What are the top financial issues I should consider,

as I become a parent for the first time?

written By Annie Beaver

Ah, there is nothing like becoming a parent to really make you grow up yourself. The maturity it takes to raise a happy, healthy, well-adjusted child is sometimes easier to acquire than the maturity it takes to get one’s financial life organized.

It is tempting to start a 529 college savings account and think you can check “baby finances” off your list, but like most things, there are more pieces than that, and they may not be as fun to talk about as the features of the newest jogging stroller. But hey, at least it is no harder than getting the toys out of the manufacturer’s packaging at Christmas – we can do it!

Protection. You need a safety net, and that net is called insurance. Be sure you have both life insurance and disability insurance. How much do you need? Well, for life insurance, people typically need approximately five times their annual income, plus more to cover their debts and the cost of college for their children. Don’t skip disability insurance. It is arguably more important since statistically you are more likely to be injured than die while you are in the workforce, plus you could become a long-term financial liability to your family. Be sure to check your employer-sponsored benefits package, if you have one; you may have some disability coverage already. Insurance may cost you several hundred dollars per year, but it is a far more important gift to give your child than a closetful of cute clothes.

By the way, your baby does not need life insurance. It is intended for people who have an income, and even the policies that are touted as ways to provide insurance for a child who may develop a medical condition later on in life are typically not good investments.

Retirement. I’ve said it before and I’ll say it again: every now and again, you have to put yourself first. Allowing yourself an uninterrupted shower is a good start, but you need to take it a step farther. Make sure you are funding your retirement before you start getting serious about saving for your child. It is far better for your child to take out college loans than for you to have to move in with your child because you didn’t save enough. If you are working, max out your contributions to your retirement plan at work. If you are staying at home, sock money away in an IRA. Young parents should probably consider Roth IRAs, which allow the earnings in the account to grow tax-free (you pay taxes on the money you put in but pay no taxes on any of the money you take out during retirement).

Write a will. If your estate is very straightforward, you can go online and use any of a number of tools for creating a simple will. (Information can be found at wikiHow, eHow, free-legal-document.com, or doyourownwill.com, to name just a few.) If you have children with special needs or multiple financial issues, it may be best to consult an attorney, who may charge $500-$1,000. The purpose of a will is to name both an executor, who will distribute your assets and pay your bills, and more importantly, name a legal guardian for your children. These do not have to be the same person.

Saving for your child. Now we are getting to the part you thought you were asking about.

Yes, it is a great idea to save for college, and 529s are a good way for you to do that. Go to montana.collegesavings.com/montana/ to learn more about the Montana college savings program. You’ll receive a state income tax deduction on funds you put into the account and growth is free from federal taxes as well as long as the funds are used for qualified expenses.

Custodial accounts. This can be a good idea from a tax standpoint (earnings and income are taxed at the child’s rate) but you have to be willing to hand over the account to your child when he or she reaches 18. Furthermore, this money will reduce the amount of financial aid your child is eligible for.

Separate account. You can open an investment account for your child, keeping it in your name but mentally earmarking it for your child. There is no tax benefit for this, but you don’t have to give the money to your child by a certain date (or at all). This option provides the most flexibility to you but does not protect the money from taxes or financial aid.

And don’t forget, live within your means! One of the best things you can do for your child is to be stress free, and not worrying about credit card debt will go a long way to making you happy, healthy, and well-adjusted, just like that sweet new baby you are raising. Congratulations!

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Annie Beaver is an Associate Financial Consultant with D.A. Davidson & Co. in Livingston, MT. This information is not intended as specific investment advice.  Past performance does not guarantee future results. D.A. Davidson & Co. is not a tax advisor. Information from sources deemed reliable include D. A. Davidson & Co., member SIPC.