4 Personal Finance Tips for New Parents

Having a baby can change your life in more ways than you might imagine, and that includes your finances. Babies have a way of magically zapping their parents' financial resources as easily as they do their energy, and while it's harder to cope with the latter, you can protect yourself from the former by following these four tips.

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1. Create a new budget

Perhaps you had a budget before your baby arrived, and if so, that's certainly a good start. But now that there's a baby in the mix, those numbers are highly likely to change. From diapers to clothing to feeding supplies, caring for a new baby takes money. And then there's child care, which is a major point of financial stress for so many new parents. (On the plus side, you'll probably spend less money on nightlife, as your new baby will become your life -- so there's a bit of savings there.)

Once that baby arrives and you start to get a sense of how much you're spending, sit down and create a new budget that more accurately reflects your expenses. It'll help you track where your money is going and help you identify more cost-saving opportunities as you navigate life as a new parent.

2. Pad your emergency savings

As a general rule, most people need three to six months' worth of living expenses in an accessible emergency account. If you're behind on your emergency savings, or have only saved enough to hit the lower end of that range, now's the time to up your game and make every effort to save even more. This holds true especiallyif you're a single parent or one-income family. Imagine what might happen if you get laid off and lose your health insurance in the process. Not only will you need to figure out coverage for yourself, but you'll also have your child to worry about. The more you add to your emergency fund, the more protection you have from the unexpected.

That said, don't be discouraged if you can't contribute more than a few dollars each week. Even an extra $200 over the course of a year might go a long way if a true financial emergency strikes.

3. Open a dependent-care FSA

The cost of child care these days is so high that many new parents actually wind up getting priced out of returning to work. But if you are going to pay for child care, you might as well use some pre-tax dollars to cover your expenses, and that's where a dependent-care flexible spending account (FSA) comes in handy. Much like the healthcare FSA, a dependent-care FSA allows you to allocate up to $5,000 a year (assuming you're a couple filing jointly) in pre-tax dollars for eligible child care costs like day care, preschool, or summer camp so that you and your partner can work or look for work. If your effective tax rate is 25% and you put in the full $5,000, you'll save $1,250 on your taxes during the plan year.

The only catch is that dependent-care FSAs work on a use-it-or-lose-it basis, so if you put $5,000 into an account but only rack up $4,000 in expenses during the plan year, you'll forfeit that extra $1,000. But if you need full-time child care, there's a good chance you'll hit that $5,000 threshold and then some. The average American family currently spends over $10,000 a year for full-time day care at a center, and those who use nannies can pay three times as much per year. If you plan appropriately, a dependent-care FSA can be a solid source of savings.

4. Take advantage of tax credits

There are numerous tax breaks and credits available to new parents. A few notable ones include

  • the child tax credit, which, if you're eligible, gives you a $1,000 credit each year until your child turns 17
  • the earned-income tax credit (EITC), which currently gives low- to moderate-income families up to $3,359 per year for a single qualifying child
  • the child and dependent-care credit, which, depending on your child care expenses and income level, lets you claim up to $3,000 for a single child under 13

Furthermore, there are tax exemptions for dependents that can help ease the burden for many new parents. Provided you don't exceed the income limits for full eligibility, you can currently exempt up to $4,050 of your income thanks to your new baby.

Though it may be tough to focus on your finances during those early sleep-deprived weeks, a few smart money moves could put a fair amount of cash back in your pocket. And when you're spending $150 a month or more on diapers, it's fair to say that every little bit counts.

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