Parenting guide: How to financially prepare for a baby

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Hanna Horvath, CFP®

Hanna Horvath, CFP®

Managing Editor & Certified Financial Planner™

Hanna Horvath, CFP®, is a certified financial planner and former managing editor at Policygenius. Her work has also been featured in NBC News, Business Insider, Inc. Magazine, CNBC, Best Company, and HerMoney.

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Parenting is many things: rewarding, exciting, fulfilling. One thing it’s not? Cheap.

A recent Policygenius survey found that 42% of parents say they were not financially prepared to have a child. Whether you are expecting a new baby or are in the midst of raising a child, there are plenty of financial implications to consider, from saving for college to budgeting for child care to tax and insurance changes.

While there is no one way to raise a child, it’s important that you and your partner have a financial plan before expanding your family. Here’s a complete guide to money and parenting, with tips, tricks and advice for new and existing parents.

Before you have a baby

How to get your finances ready for a new baby

Before you have a baby, it’s important to plan ahead. Sit down with your partner and discuss your finances. Talking about money before a new baby can help avoid negative surprises.

One of the best ways to foster financial transparency? Building a budget together. There are plenty of apps to help monitor your spending, or you can go old school with this downloadable budgeting spreadsheet. Record any recurring fixed monthly expenses, like child care and mortgage payments, and discretionary spending. Track how much you’re spending and adjust when necessary.

Make sure you’re also saving for a rainy day. It’s important to have three to six months of expenses saved for emergencies. If you have any lingering debt, make a plan to pay it off as quickly as possible. Consider the avalanche method, which has you pay off debts from highest interest rate to lowest. It’s one of the fastest ways to get out of debt. Just make sure you’re making the minimum payment on all your accounts.

Preparing for parental leave

Next, prepare for parental leave. Read over your benefits package to learn how much time your job allows you to take to care for a new child.

According to federal data, fewer than one in five parents has access to paid family leave. If you need to take unpaid leave, factor that into your financial plan. We have a breakdown on parental leave laws by state.

Women who plan to get pregnant can get short-term disability insurance. Disability insurance provides replacement income if you become unable to work. A typical short-term disability policy only lasts a few months, and is beneficial if your employer doesn’t offer paid leave. You may also want to consider long-term disability insurance, which protects you for a longer amount of time — learn more here.

Picking the right health insurance plan when pregnant

There are important health insurance updates to make when you and your partner are expecting. Having a child qualifies you for special enrollment, during which you can add your child to your or your partner’s health insurance plan or switch plans. It’s best to do this as soon as possible.

Delivering a baby is expensive, even if you have insurance. Out-of-pocket costs vary widely across the country. Having an emergency fund comes in handy, but a good first step to getting quality care at an affordable price is to do your research. Confirm your obstetrician and the hospital where you plan to deliver are included in your in-network benefits. If you have a high-deductible plan, contribute the maximum amount to a tax-deductible health savings account. Any money left over will roll over into the new year.

Life insurance for new parents

Consider purchasing life insurance, if you haven’t already. Life insurance financially protects your family if tragedy occurs, helping to replace your income and covering expenses like a mortgage and childcare. Workplace life insurance coverage is often not enough, so it’s important that you and your partner get life insurance to completely cover your assets. If you already have a policy, ensure you have enough coverage for your expanding family.

According to the Policygenius Parents & Money survey, parents without private life insurance felt less financially prepared than parents with private life insurance. The same goes for parents with an estate plan.

So while you’re at it, make sure your estate is in order. Estate planning financially protects your new child if you should die — you can designate a guardian for them and pass down assets using a trust. Lastly, make a will, if you haven’t already.

After you have a baby

How to save on child care

Families often pay a large percentage of their annual earnings just to cover the cost of child care. Depending on the state, the average cost can reach nearly 18% of the state median income for a married couple, according to a 2019 report from Child Care Aware of America, a nonprofit advocacy group.

It can also often take days or weeks to find the right day care or babysitter. If you’re considering day care, do your research and sign up for waitlists as soon as possible, even before your baby is born. Church-based day care and in-home day care provide a more affordable alternative to regular day care. If you’re using a nanny, consider a nanny share or host an au pair to save on costs.

If you’re looking for additional ways to save, there are a number of options.

Consider claiming your child and dependent care tax credit, which allows you to deduct child care expenses for children under age 13. The credit is worth a percentage of your child care expenses with a limit of up to $3,000 for one child, and $6,000 for multiple children.

Thanks to the Secure Act, a retirement law that took effect on Jan 1., new parents can take penalty-free early withdrawals from their retirement accounts. But this method should be seen as a last resort as it depletes your retirement savings.

New parents can also save on childcare costs by contributing to a dependent care flexible spending account, which reduces your out-of-pocket expenses. Dependent care FSAs allow parents to pay for child care with tax-free funds. There are some eligibility rules to keep in mind — here’s how to set one up.

Setting up a 529 college savings plan for your child

While college may seem like years away, it’s essential to start saving as soon as possible.

In the Policygenius Parents & Money survey, only 20% of parents said they had opened a 529 college savings plan, which is designed to help parents save for educational costs. 529 plans are tax-advantaged, making it easier for parents to shoulder the financial burden of educating a child.

Almost every state offers its own plan. Some states also offer a tax break to residents who open and contribute to a 529 plan. Check out this state-by-state guide to learn more.

Image: Nastia Kobzarenko