A Pre-Pregnancy Financial Planning Guide: Money moves for prospective parents
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Dreaming of tiny rompers and knitted baby booties? Before you start a family, take some time to put your financial house in order. Raising a kid to age 17 costs middle-income parents a whopping $233,610, according to the U.S. Department of Agriculture. That’s not including the hospital bill or the cost of college tuition.
Child care, health care and education are three of the biggest expenses a prospective parent faces, according to Steve Branton of Mosaic Financial in San Francisco, California.
“Developing a policy for each as a couple is a must,” he says.
Start these money conversations before getting pregnant so you and your partner can begin the next stage of your life on the same page. Here’s a guide to the major financial tasks to tackle when you’re getting ready to start a family.
If you lived in, say, Finland, you would get up to three years of paid maternity leave as a new mom. Here in the U.S. you’ll likely patch together a quilt of maternity leave, unpaid family leave, vacation days and personal days in the first months of your baby’s life.
Once you return to work, there’s the cost of daycare or babysitters to consider, unless it’s affordable to have one parent stay at home.
“Review your time off policies at work — paid and unpaid — and line up your daycare if needed,” says Joyce Streithorst of Frisch Financial in Melville, New York. “Then review your numbers carefully to make sure you budget for everything.”
The U.S. is the only developed country that doesn’t require employers to offer paid maternity leave, though four states — California, New Jersey, New York and Rhode Island — and Washington D.C. do have such mandates. Washington state is slated to implement a paid family leave program in 2020.
Still, only 12% of private sector workers have this benefit, according to the Department of Labor.
Companies set their own paid leave policies, so ask your human resources department:
Does the company offer leave for new moms? Dads?
Do you get paid and how is that income calculated?
How many vacation or personal days can you use?
Could you roll unused days to the next year to use when your baby is born?
Another potential way to get paid leave: Disability insurance, which replaces a person’s income for a period of time if they are too ill or injured to work. Employer-sponsored short-term disability insurance often covers birth, whether by vaginal delivery or caesarean section and also grants claims for postpartum. Income is typically covered for six weeks after a vaginal delivery and eight weeks after a C-section.
Long-term disability insurance doesn’t cover birth, but will provide coverage if you experience complications during pregnancy. Your employer might provide some long-term disability insurance, but most people with policies have purchased them from a private insurer. (You can learn more about disability insurance and pregnancy here.)
The catch with both types of disability insurance: You must have the policy in place prior to becoming pregnant to be eligible.
“Before you start trying to have a baby, check your benefits at work,” says Jim McGowan, a fee-only financial planner with Marshall Financial Group of Doyleston, Pennsylvania.
Ask your human resources representative:
Does the company offer short-term disability coverage?
Is pregnancy and postpartum recovery included in the policy?
What percentage of income does the policy cover?
How long would you have to be enrolled to be covered?
“Become friends with your HR person sooner rather than later,” McGowan says. You may be able to gain valuable benefits and extra paid time off with your new baby by checking a certain box on your benefits form or waiting a certain number of months to become eligible.
Paid leave, if any, is often inadequate. You or your partner might need to take unpaid leave to stay at home with your child for the first few months after birth.
The Family and Medical Leave Act entitles you to up to 12 weeks of unpaid leave, with your job and group health benefits protected. FMLA applies at companies with 50 or more employees. It kicks in after 12 months at your job, after at least 1,250 work hours.
If mom or dad wants to stay at home, consider what a one-income budget looks like. Start tracking your monthly expenses. Add baby necessities like diapers or formula. Subtract any expenses you might cut (bar tabs? ski weekends?). Crunching these numbers will help you see how feasible a full 12 weeks of unpaid leave is.
An app like Mint or You Need a Budget can help you make a monthly financial plan. So can this simple budgeting spreadsheet we put together.
For 63% of parents, child care costs play into major career decisions like becoming a stay-at-home parent, downshifting to a part-time job or asking for a flexible work schedule. That’s because it’s enormously expensive: One-in-three families spend 20% or more of their household income on child care, according to Care.com.
If Grandma’s not on call for free babysitting, will you use daycare or hire a nanny? Research prices at care providers in your area, and ask friends for recommendations so you’ll have a realistic sense of the cost. Unfortunately, many parents do end up spending more than they budget for child care, Care.com found. In 2016, daycares used by the site’s members averaged $10,468 a year for infants, while hiring a nanny for one child was $28,905.
Out-of-pocket costs for child birth vary wildly, depending on the hospital and your health insurance. A little homework before getting pregnant may save you a bundle on the hospital bill.
