By Cora Gold, Editor at Revivalist
Nothing accelerates lifestyle inflation faster than having a child. Even if your income can handle the additional costs you have now, you must be wise with your money. Use these seven tips to be more fiscally responsible as a new parent.
1. Master Household Budgeting
Raising a child from birth to 17 years old costs more than $310,000 in the United States. This figure is bound to continue rising due to inflation and is already beyond the reach of many Americans.
In other words, your monthly living expenses would increase roughly by $1,400 — that’s just for one kid. Although the cost of child-rearing decreases per additional offspring, welcoming more to your home means more pressure on your bank account.
Learn to control your cash flow no matter how many people you want to bring into this world. A popular budgeting strategy is the 50/30/20 rule. It states that 50% of your after-tax income must cover your necessities, 30% must be available for discretionary expenses and 20% must go toward savings and debt repayment.
Use this rule as your guide to know where to cut costs and determine how much more you must make to support your desired lifestyle.
2. Build Adequate Cash Reserves
Saving for a rainy day and emergencies matters. A rainy day fund pays for expenses you can anticipate but don’t deal with regularly, like routine car maintenance. An emergency fund is a contingency reserve designed to keep you from borrowing when facing an unexpected financial setback, such as job loss or a medical problem.
A rainy day fund can be a fixed amount since you can reliably estimate the expenses. Conventional wisdom says a good emergency fund should equate to three to six months of expenses, but more is better. High-yield savings accounts are some of the best places to keep both.
3. Strive to Be Debt-Free
Zeroing out your debt allows you to dedicate 20% of your budget entirely to savings. While borrowing cash isn’t necessarily unwise, it can weigh you down when you lose an income.
Repaying everything you owe is challenging but doable. Paying down high-interest debts, consolidating them with a lower interest rate or 0% annual percentage rate and renegotiating terms with your creditors are effective ways to get out of debt more quickly.
4. Revisit Your Insurance Needs
Aside from adding your child to your health insurance plan, buy life and disability policies. Although you can remain gainfully employed despite having an impairment by working from home, getting insured can bail you out when your condition negatively impacts your income.
If your employer offers disability benefits, review them to ensure they can sufficiently support your needs. Otherwise, get a supplementary policy to bridge the gap.
5. Minimize Your Tax Liability
Claiming tax breaks for parents could save you thousands of dollars yearly. The Child Tax Credit and Child and Dependent Care Credit are prime examples.
Increasing your health savings account contributions reduces your taxable income when not used for non-medical purposes, renders your money budget more manageable and helps preserve your emergency fund.
Opening an employer-sponsored dependent care Flexible Spending Account helps pay for qualified childcare expenses while reducing your income tax liability. It doesn’t roll over to the next year when unused, though.
Don’t forget about federal and state tax refunds. The median amount is $932, so you may have hundreds of dollars idly sitting in the IRS’s coffers. The authorities won’t wait forever, so set up direct deposit to claim your money more quickly.
6. Prepare for Retirement
Having ample savings to support yourself in your sunset years means being more independent in your next stage of life. Putting off saving for retirement will come back and bite you. Delaying it for 10 years forces you to set aside three times as much cash to make up for lost time.
7. Have an Estate Plan
Estate planning is vital regardless of your net worth. It enables you to control what happens to your possessions when you’re no longer able to make that decision.
About half of American adults describe how to distribute their assets using a will. Alternatively, you can also consider a trust, a living will and a power of attorney. Life insurance is a form of estate planning.
Be More Financially Literate as a First-Time Parent
Managing your money correctly lets you focus on parenting your new child. Your financial decisions today will affect your family’s future, so use these tips to make wise choices from here on out.
