The Ultimate Financial Guide for New Parents and Those With Young Kids
Bringing a child into the world is one of life’s most exciting moments, but it’s also a major financial milestone. From managing healthcare costs to saving for your child’s future, new parents face many financial decisions that can feel overwhelming.
This guide is designed to help expecting and new parents navigate their financial responsibilities with confidence. Whether you’re trying to adjust your budget, optimize tax savings, or plan for long-term financial security, this comprehensive guide will walk you through the key financial moves you should consider, including:
✅ Protect your income with life & disability insurance
✅ Secure your child’s future with an estate plan
✅ Save thousands on childcare with a Dependent Care FSA
✅ Optimize healthcare expenses using an HSA & Limited-Purpose FSA
✅ Plan for potentially higher health insurance premiums
✅ Navigate Colorado’s new FAMLI+ paid parental leave
✅ Budget for childcare expenses
✅ Choose the right type of account for your child’s future with a 529 or UTMA
✅ Adjust your W-4 tax withholding to optimize monthly cash-flow and taxes
✅ Understand how your priorities and income-producing capacity may change upon having kids
Let’s dive into each of these critical areas.
1. Life & Disability Insurance: Protecting Your Growing Family
Life Insurance
First off, can I just say that Life Insurance is so oversold in today's world. Nothing boils my blood more than hearing devastating stories of a life-insurance salesman disguised as a financial planner selling permanent life insurance products like whole-life or universal-life to somebody who doesn't even need it. But truth be told, when you bring a financial dependent into the world, the conversation needs to be had about "What if something happens to you?"
Most people will need to offload the financial risk of dying to an insurance company. But not all. Some can either self-insure the risk (because they have the necessary assets to provide for their surviving spouse and child) or because they have an incredible support system in the way of family, friends, and community who would rally around the survivors' emotionally, financially, and holistically. But for most people, obtaining life insurance through their employer plus an outside, portable policy generally makes sense when bringing a financial dependent into the world.
While the general rule for life insurance coverage amounts are 10-15x your income, this quite frankly it misses the mark. Life insurance is a replacement for YOUR EXPENSES, not income. This is one of MANY reasons why knowing what you spend is a necessity to making informed decisions.
If you don't work with an independent, fiduciary, non-commission financial planner who can run customized analysis around how much you need based on your family's actual expenses (like the below visual), consider your surviving spouse's income, existing non-cancelable debts like a mortgage, childcare expenses, future education expenses, funeral costs, and general lifestyle expenses. If all else fails, the 10-15x your income rule of thumb is better than nothing.
While there are a myriad of free Term life insurance quoters out there to evaluate the cost of coverage - here's one you can use if you like. For example, a $1.5 million dollar 20-Year Term policy for a 35 Year Old, Non-Smoking Male with a Preferred Health Underwriting Class (2nd highest) comes out to ~$62 per month as of the time of this writing.
Disability Insurance
Disability insurance provides provision in place of your income if you can’t work due to injury or illness. The chance of becoming disabled for at least 3 months is 1 in 4 before retirement, so it’s critical for cash-flow replacement when you have a financial dependent.
Most employer disability plans cover only 40-60% of your salary, so many need to consider supplementing with an individual, outside policy to supplement the remainder. Just keep in mind - if you pay your Disability Insurance policy premiums with after-tax funds (typical with outside policies, NOT typical with employer-provided disability insurance), the disability benefit you would receive if you filed a claim would NOT be taxed. So while it will depend on your specific income and tax bracket, you likely don't need to replace 100% of your income, knowing that the outside policy's 'disability income' would not be taxed.
WARNING: Disability insurance can be a bit spendy because the odds of a claim before retirement are fairly high at 1 in 4, so the insurer takes on a fair amount of risk by supplying the policy and therefore has to be compensated for taking on that risk and paying out claims for 1 in 4 policies (and not to mention, insurance companies are a for-profit business ran by mathematical wizards called actuaries). You can't 'game' insurance - you can simply pay as little as possible for the amount your family actually needs, and hope you never need to file a claim :)
Again, there's plenty of free estimators out there, but feel free to use this one if you like.
