Steps to Financially Prepare for a Baby
Your life — and your bank account — will never be the same! There are many emotions that come when finding out you're going to be a parent. The joy of seeing the baby's development and as you buy adorable onesies is another. Then, the realization that life is about to undergo a massive change, both financially and emotionally. As you know, the bills will start piling up. This bundle of joy is going to cost you! There will never be another event in your life that signifies financial change quite like this one, from the first prenatal checkup to college graduation day and beyond!
Did you know?
The USDA published a report using 2015 data, It was predicted that raising two children in a middle-class family would cost $233,610 from birth to age 17 on average. With inflation, that number translates to almost $286,000 in 2022. And that doesn’t even include the costs of college. For the 2021-2022 academic year, the average price of tuition and fees came to $38,070 at private colleges. $10,740 at public colleges (in-state residents) $27,560 at public colleges (out-of-state residents)
So how do you prepare financially for one of the most rewarding times of your life?
First things first, it helps to think early on about how you'll need to adjust your finances in order to fit a kid (or kids!) into the picture. And come up with a financial plan for getting your own "Full House." To begin with, it's good to consider your finances in advance in order to support a child (or children!). But believe me — ticking these checkboxes will be well worth it.
1. MAKE A THOROUGH AND REALISTIC BUDGET ANALYSIS
Why it’s crucial: Having a new baby includes costs that you probably haven't thought of before such as the fact that you'll need extra space once the baby is born. For example, what kind of home can you afford (a somewhat less-tiny apartment? Townhouse? Expansive home?), what kind of baby gear you'll need (top-of-the-line designer duds or hand-me-downs from your sister?) and how much child care you'll need.
Here’s an idea of some baby gear items and their costs you want to take a look at:
1. Bassinet/Crib – $150-$1,600+
If you want your baby to sleep in your room, a bassinet is a terrific option. They are more portable and more compact than cribs. Because you can change the crib as your child develops, convertible cribs are a fantastic option. The majority of cribs are "4 in 1," or convert to toddler beds, daybeds, and full-size beds with headboards. Check out this one on Amazon.
2. Car Seat – $160-$300+
These things each sell for about $160 at retail. With it, you can purchase one base or car seat. If you choose the carrier option, you may get a second base for roughly $80 if you want something in each car. Otherwise, you would need to invest $300 in a car seat for each car. This Graco car seat is a great option.
3. Baby Monitor -$70-$400+
There are a couple of things to consider about monitors. Nowadays, wifi monitors allow you to use your phone/tablet as the screen. This is a great concept because now you don’t have to worry about losing your monitor. Here are some ideas for the best baby monitors out there.
4. Stroller – $120-$500+
If one parent is alone with the child, having a stroller that is compatible with your carrier will save you a lot of hassle. The Graco FastAction Fold (Amazon) is one that is highly recommended. If you're really monitoring your money, this stroller (Amazon) is far less expensive and has outstanding reviews, all for about $120. It does not, however, offer the capacity to attach a carrier. So those are some ideas of some of the baby gear you want to take a look at. If you don't already have a budget, you should either analyze your present one or create one from scratch. You'll need to set aside money for recurring costs like diapers and child care. Sticking to the necessities can make it easier to save money for fun purchases like that mom-and-baby class you've been coveting.
What to consider: If you live in a two-income household and you or your partner plan to reduce your working hours, your revised budget must take this into account. We recommend setting up an emergency fund that is three to six months' worth of your monthly income and is held in a separate, easy-to-access, secure bank account. If you're expecting a baby sooner, you may want to increase your liquid funds to help pay for some of the shorter-term expenses, such as diapers or new clothing for a newborn who is constantly growing. Also, if you suddenly lose your job or experience some unexpected financial setback, you'll want to make sure you can take care of both your needs and those of the baby/ies.
Snag your FREE budget template here.
2. HAVE OR GET AN ESTATE PLAN
Why it's crucial: Your parents may think that a will or a trust should be used to specify who receives grandma's antique silverware. However! It also plays a crucial role when you have a baby. A will enables you to specify who will gain custody of your child and how any money you leave to them is managed if something unfortunate happens to both parents, God forbid. Without one, a judge will decide all of those decisions. If you already have one, you should update it.
