by Amy Shepard, CFP®, RMA®, BFA™, MBA
Preparing to welcome a child to your family comes with a lot of excitement – and also a lot of questions. Amy Shepard of Sensible Money outlines seven of the most important financial considerations to explore as you get ready to welcome your little one to the world.
Taking time away from work
Parental Leave: More and more companies are starting to offer parental leave to their employees which is a wonderful thing. This should be the first thing to explore if you are expecting – review your company benefits and see if there is paid parental leave available. Paid parental leave is typically available to both parents.
Short-Term Disability: If parental leave is not a benefit available to you, the next step is to see if you are covered by a short-term disability policy. This coverage typically provides a portion of your income (usually 60-80%) for 6-8 weeks after having a baby. Short-term disability benefits will only payout to the mom since she is the one giving birth and going through a physical recovery.
Family and Medical Leave Act (FMLA): If you meet the eligibility requirements, FMLA provides up to 12 weeks of unpaid leave from work for parents following the birth or adoption of a child. Since this leave is unpaid, many people chose to use vacation time and then savings to replace their income while on leave. Even though this leave is unpaid, it guarantees that your job will still be there for you when you return from leave.
If your only option for time off is FMLA or other unpaid leave, it’s important to set aside savings for the time you’re out of work. In my personal experience as a mom of 3, taking 4 weeks is the minimal amount of time needed to feel somewhat recovered. Taking 8 weeks is usually enough time to start feeling back to “normal” and taking 12 or more weeks is ideal – that gives you plenty of time to recover, get into a new routine, and bond with your baby.
Planning for healthcare costs
Health Insurance - Understanding your health insurance coverage is important so you know what to expect financially for the cost of prenatal, delivery, and postpartum care. Reach out to your insurance provider and ask for a cost estimate for pregnancy and maternity care.
Some key points:
· If you have a high deductible plan, expect to meet the out-of-pocket maximum.
· Ask if your baby will have to meet their own deductible and out-of-pocket maximum upon birth.
· If your pregnancy spans two calendar years, be prepared to spend more on costs as your deductible will likely reset on January 1.
· Make sure your chosen doctor and hospital are in-network with your insurance. In addition, confirm with your insurance company that any ancillary services received in the hospital that you can’t choose beforehand (anesthesia, pediatric care, etc.) will be counted as in-network.
· You’ll need to add your baby to your health insurance plan – usually within 30 days of birth – to ensure they maintain coverage.
No Health Insurance – With healthcare costs soaring, many people are opting out of traditional health insurance and either paying cash or enrolling in health share programs. A general estimate for a cash price of an uncomplicated vaginal or cesarean birth is roughly between $6,000-$10,000.
As a mom of three, I’ve learned that you really don’t need a ton of stuff to prepare for a baby! The true necessities are diapers, food, a safe place to sleep, clothes, and a car seat. Of course, there are plenty of other items that can be purchased such as baby carriers, strollers, bedroom sets, toys, etc. The costs for these items can vary tremendously based on individual preferences and situations. Some people can get everything they need for a few hundred dollars. Others may spend several thousand. My advice is to make a list of the things you want and budget accordingly.
Adjust your monthly budget
Once the baby arrives, your normal expenses will change. At a minimum, you’ll have to account for the cost of diapers, wipes, doctor visits, and possibly formula and childcare. Spend some time reviewing your current budget and accounting for an increase in expenses.
Once you have a child, having enough life insurance becomes even more important. You’ll want to make sure you have enough coverage to provide for your child if you were to pass away unexpectedly. A common rule of thumb is to get a policy large enough to cover your child’s expenses until age 18. The amount will vary based on each person’s individual situation.
Learn about tax breaks
There are many tax incentives for parents such as:
· Child Tax Credit – For 2021, this is up to $3,600 per child. You can use the IRS Withholding Estimator to see how having a child will impact your federal tax liability and adjust your tax withholding accordingly.
· Child and Dependent Care Credit – This credit can help offset the cost of childcare for working parents.
· Dependent Care Flexible Savings Account (DCFSA) – Many employers offer the option to contribute to this type of account through payroll. It allows you to set aside pre-tax dollars each pay period to help cover the cost of childcare.
· Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) – These are accounts that you can use to save pre-tax dollars for health care costs. The FSA is a bit more limited as the contribution limits are lower and the money must be used within a certain amount of time. The HSA allows for higher contribution limits and no timeline to use the money, but you do need to have a high-deductible health plan to contribute to an HSA. Both accounts can be great ways to save for healthcare costs relating to having a baby.
Save for your child’s future
It’s never too early to start saving for your child’s future. There are many ways to save, whether it’s for general expenses or college. You can learn more about this in another article I wrote: How to Save for Your Child's or Grandchild's Future
About the author: Amy Shepard, CFP®, RMA®, BFA™, MBA
Amy Shepard, CFP®, RMA®, BFA™, MBA is a Financial Planner at Sensible Money. She has been working with clients since 2013 and loves helping them create and implement a financial plan so they can achieve their life goals. She is involved in the CFP Boards Mentor Program and previously served on the board of the FPA of Greater Phoenix. Outside of work she enjoys spending time with her husband and kids – they have a goal to take a family picture in all 50 states!