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Are You Financially Prepared for a Baby?

December 28, 2022

Are you expecting? Congratulations! Don’t forget about finances amid the excitement. Learn more about childcare, health insurance considerations and more.

Can your finances handle a baby? There are several things you should consider before your bundle of joy arrives. This includes childcare considerations, reviewing your health insurance, starting an emergency fund, creating a budget, and more.

Here are seven financial considerations to address with your partner before approaching parenthood.

7 Financial Considerations Before Having a Baby

  1. Childcare – Making decisions on childcare can be challenging and expensive for many families. Will there be one parent who will take care of the child, or is there interest in hiring a nanny or attending a daycare center? Does your employer and/or your partner’s employer offer maternity or paternity leave? Is it is paid or unpaid? These are all important questions to consider. For one child, the current weekly rate for a full-time nanny averages about $600; and $300 weekly for a daycare center. It is important to discuss all options when choosing which environment will be best suited for you and your family.

  2. Estate Planning –In the beginning, your to-do list will seem endless, but one important box to check off early on is your estate planning. Arranging your estate on behalf of your child will cover all areas in the unfortunate occurrence of death or incapacitation of either you or your spouse. Here are five things to do to prepare:
    1. Decide on a guardian- In your will, you can name a guardian for your children, allowing you to select the person who shares your parenting values and who is financially and mentally able to raise your child into adulthood.
    2. Set up living documents- This may involve creating a trust and funding so that your guardian can afford to raise your child
    3. Update beneficiaries- You will likely need to revisit your estate plan to add your child as a beneficiary. 401(k)s and IRAs require you to specify who will inherit your assets, and life insurance policies require you to name a beneficiary who will be receiving your death benefit. Most individuals name their partner as primary beneficiary and their children as contingent beneficiaries.
    4. Revisit your life insurance policy- Life insurance will ensure your child is cared for in the event of your death or incapacitation, up until adulthood (can even be used to fund a college education). Term life insurance makes sense for a lot of parents. Also known as pure life insurance, term life insurance is life insurance that guarantees payment of a death benefit during a specified term (10, 20, or 30 years for example). Once the term expires, the policyholder can either renew for another term, convert to permanent coverage, or allow the policy to lapse. A general rule of thumb when deciding the amount of term coverage you should purchase is to consider the balance of your mortgage, annual child care expenses if one parent is gone, and the cost of college. Term insurance is relatively inexpensive for individuals who are young and healthy.
  3. Health Costs –According to the Peterson-Kaiser Family Foundation (KFF), giving birth costs $18,865 on average. While health insurance will likely cover most of that cost, the average out of pocket cost is $2,854. Depending on the specifics of your health insurance plan, out-of-pocket costs for labor and delivery can include a health insurance deductible, copayments and coinsurance. If you have already reached your annual deductible, these out-of-pocket costs will be lower. Additional costs can include childbirth classes, prenatal vitamins and breastfeeding equipment, which are generally covered by insurance as well. Costs typically not covered by insurance include equipment charges for mom and baby and certain delivery room items. You will also want to be prepared for postpartum expenses. You should review your healthcare policy to get a handle on what expenses you may be facing.

  4. Start an Emergency Fund – It is never a bad idea to have a rainy-day fund, as there may be unexpected events that occur in your child’s lifetime. No child is accident-proof, and some mishaps may be expensive. Time cannot be predicted in such circumstances, so it is safe to save at least three to six months’ worth of living expenses that would cover the necessities. If the emergency fund has a remaining balance when your child turns 18, you can transfer the remainder into a college fund. If you and your partner plan to have another baby in the future, align your emergency savings to have extra for the beginning of their birth. Since there will be an increase in monthly expenses, it is important to account for the big change.

  5. Create a Budget – In the midst of all the excitement in welcoming your new baby into the world, it is very easy to overspend. It may be beneficial to consider planning a monthly budget around baby expenses, including perishable items, safety items, and other necessities. Certain ages may be more expensive than others. In the beginning, there will be big purchases such as car seats, bassinets, food/formula, clothing, toys, and endless boxes of baby diapers and wipes. Keeping a clear focus on the necessities will keep you away from overspending on disposable, trendy baby items and help save for future endeavors.

  6. College Savings Plan – Hoping to fund your child’s education? While it may seem far away, it is never too early to begin a savings account for the future. One action you can take is opening a 529 Account, which can be done before their birth. You or your partner can designate yourselves as the primary owner and beneficiary, and then begin contributing to your child’s future college plans before their arrival. Some couples set a specific amount of money aside each week or month from a paycheck, which directly deposits into that account. For others, college may not be considered as early on. The savings plan can always be used to pursue another occupation or support an entrepreneurial dream.

  7. Plan for Your Retirement – With all the excitement of planning for your child do not forget to keep planning for your own retirement. It will come faster than you think! In broad terms, you should allocate your income into three buckets: (1) current living expenses, (2) college for your children, and (3) your retirement. If you can spend 1/3 on each, you will be in good shape throughout your life.

Starting your family is an exciting milestone and having your finances in check frees up time to soak in time with your little ones. Read more about how you can plan for life’s major milestones in our whitepaper, “Financial Planning for Every Stage of Your Life”.

Questions? Contact us.

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