for,” says Lynn Ballou, a financial planner in Lafayette, Calif. 

While you may have some life insurance coverage through your employer, “that’s usually not enough,” Ballou says. “Anyone with a kid these days should at least have a $500,000 policy as a bare-bones minimum,” she says. What’s more, if you are healthy, group policies are rarely any cheaper for you than an individual policy, and they aren’t portable. If you get laid off, you lose your life insurance. “Imagine if you got laid off when you were having medical problems. Getting a new policy would be extremely expensive,” Ballou says. “It’s much smarter to simply get an individual policy.”

How much insurance do you need? Generally people need five times their earnings, plus the total amount of their household debt and enough to cover college tuition for their children, says John Ryan, owner of Ryan Insurance Strategy Consultants in Greenwood Village, Colo.

Don’t forget to run the same calculation for a stay-at-home spouse, whose premature death may mean having to hire full-time child care, Ballou adds.

For new parents, most planners recommend term insurance. “It meets most people’s needs,” and it’s the simplest and cheapest kind, says Peg Downey, a financial planner in Silver Spring, Md. A 30-year-old healthy man recently could have gotten a $500,000 term policy from First Penn Pacific Co. for $475 a year, says Ryan, the Colorado insurance consultant. Choose a term that lasts until your dependents are through college and no longer in need of your financial support, Ryan says. And then, be sure your policy has the option to convert to a permanent whole life or variable life policy. That way, if you decide later that you want lifelong coverage, it will be cheaper to convert than to buy a new policy.

You can get life insurance quotes on MSN Money, as well as read more about insurance issues and find out if you have enough coverage overall.

Shrugging off disability insurance

Disability insurance is arguably even more important, because it’s statistically more likely that you will get injured than die while you’re in the workforce. Most employer-sponsored plans will pay you 60% of your salary if you become disabled. As a rule of thumb, if you’re earning under $100,000, that’s probably enough coverage, Ryan says. “People who earn more usually have the need for a supplemental plan.” 

Take a realistic look at your family’s spending to figure out how much coverage you should have. Get a policy that would enable you to cover expenses and maintain your standard of living if you had to be out of work for a while.

Prices vary dramatically between insurers, but generally, for a 30-year-old male, every $1,000 per month of supplemental coverage would cost about $370 a year, according to Ryan. For a woman the same age, that extra coverage would cost $540 a year. You can read more about disability coverage on MSN money.

Buying life insurance for baby

If an insurer tries to peddle you life insurance for your kid, walk away. “You buy life insurance on someone only if their death would create financial hardship,” says Marilyn Capelli, a financial planner in Bloomfield Hills, Mich. 

Some salespeople say a lifetime policy on a child is a smart security measure. If your child develops a medical condition later in life, insurance would be very costly. So if you buy a policy for less now, at least you will know he will always be insured. “But it’s unlikely a healthy child will develop a problem that will last into adulthood,” Capelli says. “And if he did, by then the coverage would probably be small relative to his needs.”

Delaying saving for college

Most parents start fretting about tuition when their kids are entering high school – way too late. “The best time to start is when you child is born,” says Dennis Gurtz, a financial planner in Bethesda, Md. There are a couple of attractive tax-free college savings options: 

  • 529 college savings plans. You can contribute $25 a month or up to $250,000 each year to these state-sponsored plans. Your money grows tax free as long as it is used for college costs.

 

  • All states sponsor one, and each is managed by a brokerage or mutual fund company. The Illinois plan is run by Salomon Smith Barney, and Maryland’s is managed by T. Rowe Price. No matter where you live, you can participate in any plan and your child can attend any school she chooses.

 

  • The plans invest your money in a portfolio of stocks and bonds that gets gradually more conservative as your child nears college age.

 

  • For information on the performance data on 529 plans, see SavingForCollege.com. (See link in left margin under Related Resources.) For a listing of all 529 plans, check out The College Savings Plans Network Web site. (Also listed under Related Resources.)

