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Hello all! Andy Hill here … We have a new guest post from Logan Allec from Money Done Right. Logan is a CPA, real estate investor, and full-time personal finance blogger. His article below shares how his life changed when he became a father. I can definitely relate! I hope you enjoy!
There’s no question that having a baby changed my life. I just wasn’t quite prepared for the impact it would have on my finances.
I was definitely prepared for all the expenses of having a newborn. However, I also found myself adjusting my long-term financial goals in a way I hadn’t expected.
If you’re a new parent — or are about to become one — you might find yourself thinking about new financial goals that probably weren’t on your mind before. You might also realize you have a different mindset when it comes to money.
Everyone’s experience is different, but here’s how the birth of my son changed my own financial goals.
New Long-Term Outlook
Before my wife and I had our baby, our goals were to save and invest and perhaps even be able to retire early. After all, if we could quit five or ten years before the median retirement age of 62, we’d have more time to see the world.
However, after we had the baby, we started thinking less about retirement and more about our child’s financial future. Simply raising a child until the age of 18 is extremely expensive, and we want to save even more money for further financial benefits like college and inheritance.
We’ve seen so many of our peers dealing with more debt and less income than their parents. A lot of them are relying on their families for financial support. We want the very best for our child and don’t want a situation like that to happen. We care more about his having financial independence than our own potential early retirement.
Focusing on Time over Money
It’s easy to get wrapped up in money when you’re single or in a relationship without children, but I was fine with losing some money to gain more time once I had a child. Money is still important, of course, but spending time with my family is now my top priority.
Without a child, many people focus on making more money so they can spend, save, and reach their financial goals. On the other hand, those goals will start to take a backseat to your family once you’re responsible for a new baby.
Money itself doesn’t have the same attraction—I know I need it to support my family, but I’m no longer interested in it for its own sake.
Relaxing My Savings Goals
Just as I’d rather spend time with my child than at work, I’d rather spend the money I earn on items for my family than save a certain percentage every month. I’ll always save whatever I can, but I’m no longer worried about hitting a specific savings target at the end of each month, and I’ve relaxed my budget significantly since my child was born.
Raising a child is incredibly rewarding, and I want to do everything I can to help him thrive and succeed. Whether or not those expenses are within my ideal budget is less of a priority than it was before he was born.
I’ve also come to realize that raising children also involves a variety of unpredictable expenses that make it more difficult to plan your finances in advance. So it’s still important to keep an emergency fund just in case.
Starting a Roth IRA
I stopped thinking so much about my own retirement goals once my child was born, but I started thinking more about his. You don’t need to worry about a new baby’s retirement fund for a while, but you can get their financial life off to a great start by helping them create a Roth IRA as soon as possible.
While Roth IRA contributions aren’t tax-deductible, they continue to grow tax-free and can be taken out without taxes or penalties once the account holder reaches the age of 59.5. The earlier your child starts to make contributions, the easier it will be for them to reach their retirement savings goals later on.
For example, if you pay your kids $50 a week to help out with your family business after school, that would add up to $2,600 each year. Since you’re covering all their expenses, they can put that money directly into a retirement account to start generating returns. Even seemingly small contributions can have a significant impact on the account’s lifetime value.
In addition to the obvious benefit of growing their Roth IRA, you’ll also have the opportunity to help your child learn more about retirement and start making long-term financial decisions. Financial literacy is a serious issue for younger people, so teaching your child about personal finance is one of the most effective ways to help them succeed.
Saving for College
You can also aid your child’s financial future by contributing to a college savings plan such as a 529 account. These state-sponsored savings accounts can let you save for your children’s future education while taking advantage of tax benefits.
Some 529s are prepaid tuition plans, which means you pay for college credits in the future at today’s prices. The hope is that the cost of tuition will continue to rise, saving you a good chunk of money when your kids head off to college.
Although the contributions you make to a 529 account aren’t tax-deductible, the earnings will grow without being taxed by the federal government, nor will you pay federal taxes when you withdraw the money from the account to pay for college, room and board, textbooks, and other approved expenses.
Note that you may have to pay state income taxes on these accounts. This varies by state.
The Bottom Line
I knew that having a baby would completely alter my life, but I didn’t anticipate all the ways in which my financial priorities would shift.
These are just a few of the most important changes I’ve noticed in my approach to money. Keep in mind that the experience of parenting is different for everyone—the important thing is to be open to change and accept that your financial and personal priorities will inevitably shift after having a baby.