Personal Finance July 9, 2015

    For most new parents, focusing on the big picture isn't easy. You're sleep-deprived, juggling naps and feeding schedules, and excited about the new little person in your life. But milestones are on the horizon, and you'll want to prepare for them while keeping your own finances on track.

    Here are five tips for new parents:

    Tip #1: Start saving for college now. By the time kids born in 2015 pack their bags for college, four years of tuition and fees are projected to be roughly $98,000 at a public university (in-state resident), and $398,000 at a private college.1 The earlier you begin saving, the better off you'll be. For example, if you begin contributing $500 per month for college savings at birth, assuming a 6% rate of return, the amount would total about $191,000 by the time your child reaches age 18. If you postpone saving until your child is 10 years old, the final amount will be roughly $61,000.

    TIP #2: Take advantage of tax breaks. For many working parents, child care can be as expensive as a second car payment or mortgage. Fortunately, tax breaks can help. If you meet certain criteria, the Child and Dependent Care Credit can cover 20% to 35% of eligible expenses, depending on your income,2 with a limit of $3,000 for one child or $6,000 for two or more.

    A flexible spending account (FSA) is another option. This is an employer-sponsored program that allows you to set aside up to $5,000 per year tax-free for qualified childcare expenses. Generally speaking, high-income families will benefit more from an FSA than from the Child and Dependent Care Credit (you can't use both). A potential drawback is that the IRS requires money contributed to a FSA to be spent during the plan year (or a grace period extension). If the money isn't used, it's forfeited.

    Tip #3: Consider insurance—both life and disability. Adequate health insurance is crucial, but you'll also want to consider life and disability insurance. If you or your partner should die, life insurance can pay for the things you'd like your family to have, such as a paid-off mortgage, school tuition or money for a future wedding. Life insurance can also replace your income for a specific number of years, easing the burden on the surviving parent.

    Disability insurance can also be a major help if one or both parents becomes unable to work due to a disabling illness or injury. While you may have employer-provided disability insurance, make sure that it will be enough to cover your mortgage, debt, child care and household expenses for a reasonable length of time. Otherwise you may want to consider supplementing your existing coverage. While you shop around, keep in mind that some policies may pay benefits only if you can't perform any work at all, rather than being unable to do the type of work you currently do.

    Tip #4: Increase your emergency fund. Having a child raises the stakes for "rainy day" planning. You'll want to be sure you can keep your household running smoothly in the event of job loss, illness or a large unexpected expense. As a rule of thumb, most financial experts recommend keeping three to six months' worth of essential living expenses readily available for emergencies. This money doesn't have to be in a single account, but can be spread between interest-bearing checking or money market accounts, certificates of deposit, short-term U.S. Treasuries or other relatively conservative, liquid investments.

    TIP #5: Prioritize retirement savings. If you must choose between saving for college and saving for retirement, choose retirement. Your child will likely have more than one way to pay for college—including scholarships, loans and grants—but you can't make up lost retirement savings. It's great to care for your kids, but not if it means burdening them financially for your care later on.

    How Schwab Intelligent Portfolios™ Can Help

    Schwab Intelligent Portfolios allows you to open a separate portfolio for each of your goals—such as saving for college, adding to a rainy-day fund or funding retirement—based on your goals, time horizon and risk tolerance while freeing you to focus on giving your child the best possible start in life.

    1. Savingforcollege.com calculator

    2. In 2014, filers earning $15,000 or less qualified for the maximum benefit, while those with incomes above $43,000 received the minimum.

    Investing involves risk including loss of principal.

    This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager.

    (0615-4920)


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