 

  • Coverdell education savings accounts. Formerly called education IRAs, these let you contribute up to $2,000 a year in a tax-free accounts. The earnings build up tax-free. There are some income limits, however: $220,000 for couples filing jointly, and $110,000 for singles. For more on Coverdell accounts and college planning, visit MSN Money’s College Planning page.

 

Forgetting what’s most important: retirement savings

Once you’re faced with the monumental task of saving for your child’s college tuition, it’s easy to shrug off saving for retirement. Big mistake, Ballou says. “Saving for retirement always comes first, college comes second,” Ballou says. “You and your child can figure out other ways of getting through school. It would be worse if your child had to support you during your retirement.” 

Max out on your 401(k), an IRA, or whatever retirement plans are available to you. Stay-at-home spouses should sock cash into an IRA. Of these, look into a Roth IRA. These take after-tax dollars. Earnings inside the account build up tax-free, and, later on, you can withdraw money without incurring taxes. Read more about retirement planning on MSN Money.

Postponing a will

Many parents assume they don’t need a will, because they don’t have large estates. But if you have a child, a will is essential to designate guardians. “If you and your spouse die prematurely without a will, a court will appoint guardians for your children,” says Elizabeth Lewin, co-author of “Family Finance.” 

Hire an attorney to draft a will (cost: $500 to $1,000) in which you name an executor, who would pay your debts and distribute your assets, and a guardian for your children. “These may be two different people; sister Jane may be a great mom, but she may not be good with money,” Lewin says.

Also, name two backups for both child and money issues, advises Ballou. “What if you want your sister to take care of your kids, but for some reason she’s not able?”

If you have specialized concerns, such as lifelong support for a disabled child, you may want to set up a more complex estate plan that includes a custodial account or a trust.

An alternative is to write your own will using computer software. For more information on these programs, read “12 easy steps to preparing your estate plan” on MSN Money. But, as Ginger Applegarth notes in that article, if your estate is at all complex, you’re probably better off consulting a lawyer.

Overspending on baby costs

The higher your income, the more expensive it is to raise a child. For a child born in 2003 to a family with annual income of more than $65,400 a year, the basic expenses of child-rearing will set you back more than $344,000, according to the U.S. Department of Agriculture. And that’s just until age 18. 

While a lot of this spending is necessary, some of it isn’t. Many seasoned parents admit their most irresponsible spending occurred in their children’s earliest years and before they were even born. Who really needs a $500 hand-stitched crib bumper? “New parents think they need everything, want everything to be perfect, and don’t know what things cost,” says Downey, the Maryland planner.

Before you start setting up a nursery, come up with a spending plan. Accept hand-me-downs, and shop at yard sales and consignment and second-hand shops.

Remember that a lot of what you buy will only be used for about a year, sometimes less — especially baby clothes.

Cheryl Whitehead, a mother of two in Temple, Pa., saved about $10,000 in her kids’ early years by buying things used or on discount. For example, she snagged a $1,200 jungle gym for $200 at a yard sale. At a KidsRUs sale, she bought $700 worth of clothes for $100. “You can give a lot to your kids while still being responsible,” she says.

If you want to see how wisely you spend, check MSN Money’s savvy spender quiz.

 

Overlooking tax benefits for parents

As your spending skyrockets, at least you can take some solace in a few tax breaks geared for parents. 

One that many parents overlook is the ability to sock away up to $5,000 of pre-tax money for child care through an employer-sponsored savings program. Called flexible spending arrangements (FSAs), most medium and large employers offer them.

There is also a child-care tax credit, which you can qualify for if both spouses are working and your child is under age 13. But Uncle Sam doesn’t let you double up on the FSA and the credit. “For most people, it’s not a tough choice – the flexible-spending plan gives you the biggest break,” says Lisa Osofsky, a New York City accountant and financial adviser.

The maximum child-care credit you can claim is $480 if you have one child and $960 if you have two or more children. In contrast, “if you put away $5,000 pretax in the FSA, and you’re in the 30% tax bracket, you’re getting a $1,500 credit,” Osofsky says.