2. Estate Planning: Securing Your Child’s Future
Estate planning isn’t just for the wealthy—it’s a must for parents. If something happens to you, an estate plan ensures your child is cared for by who YOU wanted, and makes sure they receive the inheritance YOU wanted them to have and in the manner YOU wanted them to have it -- rather the State you reside in deciding for you.
And while Estate Planning can sound super intimidating, most of it for new parents doesn't have to be (I'll unpack the 1 complex part below).
An Estate Plan is simply putting your wishes for various matters in writing (and notarizing as appropriate), giving it to the key people in your Estate Plan so they can reference and provide it to a Court should the need arise, as well as "funding your estate" (more on that below). The Primary Estate Plan Documents include:
1. Guardianship Elections: This is one of the most important decisions you’ll make as a parent. When choosing a guardian, make sure you pick someone financially stable who shares similar foundational values as you (after all, they'd take over raising your children!). It's also important to consider their age, health, and willingness to take on the role.
IMPORTANT NOTE: PLEASE make sure you have a conversation with them before naming them as your Guardians! It's also important to nominate both Primary guardians and also a Secondary guardian, in case for any reason the Primary guardians cannot serve in that role for some reason.
2. Will: A Will details how certain assets are distributed. NOTE: A Will only dictates how SOME assets are distributed. The primary assets that are NOT dictated by a Will are Retirement Accounts (401(k)'s, 403(b)'s, IRA's, Roth IRA's, etc.) and Life Insurance Policies -- these are referred to as non-probate assets, and pass by way of Beneficiaries on the accounts' themselves rather than a Will.
Assets/accounts that pass by way of a Beneficiary Designation do NOT need to go through probate-courts - they transfer directly to the beneficiary. Whereas assets that pass by way of a Will do need to go through probate court (your personal representative you designate brings your Will to probate court once you pass, and they "OK" the plan to distribute assets, assuming the Will is in good order and is legal).
2a. Children's Trust – Because minor's cannot own assets, a Children's Trust typically needs to be embedded in your Will (the Trust is technically an entity separate from your child and that entity [the Trust] owns the assets). The Children's Trust discusses how the assets your child would inherit are to be managed and when distributions are allowed from the Trust to the child.
3. Powers of Attorney ("POA")
3a. Financial POA: Assigns a primary person and secondary person to make financial decisions on your behalf if you become incapacitated (you can also choose to have it effective immediately - in other words, you don't have to become incapacitated for it to 'come to life').
3b. Medical POA: Assigns a primary person and secondary person to make medical decisions on your behalf if you become incapacitated (you can also choose to have it effective immediately - in other words, you don't have to become incapacitated for it to 'come to life').
4. Healthcare Directive – Specifies end-of-life care wishes such as life-sustaining treatment, and also HIPPA authorizations
The Often-Missed Final Step
So you got the Estate Plan all done, signed, and notarized - you're done now right? WRONG. There's 1 more CRUCIAL step, referred to as "funding your estate". Funding your estate simply means updating all of your financial assets and accounts to appropriately reflect the Estate Plan you just created.
As mentioned above, not all assets pass by way of a Will. So you need to update all non-probate assets (retirement accounts, life insurance policies, pension plans) to include beneficiar(ies), with appropriate naming conventions.
NOTE: The beneficiaries you designate on your non-probate assets do NOT have to match your Will. This can be done intentionally to optimize how your assets pass. A quick example would be somebody with a desire to pass 25% of their assets to charity upon their death. Rather than naming 25% to charity in your Will and making charity a 25% beneficiary on your Traditional 401(k), you could put a charitable organization or Donor-Advised Fund as the 100% Beneficiary on your 401(k), then neglect naming charity in your Will. Structuring your estate plan in this manner reduces the amount of taxes you'll need to pay, as if you had named your children the beneficiary on your Traditional 401(k), they would have to pay income taxes on the withdrawals (whereas charity would pay 0%, since they don't pay taxes). Not to mention the rules surrounding inheriting retirement accounts can be very complex, especially when a Trust is named as the Beneficiary.
