How to Financially Prepare for a Baby
By Hightower Westchester, Richard Flahive
As many of you know, my wife and I recently had our first child. A beautiful little girl named Sophia! We are about a month into this whole parenting thing, and it is very evident that preparation is as important as ever when it comes to a newborn. There are the obvious items such as diapers, wipes and all that fun stuff, but just as important is the great deal of financial preparation needed both before and after the baby arrives. Below I will outline a few key steps you can take to help you navigate the financial side of having a baby.
I will break this down into two sections, before and after the birth of your child, as there are things you will want to prepare for prior to the baby coming and things you can’t do until they have arrived. The more financial decisions you work out ahead of time, the more fun and time you’ll have with your new baby.
When it comes to the before, there are several steps one can take to be prepared for the financial aspects of having a child. As I write this my wife is yelling over “have a baby shower!!” She is correct. Set up a registry and add items you will need so friends and family can chip in to help buy the endless list of stuff needed for a newborn!
Next up is a budget. You know I couldn’t go a year without some mentioning of a budget in a blog and of course, here it is. Make sure to review your current budget and how it will change with future costs associated with the little one. Whether it’s diapers or daycare, trust me, it all adds up. According to a 2017 report from the U.S. Department of Agriculture, a middle-class married couple spends an average of $296,684, about $17,500 a year, on raising a child from birth to age 18.1 And keep in mind, that doesn’t include the cost of college tuition, which we know has been inflating at a very high rate for some time now. You might be asking yourself, how is this almost $1,500 more per month going to fit into our budget and how do we plan for this? Start with the overall cost of having the baby; the prenatal care, labor and delivery, and how it all fits into your health insurance and deductible. Reaching out to someone in your human resources department is a good starting point to understand your insurance plan (co-pays, deductibles, etc.) and your coverage with local doctors and hospitals. Once you have the baby, you’ll have to change your health insurance plan to include coverage for your baby and the cost will likely increase significantly. You should speak with your human resources department about the family plan options available to you and the costs surrounding those options.
There are plenty of other costs that might not be glaringly obvious at first. There are doctors’ visits upon doctors’ visits, birthing classes, lactation consultants, and much more. Make sure to factor in these extra costs when updating your budget.
It is also important to understand and plan your maternity/paternity leave. How much time you and your partner get and whether you will be paid throughout your leave. For example, my wife is a nurse and had to work with the state to supplement her income with paid family leave and short-term disability pay, it was a strenuous process and something that took multiple days and calls to get in place. This is where that rainy day/emergency fund comes into play. Hopefully you’ve already started saving three to six months of your expenses to cover these types of unexpected costs should you need it.
A few more things to investigate are lining up daycare, if needed, and a pediatrician. Daycare is a big line item in your budget, so getting the best possible care for the best price will be something that you want to devote a good deal of time to. When it comes to a pediatrician, outside of the qualitative aspects and picking one you like, make sure they are in network!
Then there is the after your baby is born. While you are in the hospital you will be asked to fill out a form to get your child a social security number that will then come in the mail. You will need to reach out to the town or municipality for their birth certificate. It can be the town they were born in or the town you live in.
Your first order of business should be talking with your human resources department. An event such as having a baby is grounds to edit your benefit elections. In most cases you have either 30 or 60 days to add your child to your health insurance. Don’t sleep on this one as most babies tend to get sick in their first year of life and you do not want to be stuck without coverage.
Next is updating your beneficiaries across your accounts. Whether it’s on your life insurance, retirement accounts, and/or 401(k) plans, make sure to take the time to make the necessary updates.
Another option through your employer is to fund a health savings account (“HSA”) and/or a flexible savings account (“FSA”). An HSA is a type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses. One can use these untaxed dollars to pay for deductibles, copayments, coinsurance, and some other expenses that are bound to arise with your new family member. Meanwhile, an FSA is another tax advantaged account through your employer that lets you pay for many out-of-pocket medical expenses including dependent care! Both are great ways to lower your overall health care costs.
When adjusting your budget after your baby has arrived, you should consider room for savings and college funding. College 529 Plans are a great way to save. They are tax-advantage plans to be used for qualified education expenses, think tuition, room and board, books, etc. It’s never too early to start saving for college. Think about all the birthday gifts that are coming that you can sock away!
Another savings option is a custodial account. Think of a custodial account as a financial account that an adult controls for a minor, typically a child or grandchild. This adult acts as the account custodian, hence the name “custodial account,” for the minor, who is the beneficiary and owner of the account.
Custodial accounts for minors come in two options. The main difference involves the types of assets each can hold. Uniform Gift to Minors Act (“UGMA”) accounts can hold most types of financial assets, including things like cash, stocks, bonds, annuities, and insurance policies. But they are limited to these liquid assets. Uniform Transfers to Minors Act (“UTMA”) accounts can hold any sort of asset. That includes alternative investments like real estate, intellectual property, artwork, and collectibles.
Now that you have the baby and you are settling into this new life, review the budget you put together and see what has changed. Perhaps you chose a different daycare, or now you need a nanny, always update your budget accordingly.
Finally, estate planning. This is the one aspect of our financial lives that so many choose to ignore or push off. Your estate plan will let you make decisions about who will care for your children. Contact an attorney and get a Will, power of attorney, health care proxy, etc. in place. If you already have one in place, review and if needed update. In addition to these estate documents, life insurance is a discussion that needs to be had. You want to have a plan in place to help protect and take care of your family if need be. Plus, this is also a good time to review your existing policies and update your beneficiaries, if needed.
Life will get hectic so preparing before and after your child arrives will help ease the stress. A quick aside, if you plan on ordering furniture or a freezer or diapers, get ahead of it! This supply chain is not friendly right now!
Don’t forget to revisit your own personal financial goals. It is important not to lose sight of funding your retirement and future as well.
If you need help or have questions with anything I have mentioned, please feel free to reach out.
Richard Flahive – Private Wealth Advisor and Director of Research & Planning – Hightower Westchester
914.825.8639 – rflahive@hightoweradvisors.com
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