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Guest Blog post by Sara Bailey
Getting married, having a baby, and sending a child to college — those are the three big life events that Discover.com says requires smart, careful financial planning. As a parent, those last two tend to hit pretty close to home, as you want to ensure your child(ren) are taken care of both now and in the future. Before you go into a parental panic, however, check out these financial planning tips to ensure all your ducks are in a row.
Planning Ahead: Discuss the Difficult Stuff
Becoming a parent is a wonderful experience, and you plan to be in your child’s life as long as possible. But what if the unthinkable happens? You can’t predict the future, but you can at least ensure your child will be taken care of should you pass away. For this reason, it’s important to establish a will to name a guardian for your child and their finances. It’s also going to be helpful to determine your financial needs at different ages; you can consider this guide from Bankrate to help you!
Now is also a time to revisit your life insurance policy and consider making a change such as switching to a 20-year term life insurance policy. Like the will, this policy ensures your child is covered if you pass away. The term length enables you to be sure that your child (and their education if they choose) is supported into adulthood. You might consider getting a policy for your child too so that it can build cash value to give them a small nest egg.
MONEY provides a TON of great resources and information about planning for life insurance. Be sure to check out this article about the 9 Best Life Insurance Companies. There are so many options to choose from, so make sure to consider the different companies and what will work best for your family. I like to make calls to each and then feel out the reps to see who is most like-minded and easy to work with. This is often a difficult topic, so do what’s right for your family!
Don’t Scoff at the Budget
You might think you have a handle on your finances, but chances are high that if you were to take a look at your weekly, monthly, and yearly spending, you’d notice some areas you need to dial back on and tighten up. To create a family budget, you need to first decide how you’ll track it whether it’s on a spreadsheet or app. Use it to log every single expense as well as track income. Create money goals, putting important stuff like utilities, transportation, clothing, and food before your annual membership to the zoo.
You may find it helpful to follow the 50/30/20 rule, where you divide your household income into three parts: 50 percent for necessities, 30 percent for wants, and 20 percent for savings/debt repayment.
Start Planning and Saving for College Now
It’s never too soon to start saving for your child’s education, but according to a survey conducted by Citizens Bank, 38 percent of parents haven’t started at all — and only 44 percent have started saving by their child’s 11th birthday. Other than a savings account, you have several college savings options.
For instance, a common one is a 529 plan, which enables you to make post-tax contributions with zero taxation when money is withdrawn. A Roth IRA is a good option too. Similar to the 529 plan, contributions are made post-tax and there is no penalty for withdrawal. Additionally, you can use the money for areas other than education.
College isn’t the only thing that can be costly, as K-12 can be pricey too when you factor in uniforms, tutoring, and other expenses. A Coverdell education savings account can help with that, giving you the ability to contribute post-tax dollars that grow tax-free.
Use Those Tax Breaks
Taxes are a necessary evil, but if you’re a parent, you can use them to your benefit via tax credits.
The one you’re most familiar with is probably the Child Tax Credit, in which you get a $2,000 tax credit per child that reduces your income tax liability. If you pay for babysitters or daycare, take advantage of the Child and Dependent Care Tax Credit. The amount is dependent on your income, but it is worth anywhere from 20 to 35 percent of allowable expenses up to $3,000 for paid care per child, and no more than $6,000 for two or more children.
If you’re a homeowner, you can receive a mortgage credit certificate from the IRS which can lower your tax burden.
Being a parent comes with a lot of financial responsibility. It’s up to you to make the most financially sound choices for your child, but there’s no need to stress about it. Being smart with your money is easy as long as you plan ahead and expect the unexpected — that’s what parenthood is all about right?
Band of Mamas is always up for new ways to refresh; be sure to check out this blog on making your marriage and your relationship a priority in addition to all these great financial tips above!
Guest Author Sara Bailey is a widow and mother of two, so her advice comes from her experiences navigating finances on her own. Be sure to check out her website, Thewidow.net and read some of the other blogs she has surrounding this important topic.