Last week I became a great uncle again as my niece Jennifer gave birth to a beautiful baby daughter. It got me thinking that I haven’t written an article in a while about what parents of a newborn child should do from a financial and legal standpoint. Therefore, I thought that I would mention a few things that parents should do when they have a newborn.
When you have a newborn child, one of the first things you should think about is their college education. I recognize that it is at least 18 years down the road; however, we all know how ridiculously expensive college has become, and as a result, you cannot start saving too soon for a newborn’s college education. My belief is that as soon as you have a newborn you should start saving for college. In that regard, one of the best ways to save for college is through a 529 plan. 529 plans allow you to invest money in pre-selected portfolios and that money will grow tax deferred until the child is ready for college. At the time that the money is withdrawn for college, as long as it is used for qualified education expenses, all withdrawals are tax free. Therefore, by implementing a 529 plan, it allows you to save tax free for a college education. In fact, something parents should consider is that as opposed to people rushing out and buying baby gifts and clothes, a better use of that money would be to add it to the education fund. I can’t think of a better gift for a newborn than helping with their future education.
In today’s world there are many options for 529 plans. Not only does the State of Michigan offer an excellent plan, the Michigan Education Savings Plan (www.mi.saves.com), companies like Fidelity, Charles Schwab and Vanguard also offer low cost 529 Plans. As far as I’m concerned, one of the keys to selecting a 529 plan is to make sure you can use it for basically any public or private institution in the country. Some 529 plans are state specific, which means the money can only be used in that state. Typically, you wouldn’t want that type of plan. All the plans I have mentioned have great flexibility in the fact that they can be used throughout the country. One of the reasons I strongly recommend the Michigan Education Savings Plan is not only can you potentially write your contribution off your Michigan Income Tax Return, but the plan also has very low costs and minimums. You can start the Michigan Education Savings Plan for as low as $25.
The second area that new parents should look at is their will. When you have a child, one of the most important responsibilities as a parent is to make sure that if something happens to you, the child is protected. The way you do this is to make sure you have a guardian named in your will. If you haven’t done a will, you need to do one. Even if you have done a will, you need to make sure it’s up to date. In addition, in naming a guardian, don’t forget to make sure you ask the person if they want to be a guardian. You may be surprised on how many people don’t want that responsibility.
Another item that you should look at when you have a newborn child is to make sure you have the proper amount of life insurance to protect the child if something happens. I don’t believe insurance is an investment, and I don’t think you should either. Rather, insurance is a means of risk management, and the question you ask yourself is, if you pass away is there enough money for the family? After all, if you were the breadwinner of the family and you passed away, what would happen to your family? Insurance is one way to make sure that your family has the resources to continue on. In that regard, for the great majority of young parents, I would recommend term insurance. Term insurance is the most affordable type of insurance, and it allows you to actually buy the amount of insurance you need. One of the nice things about term insurance is that it is easy to shop around. In that regard, when it comes to insurance, don’t forget to find out what your employer may offer. Some employers have options to purchase insurance at a very affordable price.
Having a newborn child is wonderful and exciting; however, it also comes with a fair amount of legal and financial responsibilities. When you are single without dependents you can afford to let certain things slide; however, when you’re a parent of a newborn, you have much greater responsibilities, and the sooner you begin to tackle them the better it will be for you and your child.
Good luck!
If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com.