By CAREN P. WILLIAMS, CPM®
Financial Advisor and Senior Vice President, Morgan Stanley
We have probably all heard the phrase, “A baby changes everything.” As a mother of two, I can attest it certainly changed life for my husband and me. Life with a baby is both exhilarating and exhausting at the same time. Who knew we could all function on such little sleep, right?!
Having a baby really does affect every aspect of a parent’s life, including one’s finances. If you are currently preparing for the arrival of a little one, now is also a good time to think about the financial aspects of your growing family too. Essentially, it is a matter of adjusting one’s budget to make sure you still stay on track.
Yes, you will probably need to give up some of your guilty pleasures to have sufficient funds to pay for diapers, baby food, clothing, and childcare. However, I realized that buying clothes for my daughters was more fun and satisfying than buying for myself anyway. Also, you may find quiet evenings at home with the baby are much more pleasurable than a night out on the town.
In addition to reducing your discretionary spending budget to cover the expanded costs for essentials, there are other bigger picture items to consider:
- Will you or your partner leave the workforce to care for your child full-time?
In making an informed decision, consider that it is not uncommon to incur childcare costs of $1,000/month or more for full-time daycare in the Nashville area based on my own experience. Make a pro-forma budget of your current income with the expected increase in expenses due to childcare costs and other adjustments vs. a budget with reduced income for staying home with lower discretionary expenses and adjusted essential expenses. Among my friends who have chosen to leave the workforce to raise their families, I have noticed they spend much less on food than my family does. They have more time to be thoughtful in their grocery shopping and cooking for their families.
- How should you prepare for the costs of your child’s education?
Several ways exist to save for your child’s upcoming education, including 529 college savings accounts and custodial accounts. In my opinion, the tax benefits of the 529 account make it the superior option for education savings. Tennessee sponsors a 529 plan, but you can use out-of-state 529 plans as well. In general, 529 plans allow you to set aside up to $15,000 per donor per year on an after-tax basis, and withdrawals for qualified expenses are tax-free. Under the recent tax law changes, you can now use 529 assets for primary and secondary school expenses up to $10,000/year, in addition to qualified higher education expenses. Also, anyone can contribute to a 529 account in your child’s name, including grandparents, as well as those thoughtful aunts and uncles.[i]
Custodial accounts, on the other hand, may be used for any expense for the child, not just education. Examples might include saving for an automobile or special trip for the child. However, it’s important to note that income and realized capital gains within a custodial account are subject to tax in the year incurred, and the child will gain control of the account at the age of majority. Also, gifts to a custodial account are irrevocable, and any funds in the account are considered the student’s assets when applying for financial aid.[ii]
- What lessons do you want your child to learn about money?
Children certainly pay attention to their parents’ actions when it comes to managing money. Do you allow them to purchase the impulse items at the checkout? Do you explain that “Needs” come first, then “Wants?” Do you pass on the impulse items yourself? Financial behaviors, just like any other type of behavior, are learned. Setting good examples, such as prioritizing needs before wants, saving for a special item, and tithing for charity are excellent ways to help your child develop healthy financial habits.
Take care to discuss money with your children at an age-appropriate level, and bring it up often. There are also piggy banks you can purchase online to help your child visually understand the concept of dividing money for Spending, Saving, and Gifting. Whichever approach works best for you and your child, remember to be consistent with your actions and words to improve your child’s chance of successfully developing healthy financial habits. Your child will thank you later on in life (even if he/she doesn’t say it outright.) And, you can give yourself a Parent High-Five!
The views expressed herein are those of the author and do not necessarily reflect the views of Morgan Stanley Wealth Management or its affiliates. All opinions are subject to change without notice.
The 529 Plan Program Disclosure contains more information on investment options, risk factors, fees and expenses, and potential tax consequences. Investors can obtain a 529 Plan Program Disclosure from their Financial Advisor and should read it carefully before investing. Investors should also consider whether tax or other benefits are only available for investments in your home state 529-college savings plan.
Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley
Financial Advisors or Private Wealth Advisors do not provide tax or legal advice. Individuals should consult their tax advisor for matters involving taxation and tax planning. Information contained herein has been obtained from sources considered to be reliable, but we do not guarantee their accuracy or completeness.
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