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Once your baby is home and maternity and paternity leave have come to an end, it is time to adjust your life to real parenthood. If you're interested in having a bigger part in your family's health care, now is a good time to take advantage of consumer-directed health care options in your health plan, if they are available to you. If your health insurance offers a Flexible Spending Account (FSA), consider signing up or increasing the amount of money you put into your account. This will help cover additional childcare expenses that you may not be anticipating. Using an FSA to cover childcare services is a great way to save money.
With FSAs, pre-tax dollars are set aside from your paycheck — up to $3,000 for medical and $5,000 for childcare. The account allows you to withdraw funds tax-free from the account to pay for these expenses. Be aware that if you are using your FSA to pay for childcare, you can't also claim a childcare tax credit. It is best to determine which option offers the greater tax savings.
It can be difficult to estimate how much money you need to invest in your FSA. Here are some steps to help you determine how to plan ahead:
During Open Enrollment each year, decide if you want to participate in an FSA, and if you do, make a list of monthly and annual expenses that you typically have during the year. These expenses include but aren't limited to things like:
- Chiropractic Treatment
- Contact Lenses/Saline Solution
- Co-payments
- Deductibles
- Eyeglasses
- Hearing Aids
- Hearing Exams
- LASIK Surgery
- Laboratory Fees
- Prescribed Medicines
- Psychiatric Treatment
- Routine Physicals
Ask your employer for a worksheet to help you itemize your expenses. If they don't have one, ask your FSA administrator or make your own list.
Add up the total monthly expenses and multiply the amount by 12 (for 12 months) to determine your plan year cost.
Add up the total annual expenses.
Then add the monthly and annual expenses together and divide this number by the number of pay periods. If you don't know the number of pay periods, ask your Human Resources director how many you have.
This amount is what you should put in your FSA. But, remember to be conservative in your estimation since you won't be able to get the money back!
Keep in mind any changes in family status, such as the birth of child, marriage or the death of a spouse.
Another option is a Health Savings Account (HSA), which is a tax-advantaged account for people with high-deductible health plans. Both you and your employer can contribute to this account. Your fund grows tax-free, and if you need to use the money for a health expense for either you or your child, you can withdraw the money tax-free. Your unused funds will roll over each year, even into your retirement.
Other financial planning considerations when expecting a child, if one was just born or adopted:
You'll want to get a Social Security number for your child as soon as possible — not because he or she is going to work soon, but because the number will entitle you to several tax benefits that will help defray some of the child-rearing costs.
You may also want to consider increasing your life insurance to provide for the future needs of the child in your absence. If you don't have adequate disability insurance, and many people don't, beef that up, too.
Write or review your will. You'll want to designate a guardian for your new child in your will in the event you and your spouse die. Discuss who you would like to care for your child, and then talk it over with the person to be sure he/she is willing and able.
You also may want the will to establish a trust to manage estate assets for your child should both of you die before your child is old enough to manage the inherited assets.
If you weren't saving or budgeting before, definitely start now because big-ticket expenses will grow with a new child (a larger home, a bigger car, medical expenses, etc.).