If you've just had a child, you are no doubt excited and happy, though you could probably use a little more sleep. And if you're like most new parents, you have big dreams for your little ones. But if you're going to help make those dreams come true, you're going to need to make the right financial moves. The best time to start is now.
To begin you'll want to evaluate your life insurance. When you first started out in the working world, you were only looking after yourself. You probably did not need a whole lot of insurance. After you're married, though, you'll want enough insurance to at least help your spouse pay off your mortgage. Once you have children, you'll add a new dimension to your life insurance needs, because you'll want to have enough coverage to educate your kids. You perhaps want to set them up in an adult life.
How much insurance does that take? There's no one "right" answer for everyone. You will have to consider a variety of variables, such as your spouse's income, how many children you have, what type of college - public or private - you'd like them to attend and how much you'd like to give them to begin their working lives.
Beyond obtaining enough insurance, what other financial moves should you make upon the addition of a child? Consider setting up a college fund. As you may know, college has become quite expensive in recent years. In fact, for the 2006-2007 school year, it costs, on average, $16,357 for students attending four-year public colleges and universities, according to the College Board.
If college costs were to rise 5 percent every year, today's newborns can expect to pay about $162,000 for four years at a public school. In short, you've got quite an incentive to save for college early and often.
In building a college fund, the earlier you start saving, the better. Fortunately, you have some attractive savings vehicles available, such as a Section 529 plan or a Coverdell Education Savings Account, both of which can offer tax-advantaged ways to save for college. To determine if these plans are suitable for your needs, consult with your financial and tax advisers.
In addition to a college fund, you may want to open a separate investment account for your new child. You can set up a custodial account as established by either the Uniform Gift to Minors Act or the Uniform Transfers to Minors Act.
In an UGMA or UTMA account, the first $850 of annual investment income is tax-free to a child under 14, and the next $850 is taxed at the child's rate. Any amount more than $1,700 will be taxed at your rate. Keep in mind, though, that once you make a gift to your child, it is "irrevocable" ,which means you no longer have any legal access to, or authority over, the funds. Before proceeding with an UGMA or UTMA account, make sure to consult with your tax adviser.
When you have new children, you have a lot to think about. Just make sure one of the things you're thinking about is their financial security.
Deborah Alonzo is a financial advisor with Edward Jones, 413 Canal St., New Smyrna Beach. Phone (386) 423-3400.