What to consider: Finding a guardian to care for your child should the unthinkable occur will be your primary concern as a new parent. To guarantee that your assets are used in the manner you wish, you can also specify conditions and the beneficiaries of your estate. You don't need a lawyer to make a will, but hiring a financial advisor or even an estate planning lawyer to cover all of your bases is a good idea.
3. THINK ABOUT A 529 ACCOUNT
It goes without saying that the current generation of grads owe an astounding $28k in student loan debt. Ouch. Not exactly the ideal situation for your prospective 22-year-old’s transition into adulthood. Even though we'd all like to believe that our young children will become academic, athletic, or artistic prodigies, let's face it: relying on a scholarship is a bit of a gamble. Next year, tuition and fees at private and public universities will have a 3.7% increase and this trend doesn't seem to be slowing down. The bottom line is college is expensive. So what should a savvy parent do? Your best bets are probably to invest early and in the right accounts.
A 529 plan can be a fantastic place to start. Some state-sponsored programs could significantly reduce your tax obligations. Additionally, you may have 18 years if you begin saving for college expenses as soon as your child is born. You'll thank yourself at graduation, I promise.
Let’s compare the numbers:
Let's say that after your child is born, you begin contributing $100 each month to a tax-free 529 plan. If annual investment returns were to average 6% over the course of 18 years, you could have $37,086—$15,486 more than you initially deposited and money you wouldn't need to borrow—to spend for college costs. On the other hand, if you took out a loan for the same total amount—$37,086—at a 6 percent interest rate, it might take you ten years to pay it off. Your total amount repaid would be $49,408, costing you almost $27,808 more than if you had saved consistently with a $411.73 monthly payment.
529 plans do have drawbacks (though there are potential changes coming) You might not be aware of your child's college choices, the expense of college in 18 years, or their potential as a student or athlete. For the maximum flexibility, you can create a custodial account or joint brokerage account in the parents' names. You just "earmark" it for college. You lose the tax benefits, but gain flexibility. If you are interested in setting up a custodial account or even an investment account, click here. We'd be happy to help you.
And if you save more...
The difference becomes even more apparent when you increase your saving rate. For instance, a $200 monthly commitment made for 18 years might increase to almost $74,174, or $30,974 more than your initial investment. However, if you borrowed $74,174 instead, you could pay off your loan over ten years with a monthly payment of about $823.48. In comparison to if you had saved the same amount, your payback would equal $98,817, or around $55,617 more. Your interest would rise if you spread the payments out over 20 years to lower your monthly payment.
Everything comes down to this: the more money you save, the more it can work for you, and the less money you will need to borrow and pay back with interest. It's never too late to start saving, even if your child is already a teenager, because every dollar you put aside keeps you from having to borrow another. So, make a plan to save for your child's future: How much will you set aside each month for your future child's future expenses? From preschool through college? It's difficult to imagine your baby all grown up and graduating from high school while he/she is still a bundle in your belly, but with college tuition rising at twice the rate of inflation, now is the time to start saving (yes, on top of all the pregnancy costs and baby expenses). In 19 years, sending your mini you to a public in-state institution will cost more than $240,000 for four years; private college will cost around half a million dollars. The good news is that time is on your side.
Why it's crucial: A tax-advantaged plan, such as a 529 education savings plan (which originally comes from Section 529 of the Internal Revenue Code), can be a fantastic way to save for college. It is special in that it can be used to pay for K-12 school expenses as well as any other eligible educational expense.
What to keep in mind: Since higher education is expensive, the sooner you begin saving, the longer the money will have to grow. A 529 account is still valuable to open because of its flexibility even though it's impossible to forecast where or even whether your kid will attend college. For instance, you can designate another person as the beneficiary of the funds, such as yourself, if your child's path does not ultimately include college.
If you’re interested in learning more about this account, click here to speak with our resident college pro.
4. PURCHASE LIFE INSURANCE
Why it's crucial: For all of his or her life, your baby will look to you for support. That will include a lot of financial support because things like housing, clothes, food, and college all have a price tag. Life insurance will make sure that your family has the financial support it needs in the event of your passing.
