Money Management

How to Prepare Financially for a Baby: 9 Smart Money Moves to Make Before & After

How to Prepare Financially for a Baby
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Are you expecting a new bundle of joy? Congrats! 

While it’s OK to get caught up in the excitement, it’s also important to think about how your little one will impact your finances. 

No need to worry, though. We’ve got you covered with these nine money-saving tips for before and after.

5 Money Moves to Make Before Having a Baby

Along with the joys of pregnancy come some one-time expenses and crucial financial decisions that need to be made.

#1. Life Insurance

It’s easy to put thinking about life insurance on the back burner, but the truth is that it’s more important now than ever. 

Not only that, but because of how life insurance companies price their policies, the earlier you buy life insurance, the less you’ll pay. 

Fortunately, purchasing life insurance today is easier than ever. The entire process can be done in minutes. 

For example, with Ladder Life, you can buy up to $3 million in coverage without a medical exam. Plus, you have the option to adjust your coverage amount at any time. 

Ladder Life policies can be surprisingly affordable, starting at just $5 per month. Before bringing your little one home, take a few minutes to invest in their future.

Apply for a term life insurance policy with Ladder and give your family the peace of mind they deserve.

#2. Emergency Fund

Are you familiar with the concept of an emergency fund? If not, it’s simply a savings account set aside for those unexpected expenses that come up in life. 

To ensure you’re fully prepared, we recommend saving at least three to six months of expenses in a high-yield savings account separate from your checking account. 

And don’t stress: building an emergency fund doesn’t have to happen overnight. Think of it as a goal to work towards over time. 

The good news is that with interest rates on the rise, you can now earn meaningful interest on your savings. To ensure you’re getting the best deal on your emergency fund savings account, use our tool to compare the top savings accounts.

#3. Create A Budget

Becoming a parent is a wonderful experience, but it can also put a strain on your finances. But don’t fret — with a little bit of planning and flexibility, you can budget for parenthood and still have some extra cash for savings.

First things first: you need to track your spending at a glance to understand your trends and find ways to save money. 

One app I love for budgeting is Rocket Money. Not only does it help you cut unnecessary subscriptions and save money, but it also allows you to track your expenses for free.

When analyzing your budget, use the 50/30/20 approach. This means that 50% of your income should go towards household bills, minimum loan payments, and expenses like child care, diapers and formula; 30% should go towards financial wants; and 20% towards savings and payments on high-interest debt.

Keep in mind, that split is just a goal, and you may find that your needs take up more than 50% of your income. But the point is that you’re tracking your spending and aiming for improvement.

Want to give Rocket Money a try? Download the budgeting app now and start saving money!

#4. Budget for Prenatal Care

On average, prenatal care — which includes your doctor’s visits, blood tests, etc. — will run about $2,000 in total without insurance. If you have insurance, a plan on average pays for 87% of care, leaving you with a bill of $260 for these visits. 

But here’s the catch: insurance policies vary, so it’s important to know exactly what your plan covers. For example, they may only cover one ultrasound or lab work at specific facilities.

Make sure to check if your doctor or lab is “in-network” for your insurance by calling your insurer before receiving care. 

Going to an “in-network” provider can save you a significant amount of money. Many medical providers “accept” insurance but are not in-network, which can result in a costly difference in your out-of-pocket expenses. 

The bottom line? A quick call to your insurance company can save you big bucks on prenatal care costs.

#5. Budget for Labor and Delivery

If you have health insurance, expect to pay about $2,500 for labor and delivery costs.

That’s a big bill, but it’s the reality of having a baby. 

Keep in mind, this is just an average. Your bill could be more or less depending on your insurance and the type of delivery you choose.

To get a better idea of what you’ll actually pay out of pocket, it’s important to contact your health insurance provider. 

Tell them where you plan to have the baby (e.g., at the hospital) and how you plan to have the baby (e.g., naturally, with an epidural, etc.). Have them estimate your out-of-pocket costs and ask about what scenarios would and would not be covered by your insurance. 

For example, how much would a cesarean section cost compared to an epidural? Is there a limit on the number of days you can stay at the hospital?

Another thing to keep in mind is that most hospitals consider both the mother and the newborn as patients. This means that they may be subject to separate deductibles.

Overall, don’t let the cost scare you. Hospitals want to get paid, and they understand that most people can’t pay $2,500 out of pocket.

In most cases, they’ll work with you to set up a payment plan. You may even be able to extend the payments out for a year or two, breaking the cost down to a more manageable monthly bill. 

If you’re in need of financial assistance, there are options available for those with a low income, those who currently have no insurance, or those who are on Medicaid. See here for more information. 

4 Smart Money Moves to Make After Having a Baby

Now it’s time to deal with life after the baby arrives, running the numbers of how your family’s finances will be impacted. 

