Financial Planning for Your Family’s Future

Kimmie Moehring, CFP®
Feb 16, 2023 11:40:00 AM


Life can come at you pretty quickly, and before you know it, you have a growing family (or desire to). Consider taking a pause and evaluating how your current financial behaviors may affect your short and long-term financial goals. Regardless of your life stage, it may be time to take a quick inventory of your financial health to prepare you for the next step.

Suppose you are in a position where you are planning to start a family soon. What financial steps should you be considering? That certainly depends on how your family is going to grow. You may be able to conceive naturally and start a family that way. Others may consider options such as IVF or adoption to grow their family. Regardless of how you start[ed] your family, reviewing your financial situation and goals is a wise decision. It’s never too late to start getting serious about your financial goals! I recently heard this quote by Antoine de Saint-Exupéry: "A goal without a plan is just a wish.” Planning takes time but is likely worth it in the end and may help us reach our goals. So, as you look at your situation, let’s start making those wishes a goal by putting together a plan.

Revising Your Budget and Financial Plan

At a fundamental level, revising your budget and financial plan is essential in considering the expense of a child.

  • Emergency Fund: Be sure you have 3-6 months of living expenses set aside in an online high-yield savings account such as Ally or Capital One 360, which, as of the date of this article, are currently at a 3.3% and 3.4% annual percentage yield on cash with no minimums, respectively.
  • Childcare: The most significant expense for a growing family may be childcare, according to the latest data released by the nonprofit Child Care Aware of America (CCAoA). The average annual cost of childcare in the U.S. hit $10,600 per child in 2021.
  • Many people are fortunate enough to have family members available and willing to help out for a day or two per week, which is a huge gift to working parents as it greatly reduces their childcare costs. Unfortunately, many other people don’t have that luxury for one reason or another. My brother, for example, lives out of state so when he and his wife were making decisions around childcare, they thoroughly considered their options and decided to go forward with a live-in nanny through an au pair program. For a one-year commitment, this was financially the best decision for their family with two little girls who would have had to be in full-time childcare. It’s been an incredible experience for their family and may be a good option for yours too. 
  • Dependent Care Flexible Savings Account: If your employer offers this benefit, it may be an option for you to save quite a bit on taxes. This account can be used to pay for dependent care expenses using pre-taxed dollars for eligible expenses:
    • before and after-school care
    • babysitting and nanny expenses
    • daycare, nursery school, and preschool
    • summer day camp

For 2023, contributions are capped at $5,000 annually (for married filing jointly or single) and $2,500 for married filing a separate tax return). Word to the wise: Do not overfund this account, as it is a “use it or lose it” account (with a short grace period).

  • Health Savings Account: A high deductible health care plan provides low premiums and options to fund an account with pre-tax dollars for eligible medical expenses. One of my very favorite accounts for its triple tax threat:
    • Contributions are pre-taxed (non-FICA tax) going into the account
    • Withdrawals for qualified medical expenses are tax-free going out of the account
    • Most plans have the option to invest the cash into funds, and the funds grow tax-free.
    • This account is always yours and if you have a balance after the age of 65, you can use the funds for non-qualified expenses. The distribution is considered ordinary income, but it allows you to have flexibility if you need the money for a non-medical reason.
    • If your birth plan includes a hospital, you’ll most likely hit your deductible with all the expenses incurred.

There are annual contribution limits, so that is something to be mindful of as you plan. However, unlike the Dependent Care Flexible Savings account, this account goes with you wherever you go and rolls over to the next year.

Planning For and Funding Education

Your next most significant expense will be college education funding. As the flight attendants remind us before takeoff, we always want to put on our oxygen masks before helping someone else. You will want to be sure that your retirement goals and plan come first before helping those who you love. You don’t want to end up living in their basement down the road if that is not part of your plan. So put your oxygen mask on first, then check out these articles for additional information on planning for your children’s college tuition and the benefits of a 529 plan.

Planning for the Unexpected

In the rare chance of a catastrophic event that leaves your family without either parent, it’s important to have a plan. Working with an estate attorney to create a proper estate plan is essential. Parents with minor children typically have the most difficulty deciding on a couple of essential items:

  • Who is going to be the guardian of our child(ren) if we are not alive?
  • How do we want to provide financially for the child(ren)? Should the assets be pooled into a trust and distributed throughout their lifetime?

Choosing a guardian is best determined by the parents and communicated to the appointed person(s). Alternatively, if this is not determined ahead of time, the state and family would have to decide who will be the legal guardians of the child(ren), which has the potential to put loved ones in a very challenging position. For the financial assets, it would be essential to pre-determine what to do with them. If they go into a trust, determine who would be the trustee and the rules around the trust as it relates to distributions for the children. For example, most clients would not want their 21-year-old child to have access to hundreds of thousands of dollars outright. Therefore, in your testamentary trust, you can provide guidelines for the amount and the age at which your children would receive the assets. Our job is to encourage you to have this in place with the hope that it would never be used.

Putting a plan into place to make your wishes into a goal is something that we at Birchwood work to help our clients with. If you found this article helpful or know someone else who might find it helpful and want to jump-start planning for your next life transition, we’d be happy to connect.

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