Most major life events have an impact on your finances in some way and prompt you to make important financial decisions; the birth of a child is one of the most important -- and expensive.
When you welcome a baby into your life, your financial needs will change. To get you started thinking about how to responsibly care and provide for your child, here are four financial moves to make when you have a baby on the way.
1. Get a term life insurance policy
One of the primary reasons for owning a life insurance policy is if someone else is financially dependent on you. And when you have a baby, it is undeniable that you are your baby's sole provider.
While there are a few different types of life insurance, term insurance is straightforward: It usually covers a set amount of time -- for example, 20 years. Essentially, a term policy is income replacement insurance, and you want to ensure that if something were to happen to you while your child is young (and up until they can provide for themselves), that by protecting your income with a term policy, your family would have financial resources available to them. To learn more about term insurance and why you need it, please see this article.
2. Update your estate planning documents
You want to care for your child whether you are here or should something happen to you. Although it's difficult to think about and plan for, you are caring for your child by making estate planning preparations. While you'll want to sit with an attorney who can properly advise you on the best way to protect and manage your estate, there are two important points to consider when you have a baby.
First, regardless of whether you've talked to a family member or close family friend about being your child's guardian if you were to pass away, and regardless if you believe that everyone in the family understands and knows your wishes, you still must get legal guardianship documents in place so your exact wishes are followed.
And second, before you add your child as a beneficiary on all of your accounts and to your will, know that generally, a minor cannot inherit money or property. Instead, you may need to appoint someone to act as a guardian over any financial assets your child inherits until they are of age.
3. Open a 529 account
With the skyrocketing cost of college, the best time to start saving for your child's education is as soon as you receive their Social Security number. Starting early and allowing contributions to grow and compound will offer you the best opportunity to accumulate a sizable education fund.
One of the best ways to save for your child's college education is through a 529 savings account, which is a tax-sheltered account administered by individual states, and almost every state has one. And even though you are not required to use your state's plan, nor does your child have to attend school in the state where you have an account, you may be eligible for a state income tax deduction from your home state.
With a 529 account, you contribute money that has already been taxed, but then your money grows tax-deferred, and withdrawals for qualified education expenses are tax-free. So whether you plan on fully funding your child's college education, or just helping as much as you can, a 529 account is one of the best places to start.
4. Start a savings account for your child
While this last step doesn't need to happen right away, if one of your goals is to assist your child financially, starting a savings account is a great way to accumulate funds for them. Over the years, you can deposit and save birthday and holiday money, and as your child gets older, a savings account can be a great teaching tool, showing them the fundamentals of earning, saving, and spending money.
Major life events can be overwhelming, and having a child is no different. Being financially responsible and taking care of these financial aspects is a demonstration of your love and will help to protect your family.