How to financially prepare for a baby in five simple steps
Starting a family is an exciting milestone, filled with both celebration and extensive preparation. Amidst decorating a nursery and planning a baby shower, it’s easy to overlook the crucial step of financially preparing for your new baby.
As lackluster as this step may seem, it’s an imperative one. After all, according to recent data, the average middle-income family could expect to spend upward of $23,000 on child-related expenses in the first year.
Whether you have two weeks or nine months to prepare for your new bundle of joy, we’re here to help you navigate the financial preparations in five simple steps.
1. Build or adjust your emergency fund
A healthy emergency fund is an essential tool for financial wellness, regardless of if you have children. However, when starting a family, it’s important to reflect on how your emergency savings needs change as expenses increase.
Our experts recommend saving at least six months’ worth of living expenses in accessible savings accounts. While your current emergency fund should account for rent or mortgage payments, loan payments, food and utilities, don’t forget to include new child-related expenses including childcare, formula, diapers and doctor visits.
Remember, in the event of job loss, expenses like health care and insurance can drastically increase. Don’t forget to factor in the loss of work-related benefits into your emergency savings.
Pro tip: Use an emergency fund calculator to estimate how much you need to save. The calculator accounts for length of unemployment, the percentage of expenses you could temporarily cut, and your current monthly spending habits.
2. Review and adjust insurance plans
Disability and life insurance are two important policies to have in place when expanding your family. Life insurance could support your family in the event that you’re no longer around to provide for them yourself. Additionally, disability insurance can protect your income if you are unable to work due to injury or critical illness. Purchasing these policies not only protects your family and financial goals, it also gives you peace of mind, knowing that you’re covered.
The birth of a baby is a qualifying life event that triggers a special enrollment period, allowing you to add your child to your health insurance plan within a certain timeframe (usually 30-60 days) after their birth. Even before the birth of your child, you’ll want to review and adjust your health insurance coverage to ensure prenatal care, childbirth and postpartum appointments.
3. Adjust your budget for new childcare expenses
One of the most important things you can do to prepare for your new baby is adjust your monthly budget. Expanding your family comes with additional expenses that must be accounted for.
In the short term, you’ll need to adjust your budget for expenses related to baby preparation: Prenatal expenses, baby gear, nursery setup, hospital bills, etc. In the long term, you’ll need to factor the expenses that come with raising a child: food and formula, healthcare, childcare, and clothing.
An often-overlooked facet of the budget is the potential impact on your income during parental leave. If you or your partner’s leave isn’t fully covered, you’ll need to adjust for decreased income.
One way to offset the impacts of this change is to practice living off one income before the baby is born. Automatically transfer one person’s paycheck to a high-rate savings account while you’re both still working, and you’ll have a healthy baby fund saved for your little one’s arrival.
Lastly, you’ll want to plan for increased debt. Regardless of how wonderful your health insurance policy is, you’ll likely acquire a hefty bill for your hospital stay. While medical debt is almost inevitable, it will help to have a plan in place to pay it off quickly.
4. Make a long-term savings plan for your child
You likely have big dreams for your child. Do you hope they go to college one day, or perhaps travel abroad? There’s no better time than the present to start saving for their future.
Consider this, if you tuck away just $250 per month for their college savings into a high-yield account earning 3.25% APY, you’ll have saved nearly $73,000 by the time they turn 18. However, if you wait to start saving until they turn 10, you’ll have saved just over $35,000. Every month counts when working toward a long-term financial goal.
A financial advisor can help you assess which savings tools will work best for your goals. They may suggest a 529 Plan or other investment options for higher education savings, and a simple high-yield savings account for gifts.
Empeople members receive Investment and Retirement Services as a complimentary benefit of membership. Our advisors can help you find tax-advantaged accounts that support your financial goals.
5. Update your will and estate plan
One of the most important aspects of a will and estate plan is the designation of legal guardianship of dependents. A financial advisor can assist you in documenting your wishes in the case of your death or incapacitation.
While completing estate documentation, you’ll select an executor to oversee the compliance of your will, and name beneficiary designations for life insurance proceeds and retirement account disbursements. Your designated durable power of attorney (POA) will help direct other assets and investments outlined in your estate plan documents.
Proper future planning is important for everyone, regardless of age or net worth – especially when children are involved. Without a will, power of attorney, and other documentation, your partner and children may experience complications during an already difficult time.
Preparing your finances for a new baby may seem daunting, but with careful planning and proactive steps, you can ensure a stable and secure future for your growing family. By building a robust emergency fund, reviewing and adjusting your insurance plans, and updating your budget for new childcare expenses, you can navigate this exciting new chapter with confidence and peace of mind.
