Raising a child on your own

Get your finances child-ready and make a plan for the future.

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Tips and to-dos from money guru Jean Chatzky

Bringing a child into the world means two things for your finances: You're going to be spending a lot of money on things you never expected to buy. And you have a new future to prepare for. (Not necessarily in that order.) Doing both on one income comes with extra considerations. Here's what you need to do first:

Use pre-baby window to prepare financially:

Babies—and children—are expensive. According to Babycenter.com, the average cost is $10,000 in year one alone. But the time leading up to the birth can be an opportunity to stash away more. You'll rarely have a more inspiring goal.

Baby-proof your budget:

That $10,000 figure is an average. It may be more or less for you depending on your child care plans, breastfeeding, and the availability of hand-me-downs from family and friends. What you want to figure is where the money is going to come from. So, redo your budget to come up with whatever your estimate tells you you'll be spending each paycheck on diapers, baby equipment, having a second person on the health plan, and the like. If you need to make any big changes (a bigger place, or a new car) try to make them before the baby arrives.

Initiate FMLA (Family and Medical Leave Act) leave and any maternity/paternity paid-leave process:

Plan for any uncovered days in advance. Check to see if your health plan offers any maternity perks like free in-home nurse visits or baby health care supplies. When you head back to work, you can use your Dependent Care Flexible Spending Account (FSA) —if you have one—to pay for child care on a tax-free basis. It may be helpful to consider boosting your contributions to a Dependent Care FSA now if you think you will need the child care in the same year. Otherwise, you will have the opportunity to contribute once you have your baby, within 31 days of the life event. The Dependent Care FSA contribution limit is $5,000 for heads of household.

Modify your health insurance to cover your child:

In almost all cases this must be done within 31 days of the birth of a child. If you don't have insurance—or can't afford it—each state also has a program that provides free or low-cost health insurance for children. Eligibility rules vary by state, but you can find out more about your state's program at insurekidsnow.gov. If you have a High-Deductible Health Plan coupled with a Health Savings Account (HSA), consider increasing your contributions to the latter to cover any additional out-of-pocket medical expenses you may have.

Consider general disability insurance:

Disability insurance can be important for single parents, especially if there isn't a second source of income to cover the gap (not to be confused with short-term leave or disability to cover paid time off when your baby is born). Check if your employer offers group disability coverage, often the most affordable solution. If not, price out a plan on your own. The goal is to replace at least 60% of your income in case you are ill or injured and unable work long-term.

Craft a basic estate plan:

Once you are a parent, you should consider a will not only to manage disposition of your assets, but to name a guardian for your child. You should also consider a living will, which tells the doctor or hospital whether you want life support, a health care proxy—which gives another person the ability to make health care decisions if you can't do it for yourself—and a durable power of attorney for finance, which allows another person to handle your finances for the same reasons.

Buy life insurance:

Once you have a child, you have a dependent and you need enough life insurance so that if something happened to you, a pool of money would replace that income and support the child through college graduation. Generally, term life insurance—which is a death benefit without an investment component—is the most cost-effective way to get the amount you need. It's best to use a life insurance calculator to determine how much you need, but a rule of thumb is to purchase 8× your income to cover college as well as pay off your mortgage and other debts.

Consider a 529 plan (but don't undermine your retirement):

You can't borrow for retirement, so putting 15% (including any employer match) of your income away for your future comes before saving for your child's college. Once you hit that mark, consider a 529 college savings plan. Some states will offer tax incentives for investing in their plans (you can research them at savingforcollege.com). Note: If you're going to put college before retirement, consider putting some money into a Roth IRA. It can be used for college or retirement penalty-free down the road.

Claim what's due on your taxes:

Being a parent may make you eligible for valuable tax exemptions, credits, and deductions. Claiming your child as a dependent (only one parent can do so) may reduce your taxable income. When filing your taxes, be sure to research the child tax credit, earned income tax credit, and the child care tax credit to see if you are eligible.

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Investing involves risk, including risk of loss.
This information is intended to be educational and is not tailored to the investment needs of any specific investor.
Views expressed are as of the date indicated and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author, as applicable, and not necessarily those of Fidelity Investments.
Jean Chatzky is not employed by Fidelity but may receive compensation from Fidelity for her services.

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