Hospitals charge an average of $12,290 for vaginal deliveries and $16,907 for C-section deliveries before health insurance and in-network discounts are applied, according to FAIR Health, a nonprofit health insurance data organization.
You can get a quick estimate of hospital charges in your area — to the patient and insurance company combined — by using FAIR Health’s online cost estimator. It shows estimates for uninsured/out-of-network patients and in-network insured patients. The dollar amount is not all on you, but you need to speak to your health insurer to understand your responsibility.
With this reference point, have a conversation with your insurance representative.
“Ask what your out-of-pocket cost would be for the birth and if they have recommendations for you to save,” says Monica Dwyer, a mom and a wealth adviser with Harvest Financial Advisors in West Chester, Ohio. For instance, you’ll want to make sure the hospital and all health care providers are in network.
Don’t expect total clarity.
“I could never get real info from my insurance company,” says Patrick Amey, a dad and a financial planner at KHC Wealth Management in Overland Park, Kansas. “They have resources that give you estimates in your area, but they were ranges like $4,000 to $12,000. Not incredibly helpful.”
His advice: Save up the amount of your deductible, how much money you're expected to pay out-of-pocket before your health insurance kicks in.
“In all likelihood, you will hit your deductible so the exact dollar figure of the birth isn’t incredibly relevant,” says Amey.
Alternately, assuming you’re not pregnant yet, consider switching to a different health care plan at your next open enrollment period. For each plan your company or state health care exchange offers, compare the pregnancy and child birth coverage and out-of-pocket costs. HMOs typically have low costs for child birth.
Be aware the birth of a child is a qualifying event for changing your health insurance. (Pregnancy is not.) If you choose a more-expensive health plan with lower out-of-pocket costs for pregnancy and child birth, you would have the opportunity to change back to a less-expensive plan after the baby comes.
Learn more about health insurance and pregnancy.
If you are stuck with a high-deductible health plan, you can at least get a break by opening a tax-advantaged health savings account.
“Focusing on getting your HSA balance up to cover medical costs of the delivery and initial costs associated with your baby in a hospital setting will be your best bet,” says Amey.
Divide your deductible by 40 to see how much to save each week during nine months of pregnancy. For example, if it’s $2,000, plan to sock away $50 a week to meet the deductible.
College costs today run more than $200,000 for four years of private college or $100,000 for in-state public college, according to the College Board. To get a jump on saving, many financial experts recommend opening a 529 college savings plan as soon as your kid is born and has a Social Security number.
529 plans contributions get invested in stock and bond mutual funds. Earnings on the investments are tax-free as are withdrawals for education-related expenses.
If your employer matches 529 plan contributions, put in at least enough from each paycheck to get that free money from day one. Starting early means your investments have more time to grow and compound.
“If you set up the 529 plan with a small amount, you can direct generous grandparent gifts there,” says Kristin Sullivan, a fee-only financial planner in Denver, Colorado.
Parents can use that money for elementary or secondary school tuition, up to $10,000 per year per child.
“With the new tax law, funds in 529 plans now can be used for K-12 expenses,” says Satoru Asato, president of McNellis and Asato, in Bloomington, Minnesota.
We’ve got a full explainer on setting up a 529 college savings plan here.
Life insurance allows you to provide for the people who depend on you if you die while they're reliant on your income or care. A policy pays a tax-free lump sum to the beneficiary (usually a spouse or partner) in the event of the policyholder’s death, which they can use to cover current expenses, like the mortgage, auto loan or utility bills.
A life insurance payout, known as the death benefit, can also be used by the beneficiary to cover future expenses, like (you guessed it) the cost of your child's college education. In fact, most families calculate this expense when estimating the amount of coverage they need.
The life insurance application process can take up to six to eight weeks. Rates go up alongside age and the development of any health conditions, so it’s better to apply sooner, rather than later, if you're planning to have a family.
Also, applying for life insurance while pregnant can lead to higher premiums, especially if you’re trying to get coverage in your second or third trimester. That’s when health conditions related to pregnancy, like gestational diabetes or high cholesterol, are most likely to present themselves.
We can help couples compare and buy life insurance policies here.
Completing these financial tasks lays a strong foundation for your future baby’s child care, health coverage and education expenses. Of course, your list of responsibilities as a parent won’t ever end. Once the baby’s born, you’ll need to make a will, appoint a guardian, add or augment life insurance policies and on and on. Still, working through these initial important decisions as a couple will help you communicate well about money matters as you grow your family.
Want to learn more about managing money and protecting your loved ones? Visit our Family Financial Planning Learn Center.
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