Another big tax perk: The $1,000 annual child tax credit, which applies to children under age 17. Couples filing jointly who have one child and earn no more than $110,000 can claim the full credit.

As MSN Money’s tax columnist Jeff Schnepper is fond of pointing out, a tax credit is far more valuable than a deduction because the credit is a dollar-for-dollar reduction of your tax bill.

Saving in a child’s name

Many parents try to eke out more tax savings by opening a savings account in their child’s name under the Uniform Gifts to Minors Act. 

But while this makes sense from a tax standpoint — earnings and income in the account would be taxed at the child’s lower tax rate — many planners say it’s usually not a good idea.

Once your child turns 18 or 21, depending on the state where you live, “that money is irrevocably the child’s money,” Capelli says. “You may have intended the money to be for college or a first house, but your child may blow it on a trip.”

What’s more, any money saved in the child’s name will reduce the amount of college financial aid she is eligible for, whether the money is intended for college costs or not, says Matt McGrath, a financial planner in Coral Gables, Fla.

If the money is for college, invest in a 529 plan or a Coverdell IRA, McGrath says. “Or, simply keep the money in a separate account,” he says. That way there’s less of a chance it will get used on home improvements or a new family car.

Oversimplifying the work vs. stay-at-home question

At a glance, the question of whether one spouse should quit work to care for your new baby seems clear cut: If the spouse earns only enough to cover child care costs, staying at home probably makes sense. 

But there are numerous other financial factors to consider. The most commonly overlooked is the costly benefits package provided by your employer. “Benefits are often worth about 35% of your salary,” Downey says. Run a comparison of what it will cost to replace the benefits you need if you leave your job. Also, figure in how your other expenses and benefits will change. For example, if you leave your job, you will cut out commuting expenses and the cost of pricey work clothes.

If you continue working, however, you may receive a matching 401(k) contribution from your employer.

 

 

 

Trendline Financial  Solutions is a Financial Planner Firm offering Financial Planning and Investment Management with offices in Southold, Great Neck and West Hempstead, NY – convenient to Garden City and Rockville Centre.

 

Servicing all Nassau County villages:

Atlantic Beach
Bellerose
Cedarhurst
East Rockaway
Floral Park
Freeport
Garden City
Hempstead
Hewlett Bay Park
Hewlett Harbor
Hewlett Neck
Island Park
Lawrence
Lynbrook
Malverne
New Hyde Park
Rockville Centre
South Floral Park
Stewart Manor
Valley Stream
Woodsburgh
Bayville
Brookville
Centre Island
Cove Neck
Farmingdale
Lattingtown
Laurel Hollow
Massapequa Park
Matinecock
Mill Neck
Muttontown
Oyster Bay Cove
Old Brookville
Sea Cliff
Upper Brookville
Baxter Estates
East Hills
East Williston
Flower Hill
Great Neck
Great Neck Estates
Great Neck Plaza
Kensingston
Kings Point
Lake Success
Manorhaven
Mineola
Munsey park
New Hyde Park
North Hills
Old Westbury
Plandome
Plandome Heights
Plandome Manor
Port Washington No.
Roslyn
Roslyn Estates
Roslyn Harbor
Russel Gardens
Saddle Rock
Sands Point
Thomaston
Westbury
Williston Pk

Financial Planning for a New Baby

June 6, 2010

Planning Financially for a New Baby

From , former About.com Guide

If you considered only the financial implications of having children, you might end up childless. There’s no two ways about it: having a child is very expensive. Financial experts say a home is the biggest investment most people will ever make, but they’re forgetting about the cost of raising children, which far exceeds the average home price in the US.Fortunately, most people don’t base this important decision on financial issues alone, but as with any other decision that will impact your financial situation, it’s smart to go into it with your eyes wide open and to be prepared. The changes that accompany adding a new little member to your family can be stressful, but you can reduce the stress greatly by minimizing the financial factor.

