Congrats! You just found out that you are expecting a new member of your family. After telling all your friends and family the joyous news, you begin to wonder what you should do next. Most people's attention turns to what color to paint the nursery and what the name should be. Eventually, the financial reality will eventually set in and you may start to panic. What can you do to prepare your finances for a new member of the family? We offer up these 5 tips for those who are expecting a bundle of joy:
1. Check with your OBGYN and Insurance company to get an estimate of how much the birth will cost you out-of-pocket and how much your health insurance out-of-pocket max is. You should aim to save this amount (or the maximum allowed; 3,850 for self-only and 7,750 for family coverage) in your health savings account by the time you are in your last trimester.
2. It is never too early to start planning for college or other educational expenses for your child. If college is your primary goal, a 529 college savings plan is one of your best options. Even before your baby is born you can open a 529 plan and begin saving for your baby’s college. You can open the account with you or your partner as the primary beneficiary and then change the beneficiary to your child once they are born and have a social security number.
3. One overlooked component of your personal finances is an emergency fund. No doubt, having a child is an emergency, in a good way. During the pregnancy, and soon after, you will likely need extra funds available for unplanned expenses that pop up. A good starting target for an emergency fund is 3 months of mortgage or rent payments. If you already have this down, then the next hurdle is at least 3 months of your total monthly expenses. Since you plan on adding to your family, these amounts should be increased by 1-month (i.e. 4 months of mortgage/rent payments or expenses). These funds should be kept in a savings or money market account that is easy to access in case funds are needed.
4. If you will be putting your child in daycare, investigate Dependent Care Flexible Spending Accounts that your employer may provide. These accounts are like a health savings account, but are used for childcare expenses. These accounts are tax-advantaged and let you use pre-tax dollars to pay for certain childcare expenses, including daycare.
5. If either partner will be taking an extended leave of absence from employment, and thus will not be getting paid, total up the amount of paycheck that will be missed. This amount should be added to your emergency fund listed above and should be kept in a savings or money market account.
Bonus Tip: After the birth of your child, spend the next 6 months tracking your expenses and coming up with a monthly budget for your household. This will allow you to see how much of your income you are able to save toward your goals such as college education, weddings, and even your retirement.
Of course, the financial aspects of having a baby are just one piece of the puzzle. In this article, Preconception 101: How to Prepare for Pregnancy by Dina Cheney, you can read more of our thoughts on how to financially prepare for having a baby as well as some of the other physical, mental, and emotional aspects when it comes to preparing for the birth of a child.