Financial tips for parents of young children
From first steps to t-ball, few things rival the joys and celebrations of watching your children grow. Of course, lots of responsibilities come with the territory, too.
According to the USDA, a middle class family can expect to spend approximately $233,610, not including college costs, to raise a child born in 2015 through the age of 17.1
As a parent, you will need to ensure your family’s financial security and set your children up for a bright future. Cover your bases so you can focus on the most precious moments.
Get help from the IRS
You can get tax relief from the high cost of raising children. You can claim a $4,050 exemption for each child in 2016.2 And if you earn less than $110,000 as a couple (or less than $75,000 as a single), you can trim $1,000 off your tax bill per child each year with the child tax credit.
Take an extra bonus for adoption
Parents who adopt can claim up to $13,570 to cover the adoption with a tax credit.3 The amount is subtracted from any federal taxes you owe.
Go by the (Social Security) numbers
To get tax breaks that come with parenthood, children will need a Social Security Number. Settle on a full name quickly to start the process.
Expect the best, but plan for the worst
If there’s ever been a time to plan for the unexpected, it’s now. Although unpleasant to think about, you must make plans for your children in case you die. A will details your wishes for the care of your child. Without one, a court will decide what’s best for your child.
Build a strong safety net
You’ll also want to make sure your children have the financial resources to live the lifestyle you want for them. While nothing can replace a loving parent, life insurance can help them avoid financial hardship. Term life can be more affordable. Consider a policy for a set number of years, such as 20 or 25, and your premiums could stay the same throughout.
Prepare an emergency fund
A job loss or a major expense is unsettling when you’ve got a family relying on you. Build a cash cushion of three to six months of expenses to help you through temporary hardships.
You’ve heard it before: college is expensive. A four-year state college now costs at least $20,090 a year, including tuition, fees and room and board. A private four-year school could cost approximately $45,370.4 Start saving as soon as possible, even before the baby arrives, to gain the benefits of compounding. A 529-college savings account or Coverdell account allows you to invest money that grows tax-free and can be used tax-free for qualifying higher education expenses.
Don’t forget your retirement
It’s easy to get caught up in your children’s needs, but spending all your money on diapers and toys can create financial insecurity down the line. Prioritize your own retirement, even if it hinders putting money toward a college fund. Children can get grants, scholarships and even loans to pay for college, but your own savings (plus Social Security) may be your only source of retirement income.
Having children can be one of the most rewarding life experiences, but with that joy comes much responsibility. Consult a financial advisor to help you weigh your options. The key is to consider the needs of both your family and yourself as you prepare for a happy, healthy financial future.
The information above is provided as a courtesy. Lincoln Financial Group does not offer legal or tax advice. We encourage you to seek the advice of an attorney or accountant with any tax or legal issues.
1Lino, Mark; Kuczynski, Kevin; Rodriguez, Nestor; Schap, TusaRebecca. “Expenditures on Children by Families, 2015.” Center for Nutrition Policy and Promotion. USDA. Report No. 1528-2015. January 2017. https://www.cnpp.usda.gov/sites/default/files/crc2015_March2017_0.pdf
2“Tax Exemptions and Deductions for Families.” Intuit TurboTax. 2016. https://turbotax.intuit.com/tax-tools/tax-tips/Family/Tax-Exemptions-and-Deductions-for-Families/INF12053.html
3“Tax Withholding and Estimated Tax.” IRS. Publication 505, Cat. No. 15008E. For use in 2017.
4“Average Published Undergraduate Charges by Sector, 2016–17.” CollegeBoard. 2016–17. https://trends.collegeboard.org/college-pricing/figures-tables/average-published-undergraduate-charges-sector-2016-17