How to prepare financially for the birth of a child
Are you financially prepared for a baby? Some couples have been planning ahead for years. For others, this level of preparation is unrealistic. Sometimes, pregnancy arrives unplanned and the next several months are a whirlwind.
Regardless of the time frame you’re working with, you’ll want to take certain steps to budget for a new baby and protect your growing family:
- Estimate the medical costs of pregnancy and delivery.
- Plan for short-term parental leave.
- Plan for a single-income household.
- Map out the expenses of raising a baby.
- Evaluate changing insurance needs.
These financial preparedness tips for new parents can help you have fewer things to think about once your baby arrives. That way, you can focus on enjoying that special and fleeting time when a tiny human will depend on you completely.Estimate the medical costs of pregnancy and delivery
As soon as possible, contact your health insurance provider to find out how your policy covers pregnancy and childbirth—specifically, what costs you’ll have to pay out of pocket under various scenarios.
For example, could you end up paying for genetic testing, an unplanned C-section, or an early delivery requiring neonatal intensive care? How do costs vary based on which doctors and hospitals provide your care? Now is also a good time to start researching and interviewing the pediatricians in your insurance network.
Along with your health insurance, two accounts with tax advantages can lessen the burden of these expenses.
“Depending on their employment status, new parents may have the ability to save pretax dollars via a flexible spending account (FSA) or a health savings account (HSA) through their employer and use those savings to pay for qualified medical expenses associated with the birth of a child,” said Lou Giangrande, a financial professional with Charter Oak Financial in Norwalk, Connecticut. “HSAs have higher contribution limits and offer more flexibility.”
The downside? HSAs require you to have a high-deductible health insurance plan, which may not be advantageous in a year of above-average medical expenses. However, you don’t need to have a high-deductible health plan currently to use HSA funds you may have saved up previously.Plan for short-term parental leave
Make sure you and your partner are up to date on how much paid parental leave, if any, your employers offer, as well as how much annual paid leave and sick leave you might be able to use immediately before and after your child’s birth. If you’re an independent contractor, small business owner, small business employee, or part-time employee, paid leave may not be an option.
While federal law in the United States requires covered employers to give qualified employees 12 weeks of family medical leave, that time off is unpaid and mainly serves to hold your job for you until you return to work. Some states offer more benefits.
In any case, it’s time to plan how to bridge the gap between how much paid time off you get, how much time you want to take off, and how much time you can realistically spend away from work given the demands of your job. Short-term disability insurance can provide a partial income during maternity leave. You may have coverage through your employer, or you may be able to purchase a private policy before becoming pregnant. If you have coverage through your employer, check to see how long you will have to wait until the short-term disability begins to pay and plan accordingly.
A dependent care FSA, if your employer offers this benefit, can provide a tax-advantaged way to pay for child care for parents who return to work.Plan for a single-income household
For many families, both parents either want or need to return to work after having a child. What about parents who plan to leave the workforce for a longer term?
“Creating and adhering to a monthly budget can be an effective tool to help you build that cash surplus up over time,” Giangrande said. “My clients have achieved an enhanced level of clarity by putting their expenses into a spreadsheet and tracking them. It's allowed them to more effectively pinpoint the ways in which they are overspending and target the areas in which maybe they can save better.”
In addition to cutting expenses and increasing your savings, choosing full-time parenting may mean planning to replace certain benefits if the nonworking parent can’t get them through their spouse's or partner’s employer.Map out the expenses of raising a baby
Your new baby will need many checkups during the first years of life. Talk with your human resources department or health insurance provider about how you will add your newborn child to your policy and what your new monthly premium and annual family deductibles will be. Having a baby makes you eligible for a special enrollment period, so you can sign up for health insurance or change your policy outside of the usual open enrollment dates.
Be mindful of insurance deductibles, coinsurance, and copays so that you’re prepared for these expenses. Many babies have challenges that require a visit to a specialist. Choosing in-network options whenever possible can keep costs down. Again, an HSA or FSA may help make these expenses more affordable. You’ll also be eligible for these 6 tax breaks for parents.
In addition to medical expenses, newborn and infant care requires a ton of supplies. But you don’t have to buy them all new or pay for everything yourself. Through baby showers and local parenting groups, you can acquire new and lightly used items for free or at a steep discount. Items that children outgrow quickly — like clothes, strollers, car seats, high chairs, cribs, baby monitors, and changing tables — can be especially easy to get this way.
Other supplies are best purchased new, including breast pumps, nasal aspirators, bottle nipples, changing pads, and crib pads. Sanitation is a concern for used items in these categories. Be sure to check with your health insurance carrier to see if you may be eligible to receive a new breast pump under the terms of your plan.
Make sure to check expiration dates, recalls, and the latest safety guidelines to ensure that none of your supplies are hazardous, especially car seats and cribs. Even shelf-stable items like baby food and formula can become dangerous if stored at the wrong temperature. No monetary trade-off to your child’s health or safety is worthwhile.Evaluate changing insurance needs
“Having a child means you have more to protect, plain and simple,” Giangrande said. “If something were to happen to you or your spouse, what does that mean for the family?” If you have not already evaluated your life and disability income insurance needs, now is the time.
- Disability insurance helps protect your family’s income if a working spouse or partner becomes too ill or injured to work.
- Life insurance helps make sure that the unexpected loss of a parent doesn’t cause a financial strain.
Giangrande said he educates his clients about the expenses a surviving spouse may face after an untimely death, then bases insurance recommendations on factors such as debt, income, and future education expenses so that they can decide how much coverage they want for their family.
Soon-to-be parents should also make sure their affairs are in order when it comes to their basic estate planning documents, including wills and powers of attorneys and beneficiaries. It’s especially important to designate a guardian for your child in case both parents become unable to provide care.
While bringing a new human into the world is a huge responsibility that comes with so many to-do tasks, try not to lose sight of the great reason you’re tackling these adult chores. Taking these steps will ultimately help you relax and make the most of your first weeks and months with your new baby.
When it becomes time to grow your family and make changes to your personal insurance policies and finances, the advisors at Smith Brothers are available to help you make the right decisions. You can start the conversation by calling (860) 652-3235, or visiting our website.