Having a child is one of the biggest decisions you have to make. A newborn will bring many changes to your life, and you must be ready. The changes will be more evident in your finances as you will have to shift how you spend, save, and invest your money.
According to USDA, the average cost of raising a child until they’re 18 can be as much as $301,970. But don’t be put off by the six-figure numbers. You don’t need to save that much to have a child.
While the anticipation of a new child’s arrival can be joyous and exciting, it can also be stressful for new parents. But with solid financial planning, you can make the experience more fulfilling. In this article, we share some steps you can take to prepare for a child financially.
7 Steps to Financially Prepare For a Baby
A baby will bring joy to your family, but it will also generate many new expenses, starting from the day they’re conceived to when they become financially independent. Without preparation, you will struggle to finance their needs, and if you constantly worry about money, you will have no time to enjoy your newborn.
Financial readiness will help you put the uncertainties of becoming a parent to bed and ensure that you provide your child with the best life.
Here’s a step-by-step guide to financially prepare for your first child.
Review Your Personal Finances
The first question you must ask yourself is, “am I ready to have a child?” To answer this, you will need to give yourself a financial check-up.
Here are four areas you need to focus on while evaluating your finances :
Your Income: To cover your child’s needs and save towards your other financial goals, you need a stable source of income. This will ensure you can make plans and avoid the stress of having to choose between necessities.
Your Expenses: How are your spending habits? Having a baby requires a healthy cash flow that can only be possible if you can budget and know how to balance your income and expenses. Even if you are making enough money, you still need to control your expenses to have the financial flexibility to raise a child and plan for the future.
Debt-to-Income Ratio: A new addition to your family will mean additional expenses. If you or your partner is in debt, you might struggle to meet your minimum debt repayments if your living cost were to increase. Before you commit to having a child, ensure that you can stretch your income to meet all your loan obligations and provide for your family.
Your Financial Relationship With Your Partner: Before you have a baby, you must have an in-depth money talk with your partner to ensure you are on the same page. Importantly, you must be open about your debt, income, and big-money goals. Considering that money is the biggest cause of divorce, financial honesty can help you prepare better and avoid hiccups in the future.
Revamp Your Budget To Accommodate a Newborn
As a parent, you need to prepare for all the expenses of having a new baby. Once you decide to have a baby, you need to revamp your budget to free up some money. The extra money you save will finance the cost of having a baby.
When planning to have a baby, expenses are divided into two:
One-time Expenses: These are things you pay for only once. They include prenatal care, maternity and delivery costs, furniture like a baby crib and feeding table, and safety equipment to keep your home baby-proof.
Recurring Expenses: These ongoing costs start immediately after you conceive and stop when your child is old enough to be self-reliant. They include healthcare, childcare, education planning, food, and clothes.
Revamping your budget as you anticipate a baby will help you in two ways. First, you can free up some money to save towards your upcoming expenses, and second, you will have less trouble changing your spending habit once the baby arrives.
Having a new baby can be an emotional experience, and as new parents, it will be natural to want the best for your child. However, this can quickly lead to overspending, money wastage, and debt. When creating a budget and saving for baby expenses, ensure you do it in a way that won’t affect your finances in the long run.
Review Your Emergency Savings Funds
Financial emergencies are inevitable as you prepare to have a child; it is crucial that you ensure you are prepared for all the possible emergencies that can arise. As a rule of thumb, you should have enough savings to last three to six months in case you lose your income or decide to extend your leave.
A lot of emergencies can happen along your journey to have a child; this includes early birth or other complications. When this happens, you will have a huge medical bill to pay. Without a rainy day fund, you will be forced to borrow from your savings, liquidate your assets, or take a loan.
As you prepare to have a child, ensure that you ramp up your emergency savings. Even if you already have one, you need to start thinking about the new addition to the family and their needs. An emergency fund will give you peace of mind as you won’t have to worry about your child lacking the basic needs when it arrives.
Review Your Insurance Needs
Insurance can be a lifesaver. As you get your finances in order, it is vital that you take time to update your insurance coverage. Before paying your annual health insurance premiums, you should consult with your insurer to ensure they cover all vital services you need. Doing this ensures you will have cost-effective healthcare during and after your pregnancy.
Without comprehensive health insurance, delivery can be expensive. The cost of normal Vaginal delivery is $12,000 and while a C-Section is over $21,000. If you are using other methods like IVF, it can rise to over $30,000. With insurance, you can get these services for less.
However, you should ensure that your insurance covers more than delivery and maternity fees. Look at the quality of pediatricians in the network and if they are accessible to you. Additionally, check if your insurer offers prenatal care, neonatal tests, sick and well-baby care, and fees for birth complications.
Apart from health insurance, review your life insurance, and consider investing in income protection insurance.
Plan For Parental Leave
Planning your leave is one of the most significant stressors you’ll encounter along your journey. You will need to plan how you will handle being away, who you’ll transfer your work responsibilities to, how long you’ll stay out, and how you will transition back after the leave.
The amount of leave you take will depend on several factors: your job type, your financial situation, your physical and emotional postpartum recovery, and the support you receive.
The Federal Family and Medical Leave Act allows new parents up to 12 weeks of unpaid leave. Depending on your state, some employers will pay you full or portion of your salary, while in others, you can take a leave, your job will be protected for one year, but you won’t be paid. Consider checking your local government’s website to know your rights.
To plan for your leave, ensure you talk to your employer and get your co-workers on board early enough. Next, if you have outside clients, you have to reach out to them and connect them with someone who will address their needs while you are away. Finally, you need to create a channel for transitioning back. Will it be slowly, or will you take up where you left off?
Plan for The Long-Term needs of Your Child
As a parent, you want to provide your child with the best opportunities life has to offer. And that starts by thinking about their future and creating a solid financial foundation for them. The best way to do that is to plan for their education by investing in a 529 account.
A 529 account is a state-sponsored program that lets parents, relatives, and friends invest in a child’s college education. The account is tax-advantaged and belongs to you, and you will remain in control of the money. 529s offers a selection of professionally managed investment portfolios and aged-based funds. You can choose one that suits your need and start investing as soon as your child is born.
Besides education, consider creating other designated accounts to help your child get a financial headstart. You can do this by opening a custodial brokerage account, a regular brokerage account, or a passbook savings account. For short-term goals, consider a certificate of deposit and saving bonds. They’re less volatile.
With a growing family, you should take steps to protect your family. If you don’t have a will, this might be the perfect time to create one and if you don’t have life insurance, consider buying one now.
Look Into Government Assistance for Families
If you are a low-income family, there are many federal and state government programs that you might be eligible for. These programs provide financial assistance for necessities like food, nutrition, heat, childcare, after-school care, etc.
Some of these programs include:
- Temporary Assistance for Needy Families (TANF)
- Low Income Home Energy Assistance Program (LIHEAP)
- Special Supplemental Nutrition Program for Women, Infants, and Children (WIC)
- Supplemental Nutrition Assistance Program (SNAP)
- The Child and Adult Care Food Program
Staying on Track Financially as a Parent
Raising a child will put a lot of pressure on your finances. You need to find a way to balance your child’s needs, like education and your future goals. One of new parents’ biggest mistakes is giving up retirement planning to give their kids the best opportunities. This can be dangerous.
To ensure that you stay on track to achieve your personal goals while also providing for your family, consider separating your investments. Your savings and child investments should be separate from your retirement, homeownership, and other goals. Additionally, try not to prioritize one over the other.