Money milestones: getting ready to have a baby
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Having a baby can place financial pressure on new parents. There are short-term expenses, like diapers, formula, baby toys and clothes, and then there are big-picture concerns like health care, child care and education.
To plan for both immediate expenses and long-term goals, you should start preparing long before the due date. Here’s how to get your money ready to have a baby.
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If you’re employed and plan on returning to work after the baby is born, plan your time off now. Make sure you understand your employer’s parental leave policies, if they have them. If you have to take unpaid time off, you may need to return to work sooner to generate income.
The Family and Medical Leave Act (FMLA) allows covered workers to take unpaid, job-protected leave to care for a child. Eligible parents can take up to 12 weeks of unpaid leave in the 12 months following the birth or adoption of a child, without worrying about employer consequences or losing their health insurance coverage. Employees who have paid time off can use their leave concurrently with FMLA to protect their job and earn income while at home.
Perform a full evaluation of your finances and create a budget, or adjust your existing one. Look at the income you expect to earn after the baby is born, and compare it to your existing expenses including rent, food and bills.
Next, work in your estimated baby costs including diapers, food, clothes and other essentials. You might need to estimate for now (this calculator can help) and make adjustments once the baby arrives. If your budget becomes overextended, decrease spending in other areas so you can afford the necessities.
“If you need to, consider where you can start cutting back now to help yourself get used to your new budget prior to having the baby and/or consider how you can begin earning more,” said Drew Feutz, certified financial planner at Market Street Wealth Management Advisors.
Don’t have a budget yet? This parenting budget spreadsheet can help you get started.
The birth or adoption of a child qualifies you to sign up for benefits or adjust your existing plans via special enrollment. You should make a checklist of everything that needs to be updated so you have a plan when the baby arrives. For additional instruction, you may need to speak with your employer and insurance providers. Here are some things to consider:
Health insurance: There’s generally a grace period after the birth to place your child on your health insurance, but make it an immediate priority. Health insurance can help cover the cost of birth, subsequent hospital stay and follow up appointments. Evaluate your plan options to make sure it meets your family’s needs. Compare the premiums, deductibles, in-network versus out-of-network options with other available plans.
Life insurance: Life insurance can help make up for the loss of income or financial support when a parent dies. You may want to open a new policy or increase the coverage of your existing policy. The amount of coverage you need varies, but 10 to 15 times your income is a good rule of thumb. Policygenius can help determine how much coverage you need.
Disability insurance: Disability insurance can cover income if you become too ill or injured to work. There are both short-term and long-term coverage options. If you already have disability insurance, consider increasing your coverage or benefit period now that you have an extra mouth to feed.
“Disability insurance (especially long-term disability) is something that is extremely important, but that is either completely missing or severely lacking in most people’s financial plans,” said Feutz. “The Social Security Administration reports that 25% of today’s 20-year old workers will become disabled before reaching age 67.”
Don’t forget to update the beneficiaries on your insurance plans and other policies when necessary. Having up-to-date beneficiaries will help reduce bureaucratic red tape when a claim needs to be filed.
Employer benefits and tax-advantaged plans:
Withholding: You filled out a W-4 for your employer to determine how much would be withheld from your paycheck for taxes. Because a child can impact the tax credits and deductions you are able to claim, consider making adjustments to your withholding. Leaving your withholding as is could result in a larger refund, but you could likely use a little extra money in your paycheck at this time.
Flexible spending accounts (FSAs): FSAs allow you to set aside tax-free funds to use on eligible medical expenses for yourself and your dependents, up to an annual limit ($2,750 in 2020). You will lose any funds you don’t use in the plan year, but at minimum you’ll want to contribute enough to pay for the doctor’s visits, copays and other medical expenses.
Health savings accounts (HSAs): You can open an HSA on your own if you have a high deductible health plan. They are also used to pay for eligible medical expenses for yourself and your dependents. Unlike FSAs, these plans earn interest and investment earnings. Contributions, earnings and withdrawals are tax-free when used to pay for eligible expenses. Funds can be carried over to the next year.
Dependent care FSAs: These plans are offered through employers to help parents afford childcare that allows them to work. You can set aside funds tax-free to pay for child care expenses (up to $5,000 a year for individuals and married filing jointly, or $2,500 for married filing separately in 2020).
“If you will incur qualified dependent care expenses such as day care and before and after school care, then it may make sense to contribute to a dependent care FSA. If you know that you’ll incur dependent care expenses, and you’re eligible to contribute, then this is a no-brainer,” said Feutz.
An emergency savings fund acts as a cushion in case of unexpected events like job losses, vehicle breakdowns, home repairs, medical emergencies and more. It’s often recommended to save around three to six months’ worth of expenses (or more). Even if that seems unrealistic, saving something is better than nothing.
“Babies are expensive and unexpected things can happen. Without an emergency fund in place you could end up going into credit card debt,” said Feutz.
Set aside some money in your monthly budget for emergency savings. This will give you some peace of mind and quick access to cash whenever an emergency happens.
If both parents will continue working, deciding how to pay for child care can be one of the toughest financial challenges. Average child care costs are between $9,000 and $9,600 annually per child, with much higher costs in some parts of the country. Finding child care that fits your needs and budget will take time. You may want to evaluate options including in-home daycares, local daycare centers, nanny shares with another family and au pairs. As you search for the right care, don’t neglect these cost-saving strategies:
Dependent care FSAs: As mentioned above, these employer accounts let you pay for child care, tax free, up to an annual limit. You fund the plans up front, then submit your expenses for reimbursement.
Child and dependent care tax credit: You may receive a tax credit for child care expenses for kids under age 13. This credit is subtracted from your income on your tax returns.
Assistance programs: There are assistance programs that can help low-income families afford child care so they can work. Start with the Child Care and Development Fund and make sure to check your state programs as well.
You don’t have to start planning for your child’s college education before they’re born. But the earlier you start saving, the more money you can set aside for the future. One of the best options are 529 college savings plans, an investment vehicle offered by the states. They allow you to set aside funds to be invested until they are withdrawn to pay for tuition, room and board, school supplies and more. Contributions aren’t tax free, but earnings are as long as they are used for qualifying expenses.
Just don’t neglect your own financial goals in the pursuit of your child’s college fund. Emergency savings, retirement savings, homeownership and other personal financial goals should take precedence. Keep in mind that you can contribute to a 529 whenever you wish, and anyone - including friends and family - can make contributions to your child’s account.
“If you’re ready to begin saving for college for your child, then you should consider looking into your state’s 529 Savings Plan. If you prefer to have more flexibility in case your child doesn’t go to college in the future, then you could consider using a brokerage account or even a savings account,” said Feutz.
Creating an estate plan is another important step in the family planning process, and can be done with the help of a lawyer. Important planning documents include:
Last will and testament: This dictates what happens to your assets, property and minor dependents when you die.
Living will: Provides instructions for end-of-life care.
Power of attorney: Provides someone you trust the power to make legal and financial decisions on your behalf if you become unable to do so.
“Similar to obtaining life insurance, executing estate planning documents is something that most people would rather not think about and end up putting off,”. said Feutz. “Establishing these things now can cut down on a lot of headaches later,” and prevent drawn out court proceedings or other legal issues, he said.
Paid parental leave isn’t guaranteed in the United States, but some states have their own policies. Check out our state-by-state guide to parental leave.
Here’s a budget spreadsheet for new parents.
Learn the difference between an FSA and HSA here.
How to save for your kid’s education.
How to open a dependent care FSA.
Tips for saving on child care.
Image: Aleksandar Nakic
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