Financial mistakes are something most new parents work hard to avoid, but this isn't always easy. They face a myriad of new expenses — from paying for prenatal doctors' visits to buying a crib — almost as soon as they find out they're expecting.
The good news? The majority of today's new parents are millennials. Sure, they may have more student debt than any previous generation, but they also plan and save for children more than their parents or grandparents did, according to USA Today.
However, this doesn't mean prospective new parents don't make financial missteps. Here are five common financial pitfalls new parents could avoid.
1. Saving for College — Not Retirement
Are you saving for your child's college education and not putting money away for your retirement? This decision could put you in a tight spot financially in your golden years.
When your child is ready to head to college, he or she can apply for grants, loans, scholarships and other forms of financial aid. But no financial aid is available to fund a retirement that may last 20 or 30 years (or longer). Saving for retirement could help you build a strong financial foundation, which may give you added peace of mind for tomorrow.
2. Failing to Explore Tax Advantages
New parents may find the key to some tax savings right at the hospitals where their babies are born. When you apply for your baby's birth certificate at the hospital, you could also apply for his or her Social Security number, according to Kiplinger. Your child must have a Social Security number to be added as a dependent on your tax return.
If applying at the hospital is not possible — maybe because you've adopted — you could apply for your child's Social Security number by providing Form SS-5 with proof of the child's age, identity and U.S. citizenship to the Social Security Administration.
New parents could also examine the following tax considerations when filing their taxes for 2019:
- Tax credit ($2,000): New parents are allowed the full credit no matter the month of birth or adoption. Parents can claim the credit for the first 17 years of their child's life. One caveat: Those with higher incomes may be ineligible for this tax credit.
- Withholding adjustment: Parents can file new W-4 tax withholding forms with their employers alerting the government of a dependent child. This adjustment allows the parents to have less money withheld from their take-home pay. Those who are single but have a child may qualify as "head of the household," which brings more tax advantages.
- New deductions. The recent federal tax overhaul has some advantages for new parents, including almost double the standard deduction ($12,200 for singles and married individuals filing separately, $24,400 for married couples filing jointly and $18,350 for head of household). Also, the family credit is now $2,000 per child rather than $1,000. Married couples filing jointly who earn up to $400,000 (modified adjusted gross income or AGI) are eligible for the maximum credit amount of $2,000 per child; all other filing statuses who earn up to $200,000 (modified AGI) are eligible.
3. Not Enrolling in a Flexible Spending Account (FSA)
Many employers offer FSAs that allow you to save pretax dollars to pay for certain medical and child care expenses. Some new parents ignore the FSA or only contribute small amounts for things like eyeglasses or routine doctor's visits. Some fear that adding more will cost them due to the "use it or lose it" rule.
Expectant parents should look at expected (such as doctor's fees) and unexpected (such as specialized care for premature babies) expenses they could face during childbirth. Even if insurance covers a significant portion of such costs, new parents often face bills for unexpected charges that may be FSA-eligible.
Consider any out-of-pocket expenses you could encounter during a normal delivery, cesarean section or premature birth. Then, think about contributing that amount to your FSA.
4. Skipping the Purchase of Life Insurance
Life insurance could help you ensure financial protection for your loved ones, but some new parents delay purchasing policies. There are various ways to determine the right policy for your needs, but speaking with a financial representative could help get you on the right track. New parents may also consider buying life insurance for both parents — as both generally contribute to paying the mortgage and other major household expenses.
5. Forgoing a Will
New parents can choose the guardians they want for their child, and write this choice into their wills. Doing so helps minimize misunderstandings or confusion if one or both parents pass away unexpectedly. Creating a will could be especially important for parents who've created blended families or are in second marriages. A will could also help protect the partner or spouse you might leave behind.
Saving and planning to financially provide for your family is important — and one of the best ways to do it is to understand some of the most common pitfalls. Consider taking advantage of all the tax and financial options available to help start your new life as a parent on the right track.