Often we see couples decide to change from a coveted status of a dual-income with no kids to a one-income family where one spouse chooses to stay home to raise the children. Not only is this decision a financial decision, but a personal one as well.
A family should consider what they want their life to be, and where career falls in importance. When one spouse decides to exit the workforce to stay home with the children, you should consider what that spouse’s career opportunities may be in five or more years.
On the financial side of this decision, a family needs to weigh the costs associated with both parents working against the earned income the working parent can bring in to the household. Consider the costs of child care, the need for additional household help for cooking, cleaning or lawn maintenance, and commuting costs. If one spouse is working merely to pay for child care, it may be a better economic decision to be a stay-at-home parent.
Once a family has transitioned to a one-income household, there are other financial areas that need attention. First, you may consider increasing your emergency reserve. Generally three to six months of living expenses is recommended; however, that largely depends on the family’s lifestyle, the stability of the breadwinner’s job, and how quickly either parent could become re-employed should the breadwinner lose his job. Most often, a single-income family situation lends itself to having a larger emergency reserve.
A growing family also needs to evaluate their need for insurance. While it is important to ensure life insurance needs are addressed for both spouses—most likely through term coverage—it is equally important to have disability coverage. Car accidents, health problems and an infinite amount of unfortunate occurrences can leave one unable to work and earn an income. Moreover, do not assume that long-term disability coverage through an employer will be enough. If the premiums are paid by an employer and were not included in gross income, any proceeds from the policy are taxable as income, leaving less money during a time when it may be needed most. Becoming disabled can be a more costly drain on a family’s finances than a premature death.
All new parents need to address their estate plan, updating Wills and beneficiary forms. First and foremost, new parents need to name a guardian for their child, should something happen to them. In this case, estate planning isn’t about minimizing taxes, but to ensure the proper powers of attorney for financial and health care decisions are in place should both parents become incapacitated.
As a family changes, taxes should also be addressed. With the birth of a child, most taxpayers are eligible for the dependency exemption, and some may be eligible for the child tax credit, depending on income. Additionally, if one spouse stops working, the breadwinner may be able to lower his withholding, providing more money for the family throughout the year.
Bringing children into the world is a big decision. It is important for a family to consider all of the financial aspects children can affect in your life. If you have questions on how a stay-at-home parent may affect your family’s finances, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
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