#1. Add the Baby to Your Health Insurance

One of the biggest expenses you’ll have to consider is health insurance. Once your child is born, you’ll need to add them to your health insurance plan, which can be a shock to the budget.

I ran a quote for health insurance on the ACA marketplace for a non-smoking couple in their 30s and found that the cost for an unsubsidized plan is $837.70 a month. But once I added a newborn to that plan, the cost jumped to $1,099.78 a month. That’s an increase of over $250 a month!

The good news is that in an ideal world, part of this cost increase will be paid for by your employer. So, be sure to ask HR what the cost will be for adding a baby to your plan, and adjust your budget accordingly. 

If you’re purchasing health insurance through the marketplace, a family of three can qualify for a subsidy as long as their income falls below a certain threshold. You can use the calculator at healthcare.gov to see what your monthly costs would be based on your income.

Don’t forget, in the marketplace, having a baby makes you eligible for a special enrollment period, so you don’t have to wait until open enrollment to change plans. 

Don’t let the cost of adding a baby to your health insurance plan catch you off guard. Take the time to research your options and find the best plan for your family.

#2. Create a Will

As a new parent, it’s important to think about the future and plan for the worst-case scenario. One way to do this is by creating a will that names the legal guardian of your child in the event that both you and your partner pass away. 

Without an in-force will, the court has the legal responsibility to decide who will take care of your kids, which can be a difficult and stressful process for everyone involved.

My wife and I recently created our will using Trust & Will. It’s a user-friendly platform that walks you through the process of creating, storing, and sharing your estate plan (check out my Trust & Will review for more details). 

We were very happy with the experience, and it gave us peace of mind knowing that our children’s future is taken care of.

Another important step is to review the beneficiary designations on all your existing financial accounts. Make sure that your child is listed as a beneficiary in any place where your money is held, such as an investment brokerage or checking account. 

Most commonly, you’d list your spouse as the primary beneficiary and your child as the contingent beneficiary. This will pass the assets to the primary beneficiary first, and only to the contingent beneficiary if both parties were to pass. 

If no beneficiary is named, the court will determine who gets the assets. So this is a crucial and easy step to ensure that your child is taken care of financially in the event of your passing.

#3. Rework Your Budget

There are many ongoing expenses related to taking care of your baby during their first year of life. 

On the lower end of the scale, when I use Baby Center’s first-year expense calculator, a family with no child care expenses who breastfeeds will face estimated first-year costs totaling $6,317 after accounting for baby clothing ($30 per month), food ($30 per month starting at six months), diapers, medicine, toiletries and wipes, and a toys/books ($20 per month).

These ongoing costs (like most things) can vary widely, especially if childcare is in the equation. 

For example, after our third child was born we decided to ditch our sedan and become the proud owners of a minivan. Similarly, after our first child was born, our monthly costs increased significantly as we moved out of an affordable one-bedroom apartment and into a more expensive two-bedroom space. 

While the first month or two is likely going to be a whirlwind, it’s at this stage where it’s important to not forget to revisit and rework your budget. 

#4. Consider a 529 Account

Are you looking for a way to save for your child’s college education? Look no further than a 529 college savings plan. 

Depending on where you live, you may even be eligible for a tax deduction when you make a contribution. Plus, your earnings grow tax-free and can be withdrawn tax-free if used for qualified education expenses.

But here’s the real question: is a 529 plan the best option for you and your savings goals? In my opinion, it’s not at the top of my priority list. Why? Because you can borrow for college, but you can’t borrow for retirement. I personally prioritize maxing out my retirement accounts before fully funding my kids’ 529s.

Instead, I’ve set up an automatic transfer of $50 per month into our state’s 529 plan for each of my children. This is not enough to cover the full cost of a four-year, in-state degree, but it’s a start. 

Another option is to ask for friends and family to contribute to your child’s education fund by setting up an account with Backer, instead of the more traditional baby shower or gifts after the baby is born.

Ultimately, the choice is yours. If the money isn’t there, don’t beat yourself up. You’re not a bad parent for choosing to pay off debt or fund your 401(K) over a 529 plan.

How to Prepare for a Baby: Final Thoughts

Succeeding as a new parent financially is all about developing a realistic framework for what lies ahead, and then doing what you have to do to get through this week, this month, and this year.

After all, our parents didn’t have it all figured out when they had us. 

It’s not always easy. But wow… is it worth it. 

Sources:

R.J. Weiss
R.J. Weiss is the founder and editor of The Ways To Wealth, a Certified Financial Planner™, husband and father of three. He's spent the last 10+ years writing about personal finance and has been featured in Forbes, Bloomberg, MSN Money, and other publications.

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