First, have you considered how you’ll manage on the reduced income caused by time off for the pregnancy and birth? Check with your employer to see if you’re covered by short-term disability insurance, which covers pregnancy. A typical policy will pay 60% to 70% of your gross income for approximately six weeks following the birth of your child (there may be a waiting period of a week).

Even if you don’t have disability insurance, your employer may be required to grant you time off under the Family Medical Leave Act (FMLA), but they’re not required to pay you during that time. Whether you’ll receive salary or disability benefits or not, schedule out your expected income and expenses and make sure you can make ends meet.

While you’re checking on disability insurance, make sure you know what to expect from your medical insurance coverage. Pregnancy must be treated as any other medical condition, meaning it can’t be excluded, but the general provisions of your policy will determine how much money you’ll end up paying out of your own pocket. Consider deductibles, co-pays (the typical 20% you pay after the insurance company pays their 80% in a non-HMO type plan), etc. Also, find out how much it will cost to add an additional dependent to your group medical insurance policy. If both you and your spouse have health insurance available through your employer, look at the terms and costs of both policies and decide whether it makes more sense financially to have you all covered on one plan or to split coverage between the two plans.

If your employer offers a flexible spending account, it would be wise to put some money into it to cover unreimbursed medical costs. For an explanation of Flexible Spending Accounts, see Maximize Your Employment Benefits.

Probably the biggest expense you’ll incur once the baby is born (excluding a college education) is for child care, which is especially expensive for infants. Even when your child is old enough to go to school, you’ll have after-school care, summer camps, and other related expenses. Check out day-care providers well in advance of the birth of your child in order to find one that you feel comfortable with and that you can afford. If you want to be able to deduct your child-care expenses from your taxable income, you’ll have to choose a licensed provider because you have to report his or her social security number to the IRS when claiming the deduction.

As soon as you start thinking about having a baby, start a baby fund. Put a set amount into the account each pay period to cover unexpected expenses (there definitely WILL be some and I guarantee they will be far more than you ever dreamed of).

Bargain hunt for baby equipment and supplies. It’s important to buy the best car seat, stroller, etc., to ensure your child’s safety, but your baby will quickly outgrow many of the other items you’ll buy, and paying full price is often a waste of money. Talk to friends, check stores that sell used goods, visit yard sales, etc. Your baby will never know the difference.

To help you get a grip on the changes in your finances with the addition of a child, you’ll need a budget. Find the painless way to budget at Budgeting 101. If you’re not convinced a budget is necessary, check out MsMoney.com’s Cost of Raising a Child Calculator (see link to the right). Once you’ve evaluated the costs and have come up with a plan to cover them, you can sit back and enjoy the new addition to your family.

 

Trendline Financial  Solutions is a Financial Planner Firm offering Financial Planning and Investment Management with offices in Southold, Great Neck and West Hempstead, NY – convenient to Garden City and Rockville Centre.

 

Servicing all Nassau County villages:

Atlantic Beach
Bellerose
Cedarhurst
East Rockaway
Floral Park
Freeport
Garden City
Hempstead
Hewlett Bay Park
Hewlett Harbor
Hewlett Neck
Island Park
Lawrence
Lynbrook
Malverne
New Hyde Park
Rockville Centre
South Floral Park
Stewart Manor
Valley Stream
Woodsburgh
Bayville
Brookville
Centre Island
Cove Neck
Farmingdale
Lattingtown
Laurel Hollow
Massapequa Park
Matinecock
Mill Neck
Muttontown
Oyster Bay Cove
Old Brookville
Sea Cliff
Upper Brookville
Baxter Estates
East Hills
East Williston
Flower Hill
Great Neck
Great Neck Estates
Great Neck Plaza
Kensingston
Kings Point
Lake Success
Manorhaven
Mineola
Munsey park
New Hyde Park
North Hills
Old Westbury
Plandome
Plandome Heights
Plandome Manor
Port Washington No.
Roslyn
Roslyn Estates
Roslyn Harbor
Russel Gardens
Saddle Rock
Sands Point
Thomaston
Westbury
Williston Pk