Get Financially Fit for Baby
You are about to bring a new life into the world and you want to be ready. But there’s more to it than designing the nursery and shopping for clothes. Are you also getting financially fit for your baby?
These tips from financial advisors will help you do that so you can spend more time enjoying your baby, and less time worrying about how much she costs.
Get a Financial Physical
When it comes to the pregnancy “to do” list, getting a financial physical is “just as important, if not more important, than buying strollers, clothes and decorating the baby’s room,” says Court Creeden, a financial advisor with Parent Financial. This allows you to “gain clarity on where you are now as a couple and where you want to go as a family.” It also involves several key financial planning steps that parents of all income levels can and should take in preparation for baby’s first year.
Create a Budget
“Having a baby means you’re going to have additional expenses that you didn’t have before,” says Nathan Farrior, a program manager with Durham Regional Financial Center. Preparing a budget during pregnancy gives you a chance to adjust for those added costs, and allows you to track and plan your expenses so you aren’t hit with too many surprises after baby arrives.
Creeden suggests pricing out one-time and ongoing expenses related to the birth of your baby. This will help you determine if your dream nursery matches what you can really afford, and if all new clothes are truly necessary. Once you have a ballpark figure in mind for what your baby’s first year might cost, allow for some extra. There are always surprises.
To help you track specific known expenses and find out what your baby’s first year might cost, BabyCenter offers an online calculator at babycenter.com/baby-cost-calculator. Determining as many of those costs as possible and how they fit in your budget should guide many of the decisions you make as new parents.
Decide About Working
Having a budget also helps expecting parents determine whether one spouse will be able to stay at home with the baby or cut back on work, if that’s what both parents want. Full-time daycare costs an average of $1,000 per month. Holly Nicholson, a certified financial planner from Raleigh, advises trying to live off one salary and “banking the other one” before baby arrives. This helps couples determine whether they can afford to have one parent stay home with the new baby and if any budgeting adjustments are necessary.
Save More, Spend Less
Living off one salary during pregnancy is also a great way to jumpstart the savings habit. If expectant parents haven’t already started saving a little money each month for emergencies, now is the time to do it. Daniel Corley, a financial advisor from Chapel Hill, recommends putting away at least three to six months of expenses. While this is the general rule for everyone, he advises aiming for the higher amount in preparation for maternity leave.
Retirement may be the furthest thought from many expecting parents’ minds during pregnancy, but saving for it should be a top priority. Nicholson advises putting at least 10 percent of your income into a 401(k) plan and/or a Roth IRA. If you can’t afford to do that, Corley advises setting an overall 10 percent savings goal for your baby’s first year. That should translate into 7-8 percent going toward retirement initially and 2-3 percent going toward education savings, such as a 529 plan. Once you establish that base, Corley advises adding 2 percent a year toward these goals over the next 10 years.
In addition to saving money during pregnancy, living off one salary makes it possible to pay down credit card debt and other large, high-interest debts. Corley says you should have “zero credit card debt when the child arrives” because it’s a mistake to think you’re going to “get rid of it easily once the child gets here.”
Evaluating employee benefits is a crucial step during pregnancy. Start with your health insurance and find out how your plan covers delivery costs and the addition of a child to your policy.
The next step is to figure out how much life insurance you have through work. Creeden warns that many people think they have plenty just because they have a policy through their employer, but are surprised when they find out how much it’s really worth. He cautions against taking someone else’s “guesstimate” for how much life insurance you need because every family’s needs are different. Know your regular expenses, future planned expenses and your family’s goals. Those numbers should dictate how much life insurance you need.
Child care and health flexible spending accounts provide another way to save money because they allow you to pay for health care expenses with pre-tax dollars. Child care FSAs allow you to pay for daycare expenses with up to $5,000 pre-tax. Up until now, there wasn’t an official limit on how much you could contribute to a health FSA; however, as part of the Affordable Care Act signed by President Obama, FSAs will incur annual limits of $2,500 a year starting Jan. 1, 2013. This limit is per individual, so each working spouse can elect to set aside up to $2,500. Going forward, that limit could rise annually based on inflation. FSAs will remain “use-it-or-lose-it” accounts, so any unused balance for one year can’t be used to fund expenditures the next year.
Make a Will
Naturally, pregnancy is not a time when you want to think about “what if,” but it’s a must. “This is the time to write a will and designate a guardian” if something should happen to you or your spouse. As soon as your baby is born, finalize everything and be done with it — at least until the next baby comes along.
Financial planning may seem like the most “un-exciting” thing you can do during pregnancy, but as Creeden says, you don’t want to wait until you’re in the wonderful “tornado of parenthood” before realizing what you need to do.
Robyn Kinsey Mooring is a Durham-based writer and the mother of two boys.
Typical Versus Ideal Family Expenses
Living expenses = 60-70 percent
Taxes = 15-25 percent
Insurance and savings = 0-5 percent
Living expenses = 50-60 percent
Taxes = 15-25 percent
Insurance = 5-7 percent
Savings = 10-20 percent
Source: Court Creeden, financial advisor with Parent Financial