Congratulations! You’ve just found out that you’re expecting and you’re breathless with excitement—and nerves. A baby means big changes, and some of those changes bring many new expenses. How will you pay for it all?
Whether you’re only thinking about having a baby, or your due date is fast approaching, there’s no need to stress about finances. By taking the necessary measures today, you can learn to cover these new expenses without falling into debt.
Here are some steps you can take to prepare financially for a new baby:
1. Pay down debt.
There’s more than just a nursery to set up before your baby’s arrival. It’s best to get your finances in order to make it easier to manage all new expenses and prepare for your child’s future. If this involves getting rid of a mountain of debt, choose between these two debt-kicking plans.
2. Adjust your monthly budget.
Babies don’t come cheap. When your little one arrives, you’ll need to spring for baby gear and furniture, a new wardrobe, diapers and possibly child care as well. According to the USDA’s most recent report on the cost of raising a child, the average middle-income family will spend approximately $12,350-$13,900 on child-related expenses before their baby’s first birthday.
Most of these expenses will be ongoing, and it’s best to make room in your budget for these new items before the baby is born. Spend some time reviewing your monthly budget to look for ways to cut back on spending and give you that wiggle room to cover baby-related expenses.
3. Create a Family Leave plan.
Whether baby is still in the planning stages or you’ve just found out you’re expecting, it is reasonable to meet with your company’s human resources representative to find out what benefits are offered for parental leave. The federal Family and Medical Leave Act, known as FMLA, requires most companies to give employees 12 weeks unpaid leave for the birth or adoption of a child. FMLA applies to parents of both genders, so fathers can discuss taking leave with their human resources department, too.
Your HR department should be prepared to answer your questions about company policies regarding combining your vacation, holiday, personal and sick days so that you will be paid during part of your leave. You also might have short-term disability insurance offered through your employer, and your state might pay disability to new mothers. Inquire as to whether your company pays your medical insurance premiums while you are on parental leave. If you’ll be responsible for the premiums, you’ll need to add that cost to your budget.
By creating a family leave plan, you can be confident that you are maximizing your income when you are at home with your baby.
4. Optimize your insurance (estimate prenatal care and delivery costs).
FAIR Health, a nonprofit that collects medical-related data, reports that the average delivery now costs $12,290 ($17,000 for a C-section). This doesn’t include prenatal visits to the obstetrician or post-birth visits with the pediatrician.
If you are planning to start, or add to, your family, it’s wise to research the insurance plans available to you from your employer or through the marketplace. The Affordable Care Act requires almost all medical plans to cover prenatal and maternity care, along with well-baby visits, as essential services, but be sure to read the fine print for other events such as premature birth—and don’t be afraid to ask questions to make sure you’re choosing the plan that best suits your family’s needs.
Before giving birth, research the hospitals where your obstetrician has medical privileges. It’s important to verify, for example, that the hospital you choose is “in network,” meaning it has a working agreement with your insurance company and you won’t be socked with extra, or unexpected, fees because the hospital is “out of network.”
5. Set up a baby account.
Even if you have terrific insurance and a good family leave plan, it is a good idea to save as much money as you can fit into your budget to cover any medical costs and gaps in income.
To start, you can take advantage of federally-approved savings plans for medical costs. The first is a Health Savings Account (HSA), which allows people with high-deductible insurance plans to save money for medical costs. The other, a Flexible Spending Account (FSA), can be used to pay out-of-pocket health or dependent care expenses incurred in the same calendar year that you deposited the money. Both are pre-tax options, so you won’t pay income taxes on the salary you put into those accounts.
There’s also the option to put extra cash into a high-yield savings account, which you can tap into for first-year baby costs such as child care when you return to work. Consider setting up a separate savings account for all baby expenses to keep this money separate from other savings. You may also want to automate these savings by setting up a monthly transfer from your payroll or checking account to your “baby account.” Here’s a tip: Keep adding to that savings account even when the baby comes. The little one doesn’t get any cheaper to raise as the years go on.
6. Start saving for college.
Hard as it may be to believe, your little one will one day be all grown up and ready to go to college. With one year of college now averaging $54,501 at private colleges and $25,707 for state residents at public colleges, this can mean paying a small fortune to give your child an education. In addition to spreading the costs over nearly two decades, starting to save for your child’s college education now will give those savings the best chance at growth.
Consider opening a 529 plan before your child is born where your college savings can grow tax-free.
7. Write a will.
No one wants to think about their own death when preparing for a birth, but writing a will—and purchasing life insurance if you haven’t already done so—can be the best gift for your child in case the unthinkable happens.
8. Prepare for first-year baby costs.
Your friends and family, or maybe your co-workers, may have thrown a baby shower for you, where you picked up a few of the big-ticket items such as a crib, stroller or car seat, or, instead, bought adorable clothes, practical diapers or a fun mobile to hang over the crib. If so, congratulations; you’re off to a great start.
Even if you had all the big things gifted to you, you’ll quickly find your little baby is a big expense. She or he will grow out of those clothes, and the packs of diapers you thought would last three months will most likely be gone sooner than that.
But there are many more costs involved. As reported in the USDA study, when you factor in the costs of child care, housing, health care, food, transportation and more, a child through age 17 costs $284,570 (which does not factor in the cost of college education).
A baby brings immense joy to a family, and you’ll want to spend as much time as you can acclimating to your new role as a parent—and the lack of sleep!—without having to worry about money. By planning ahead financially, you’ll be able to rest much easier.