What to consider: There are other kinds of life insurance, but the two most fundamental kinds are permanent and term. In a nutshell, term insurance only protects you for a set amount of time, but permanent life insurance never expires and builds financial value over your lifetime. Many new parents receive a mix of policies that includes a small permanent policy and a bigger amount of term insurance since the two types of insurance typically play different roles in a financial plan. If you're unsure of how much life insurance you'll need, we recommend speaking with a financial advisor who can help you decide the best course of action for you and your family.
If you are interested in speaking with one of our advisors, click here.
5. CHECK YOUR HEALTH INSURANCE
What it’s crucial: Health insurance is essential for both prenatal care and hospital delivery fees, as any expectant parent knows. Additionally, once your kid is born, he or she will need coverage for the first pediatrician visits as well as any other future health issues.
What to consider: Before the birth of your child, you should reevaluate your strategy to see if it still makes sense for your expanding family. Verify deductibles, co-pays, and out-of-pocket maximums when comparing plans to keep costs low. Also, take into account in-network medical professionals. Typically, you can alter your health insurance plan and coverage only during open enrollment. The enrollment period does not apply to adjustments made after the birth of your child because having a child qualifies as a qualifying life event. Check with your insurance provider to make sure you don't miss the deadline; you normally have 30 to 60 days to name your baby on your coverage after he or she is born.
6. GET A SOCIAL SECURITY NUMBER
Why it's crucial: Although it is optional, you should get your baby a Social Security number so you can start their financial life and declare them as a dependent on your tax returns, which can lower your taxes.
What to consider: You can apply for a Social Security number for your child as soon as they are born. In fact, you'll probably be asked if you want one at the hospital when you supply information for your child's birth certificate.
7. The Price of Prenatal Care/Childcare
Find out what screening tests, labor and delivery alternatives, alternative therapies, doulas, and prenatal vitamins are covered by your health insurance. Give yourself ample time to transfer insurance plans if you need more coverage if you can. Let us also remember when the baby arrives you may need babysitting and child care. Prices differ depending on where you are. Daycare costs between $200 and $250 each week. A nanny can cost roughly twice as much, at $565. Babysitting costs are comparable, ranging between $12 and $18 per hour.
It would be great to have a relative or close friend watch your child while you are gone, but for many of us, this is not feasible. If you are a couple, one of you could prefer to stay at home, depending on how much money you would have to give up and whether you reside in a state where paid parental leave is required.
8. Look Into Your Company's Family Leave Policies
Think about whether you'd like to take time off from work to spend more time with your kid/s. Then, check out your company's parental leave policies. If your company offers one, that's fantastic (although, regrettably, you are in the minority, as the majority of businesses in the U.S. still do not). If you didn’t know, companies in the United States are not required to compensate employees for parental leave. You can take up to 12 weeks of unpaid parental leave under the Family and Medical Leave Act (FMLA). To be eligible, you must have worked for at least a year for a company with more than 50 people.
Next, consider the expense of a long career break. Will you be able to take unpaid leave, and how will this influence your financial situation? We have a tendency to greatly underestimate this expense.
Look at this example:
Let's say you make $95,000 a year and wish to take a two-year break from your career. What would that set you back? Most people will respond with $190,000. The right answer? It could cost you ten times that, or $1.9 million, over the course of your career. Oof. The number is so high because a two-year career break can result in a 20% pay cut. Therefore, future salary rises will be based on reduced earnings levels going forward; not to mention, you won't be investing in your 401(k) or paying into Social Security while you're not working.
Investing is one way you might be able to "pay for" the career hiatus in part. Historically, investing has been much more powerful than leaving your savings in the bank.
The Bottom Line
New parents have a lot to think about, and their assured lack of sleep for the next, hmm, 18 years isn't even in the top five. What is the primary concern? Money, or more precisely, the money needed to care for the new baby. ( Yes, having a child might be a substantial financial change, but it's also one of life's greatest joys!
Click here to connect with a financial advisor who can talk through how all the pieces of your financial plan fit together.