The 1 Potentially Complex Aspect of Your Estate Plan
Remember above when I said there's 1 complex part to New Parents' Estate Plan? It's this: Appropriately naming your child as a beneficiary on your non-probate assets (retirement accounts, life insurance policies, pension plans). Recall - minors cannot own assets, so it's a common pitfall to see minor children directly named as a Beneficiary on a retirement account or life insurance policy. Instead, it's typically advisable to name the Children's Trust or to name a UTMA for the benefit of the child. When inputting the nomenclature for the beneficiary, it's important to be specific in the naming convention to avoid all doubt about the beneficiary of the account. An example could be: "Testamentary Children's Trust for the benefit of Son 1 as specified in Article IV, Section II of my Last Will & Testament". If you have not gotten around to implementing an Estate Plan with a Will and embedded Children's Trust, a potential short-term workaround would be to open a UTMA for the child, and name that UTMA as the beneficiary on the account.
3. Enroll In a Dependent Care FSA: A Tax-Smart Way to Save on Childcare
A Dependent Care Flexible Spending Account (FSA) is a special type of account you setup through your employer once you have your child through your benefit-elections and allows you use up to $5,000 per year of pre-tax dollars to pay for childcare expenses.
Eligible childcare expenses include things like daycare, preschool, nannies, babysitters, and even summer camps.
Not only do Dependent Care FSA contributions avoid federal and state income taxes, but they also avoid Social Security taxes (6.2% if your income is under $176,100) and Medicare taxes (1.45% - 2.35%, depending on your income)! For a dual-income married couple in Colorado where each spouse earns $150,000 per year, the tax savings from contributing $5,000 to a Dependent Care FSA would be ~$1,800 (36% tax savings).
If you as an employee are "highly compensated" and earn over ~$155,000, your tax deduction is limited to $2,500 per year. The other important thing to know is Dependent Care FSA's are "use-it or lose-it", meaning funds must be used each calendar year and don't rollover to the next year. However, given the average cost of childcare it shouldn't be overly difficult to use the full $5,000 limit each year ($417 per month).
4. Couple Your HSA with a Limited-Purpose FSA to Save Even More on Taxes
Check out this short 3-minute video on how to save money on taxes by coupling a Limited-Purpose FSA with your HSA:
5. Understand How Your Health Insurance Premiums Will Change
Oftentimes during DINK life (dual-income no kids), each spouse will be on their own health insurance plan through their respective employer. And oftentimes, employers will fully pay for Employee-Only health insurance coverage (meaning your cost is $0), but once you upgrade to either Employee + Children or Family coverage, you will need to start paying a portion of the health insurance plan premiums.
It's not uncommon to see Family health insurance plans cost >$2,000 per month. If your employer covers half the cost, that's still an extra $1,000 per month expense you will have to account for once you have a kid (most employers allow you to pay health-insurance premiums with pre-tax dollars, so most families can knock $200-$300 per month off that cost though).
It will be important to compare both spouse's health insurance plans (if both will plan to continue working), and re-evaluate your health insurance coverage for the entire family. You can add your child to your health insurance plan once they are born as you qualify for a "Qualifying Event" when they are born, even if it doesn't line up with your open-enrollment period.
6. Colorado State FAMLI+ Leave (Became Effective in 2024)
If you live in Colorado, the Family and Medical Leave Insurance (FAMLI+) program now provides paid parental leave, offering up to 12 weeks of paid leave (16 weeks for pregnancy complications). This time can cover childbirth, adoption, or caring for a sick family member.
If your employer offers you 4-weeks of fully paid leave, you could still get an additional 8-weeks of leave by taking the state-sponsored FAMLI+ parental leave. While the amount you can receive depends on your income, oftentimes the wage-replacement is 60%+. Keep in mind FAMLI+ benefits are NOT taxable for state-income tax purposes, so be sure to tell your tax preparer about this, as the 1099-G sent from the state of Colorado won't specify it's not taxed for state-income tax purposes. As a quick example, if you received $10,000 in state-paid parental leave, that's $440 of unnecessary tax you're paying if this manual-step is missed!
