Financial Moves to Make When Expecting a Baby
Friday, August 14th, 2020

So, you’re going to have or adopt a baby. Congratulations! Parenthood may be one of the most rewarding experiences you’ll ever have.

As you prepare for life with your baby, here are a few things you should think about when it comes to your finances and lifestyle.

Reassess your budget

You’ll have to buy a lot of things before (or soon after) your baby arrives. Buying a new crib, stroller, car seat, and other items you’ll need could cost you well over $1,000. If you do your homework, you can save money without sacrificing quality and safety.

Discount stores or internet retailers may offer some items at lower prices than you’ll find elsewhere. If you don’t mind used items, poke around for bargains at yard sales and flea markets or on your local Facebook Marketplace page. Finally, you’ll probably get hand-me-downs and shower gifts from family and friends, so some items will be free.

Buying all the gear you need is pretty much a one-shot deal, but you’ll also have many ongoing expenses that will affect your monthly budget. Some things may include daily needs like baby formula and food, diapers, and more. There are also items that your child will use for a short time like clothing. Finally, there are recurring expenses including childcare like daycare and babysitters and medical costs not covered by insurance like co-pays.

Some families choose to move to a home with more space when their family expands. Therefore, you might want to factor in increased housing costs as well. This might mean saving for a down payment.

Redo your budget to figure out how much your total monthly expenses will increase after the birth of your baby. Expenses might change each month, so be sure to set aside money for an emergency fund if possible. This will help you to manage any unforeseen expenses. If you’ve never created a budget before, now’s the time to start. Chances are, you’ll be spending at least an extra few hundred dollars a month. If it looks like the added expenses will strain your budget, you’ll want to think about ways to cut back on your expenses.

Decide if one of you should stay home

When the baby comes, taking care of them will be a full-time job. If one or both of you has parental leave, that will eventually come to an end, which may have you questioning if it makes sense for one of you to stay home. That’s a question only you and your spouse can answer. Maybe both of you want to work because you enjoy your jobs, or maybe one of you can start working from home or working part-time. Alternatively, maybe the only way you can get by financially is for both of you to work outside the home.

Don’t be too hasty to decide if one or both of you should continue working outside the home. The financial benefits of two incomes may not be as great as you think. Remember, you may have to pay for expensive daycare if both of you work. You’ll also pay more in taxes because your household income will be higher.

It is also important to think about the expenses related to work. For example, one or both of you working will mean commuting and other work-related expenses. Run the numbers to see how much of a financial benefit you get if both of you work. Then, weigh that benefit against the peace of mind you would get from having one spouse stay home with the baby. A compromise might be for one of you to work only part-time.

Review your insurance needs

Pregnancy, delivery, and baby care are expensive. Either before or as soon as you get pregnant, it’s wise to evaluate your medical coverage so that you know what’s covered and decide if you need to buy a better insurance policy. Good medical coverage for your baby is critical because trips to the pediatrician, prescriptions, and other healthcare costs can add up quickly.

Fortunately, adding your baby to your employer-sponsored health plan or your private plan is usually not a problem. Just ask your employer or insurer what you need to do and when to make sure your baby will be covered from the moment of birth. Most insurers require you to add your child within 30 days of their birth or adoption. If you have access to an employer-sponsored plan, that is often the best way to insure your baby’s health, because these plans typically provide good coverage at a lower cost. You should expect additional premiums and out-of-pocket costs such as co-payments after adding your baby to any health plan.

Having a baby also means that it’s time to think about life insurance. Though it’s unlikely that you’ll die prematurely, you should be prepared anyway. Life insurance can protect your family’s financial security if something unexpected happens to you. Your spouse can use the death benefit to pay off any existing debts such as a mortgage, car loan, or credit card. They can also use it to support your child and meet other expenses as they will no longer have your income. Some of the funds could also be set aside for your child’s future education. If you don’t have any life insurance, now may be a good time to get some. The cost of an individual policy typically depends on your age, your health, whether you smoke, and other factors. Even if you already have life insurance through your employer or privately, you should consider buying more now that you have a baby to care for. An insurance agent or financial professional can help you figure out how much coverage you need.

Update your estate plan

With a new baby to think about, you and your spouse should update or prepare your wills with the help of an attorney. You’ll need to address what will happen if an unexpected tragedy strikes. You should ask yourself who the best person to raise your child would be if you and your spouse died at the same time. Additionally, if the person you choose accepts this responsibility, you’ll need to designate him or her in your wills as your minor child’s legal guardian. You should also name a contingent guardian in case the primary guardian dies. Guardianship typically involves managing money and other assets that you leave to your minor child. You may also want to ask your attorney about setting up a trust for your child and naming trustees separate from the suggested guardians.

While working with your attorney, you and your spouse should also complete a healthcare proxy and durable power of attorney. These documents allow you to designate someone to act on your behalf for medical and financial decisions if you should become incapacitated.

Start saving for your little one’s education

The price of a college education is high and keeps getting higher. By the time your baby is college-bound, the annual cost of a good private college could be almost triple what it is today. This will include tuition, room and board, books, and so on. You should think about how you will afford this.

Your child may receive financial aid such as grants, scholarships, and loans, but you need to plan in case aid is unavailable or insufficient. You can do this by setting up a college fund to save for your child’s education. You can arrange for funds to be deducted from your paycheck and invested in the account(s) that you choose. You can also suggest that family members who want to give gifts could contribute directly to this account. It’s important to start saving as soon as possible and save as much as your budget permits. Many different savings vehicles are available for this purpose, some of which have tax advantages. Talk to a financial professional about which ones are best for you.

Don’t forget about your taxes

There’s no way around it: having children costs money. However, you may be entitled to some tax breaks that can help defray the cost of raising your child. First, you may be eligible for an extra exemption if your annual income is below a certain level for your filing status. This will reduce your income tax bill for every year that you’re eligible to claim the exemption.

You may also qualify for one or more child-related tax credits. For example, the child tax credit is a $1,000 credit for each qualifying child. There is also the child and dependent care credit if you have qualifying child-care expenses, and the earned income credit if your annual income is below a certain level. To claim any of these exemptions and credits on your federal tax return, you’ll need a Social Security number for your child. You may be able to apply for this number as well as a birth certificate right at the hospital after your baby’s birth. For more information about tax issues, talk to a tax professional.

The bottom line

Having a baby is such an exciting time in your life. While you don’t need to be rich to have a baby, it is important to evaluate your budget and plan it around your family’s goals. Don’t forget to plan for unforeseen expenses so that you don’t hit any major road bumps. Some of the details of financially preparing for a child can seem cumbersome but be sure to take the time to enjoy every step of the parenting journey.