The Colorado FAMLI+ program is funded through payroll deductions (0.45% of wages).
As with any upcoming leave, be sure to coordinate with your employer early so all parties can plan accordingly from both a professional and financial perspective.
7. The Cost of Childcare: Planning for a Major Expense
Childcare is often one of the biggest expenses new parents face. In my experience, I often see daycare expenses run between $2,000 - $3,000 per month, per child. And while there are ways to save on childcare such as using a Dependent Care FSA or leveraging grandparents part-time, this is typically a major expense that needs to be reflected in your cash-flow planning and retirement-savings strategy.
For many households, the cost of childcare may prompt conversations around life-changing courses of action, especially around vocation. If you have 2 kids in daycare at $2,000 per month, that's $48,000 per year of after-tax income that needs to be made up for to justify a 2nd spouse working (likely an equivalent of earning $60k - $70k per year of gross income, depending on your household income / tax rate).
For many households, a 'hybrid' approach is feasible too, depending on the income-level and flexibility of both spouse's jobs. Just be sure to have these conversations amongst yourself, with your financial planner, and with your employer as early as possible. Many daycares have 6 or even 12+ month wait-lists, and part-time daycare can be more challenging to come by that meets everybody's scheduling and financial needs.
8. Saving for Your Child’s Future: 529 Plan vs. UTMA
529 Plan
A 529 Plan is a state-sponsored, tax-advantaged education savings plan. While an imperfect analogy, think of it like a Roth 401k Plan in that you pay taxes first on any dollars you want to put in (i.e. you contribute after-tax dollars), you select from a pick-list of available Investment Funds within the 529 Plan, and then your money grows tax-free within the 529 Plan and can be withdrawn tax-free, as long as it is used for qualified education expenses.
If you live in a state with income-tax (like Colorado), some state 529 Plans offer a state-income tax deduction for contributing to your home-states 529 Plan. And certain states (like Colorado) have matching programs as well. If you live in a no-income tax state (such as Washington, Texas, etc.), you'll want to prioritize a plan with low-cost, sound investment options (we tend to like Utah's My529 Plan), and also if you plan on sending your kids to non-public school K-12, pick a state that allows for the $10,000 per year tax-free withdrawal for K-12 tuition expenses (Colorado is NOT one of them).
An advanced 529 concept is who the owner of the 529 Plan is. The FAFSA recently changed its policies so that now, grandparent-owned 529 Plans are NOT counted against you when it comes to applying for student aid. Of course, this needs to be weighed with items discussed above like matching programs, tax-savings, investment fund lineup, etc.
UTMA
The Uniform Transfers to Minors Act (“UTMA”) is a custodial account that allows adults to irrevocably transfer money to a minor while maintaining control over those assets until the minor reaches the age of majority in their state (typically 21). At that time, the UTMA will be owned by the child directly and transferred into the child (now adult’s) name.
UTMA’s can be used for any purpose that benefits the child -- they are not restricted to education-related expenses like the 529 Plan is. UTMA's are like a Roth IRA in the sense that you can invest in any publicly traded stock, bond, ETF, or mutual fund. However, they are not ALWAYS tax-free like a 529 Plan, come with more complex tax-reporting requirements, and are less advantageous when applying for collegiate financial aid for your child.
9. Adjusting Your Tax Withholding on Your W-4
If your household gross income is below $440,000 (married filing jointly) OR both spouses work (dual-income family) and you incur childcare expenses, your tax bill will be LOWER by having a child.
Specifically, there are 2 main credits you may be eligible for:
1) Federal Child Tax Credit – If your MAGI (effectively, your household gross income on your tax return) is below $400,000 (married filing jointly), EACH child you have will reduce your taxes by $2,000 (although if this Credit pushes you into getting a tax refund, you'll only reap $1,700 per child). If your household income is above $440,000, you unfortunately won't qualify for this credit.
2) Child and Dependent Care Credit – For those who make over $43k household annual gross income, you can multiply your childcare expenses by 20% (up to $3k if you have 1 child, and up to $6k if you have >=2 children). For example, if you have 2 kids, and paid $24,000 in childcare expenses during the year, your eligible expenses for the credit are $6,000, then multiply that $6,000 by 20%, effectively reducing your taxes by $1,200 ($6,000 x 20%). Keep in mind if you participate in a Dependent Care FSA, the amount you used from the Dependent Care FSA (say $2,500), reduces the eligible-expenses for the Child and Dependent Care Credit. Continuing with the prior example, the eligible childcare expenses get reduced from $6,000 to $3,500 ($6,000 eligible expenses minus $2,500 from Dependent Care FSA), then multiply the $3,500 by 20% to arrive at reduced taxes of $700 via the Child and Dependent Care Credit (plus the tax-savings you reaped from the Dependent Care FSA, of course).
How to Update your W-4
As soon as you know you'll be having a child, go into your payroll software (ADP, Paycom, etc.) and update your W-4 digitally therein, and update it for however many dependents you will have, so your employer will withhold less taxes throughout the year and your paycheck will be higher each time you get paid, effectively smoothing out your income throughout the year and avoiding giving the government a 4%+ interest-free loan and enhancing the predictability of your cash-flow each month.
SIDE NOTE: If you are in a large refund or owing position each year, update your W4 beyond just checking the box for a Dependent! You can add extra withholding (if you owe a lot of taxes each April), or add extra deductions (if you are always getting a large refund).
10. Shifting Priorities: Time, Energy, and Money
It's very challenging to predict how each of us will respond to parenthood. Even if you have 1 child already, the addition of a 2nd may have a bigger impact on your time, energy, or priorities than expected (it did for me personally). You don't know what you don't know. Because of this, as you're growing your family, I think one of the most underappreciated aspects of financial well-being is having flexibility (what I call "metaphorical call options"). And flexibility is achieved by preparedness, discipline, and most of all - living with financial margin. Check out this short 90-second video for what I mean.
When you have kids (especially young ones), it's very likely your capacity for your vocation and income-enhancing tasks like professional credentials, social events, and discretionary time will diminish. It doesn't mean you love your vocation any less; it's because you're HUMAN. We only have a finite amount of time and energy and quite frankly, little kids require a lot of it, giving us less to offer to our careers and accordingly, our incomes. And while it's not forever, it's definitely a season that is long enough where you need to have the proper financial foundation and habits in place to successfully navigate these new waters and come out better and stronger on the other side.
Final Thoughts: My Friend TED
When it comes to deciding whether to DIY or Outsource a professional service, I encourage people to ask themselves "How good of friends am I, or do I want to be, with TED?"
TED is:
Time
Energy & Expertise
Desire
If you look at the above 10 points in this guide, do you have the Time, Energy, Expertise, and Desire to carry them out excellently, strategically, and accountably? If so, you are a great candidate to DIY, and I hope this guide was extremely helpful for you!
And if not, you could be a great candidate to consider partnering with an independent, fiduciary-at-all-times, fee-only CPA and CERTIFIED FINANCIAL PLANNERTM who specializes in helping new and growing Christian families in their 30's and 40's. Our services are akin to a self-driving car (think Waymo) - you help us understand where you want the car to go from the passenger seat, but we take care of optimizing the route there, navigating traffic and the unexpected, and execute on the Plan.
Specifically, we integrate the following services to help our clients maximize their financial resources and impact during their life: cash-flow systemization and automation, student loan repayment strategies, tax planning (and we will file your taxes for you too!), investment strategies & ongoing management, company benefits optimization, education planning, charitable giving strategies, estate planning (including the cost to get an estate plan and fund your estate!), insurance planning, retirement planning, and more - all for ONE TRANSPARENT FLAT-FEE.
You’ve worked incredibly hard to get to this point, and now is the time to be intentional and strategic about your financial future. The decisions you make during this next season of building and growing your family will have a lasting impact on your ability to build wealth, achieve financial freedom, and make a meaningful difference in the world.
If you want a trusted guide in this journey, we’re here to help. Book a complimentary 60-minute Discovery Meeting to collaborate on optimizing your financial puzzle pieces and explore if we'd be able to add value in excess of our fee for your specific financial situation.
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