When financially preparing for a baby, it’s important to understand your budget, get life insurance, and establish a will
Adding a new member to your family is nothing short of exciting. With a new baby comes new financial responsibilities, which can be stressful for new parents. The average cost of raising a child in the US through the age of 17 is estimated at upwards of $230,000. With the cost of housing, food, and childcare rising each year, you and your partner must sit down to understand expected costs and what lifestyle changes you may need to make to properly afford to raise your new baby. Among going to doctor visits, buying all the things you need for a baby, and setting up your nursery to welcome your little one, understanding your finances can feel a bit overwhelming. That’s why we’re breaking down the 6 financial steps you need to take to prepare for the new addition to your family—from getting term life insurance quotes to establishing a will. Let’s get started!
Step 1: Create Or Update Your Budget
Understand your family’s budget before getting life insurance quotes or updating your health insurance policy
No matter if you have a budget set up already or you are starting from scratch, you will need to factor in new expenses, such as daycare or formula. It is estimated that the cost of raising a baby is upwards of $21,000—and that’s just in the first year. To get a better idea of what to financially anticipate when you welcome your bundle of joy into the world, there are baby cost calculators you can use to estimate the costs for your specific situation. For example, you may not need to pay for daycare if you plan on staying at home or you have a family member who is available to watch your baby while you work. Note any anticipated changes to the cost of your health insurance and estimate the monthly cost to get life insurance to support your family in the case of an untimely death.
After you have a better understanding of your new expenses, it’s time to dive into your current expenses and income to prepare your budget for your new bundle of joy. First, start by calculating your net income and then track your spending on a month-to-month basis to understand where your money is going. List any fixed expenses, like your mortgage and car payments, and variable expenses, like groceries and entertainment. Together, come up with a list of short- and long-term financial goals that you want to achieve in the coming years. These goals can include saving for your child’s education or paying off current debts.
When making a plan for your budget, the goal is to look at your finances from a 50/30/20 approach. Using this method, 50% of your finances will be devoted to your needs, 30% will be devoted to your wants, and 20% will be devoted to paying off debt. While this approach may not work for everyone, it is a great place to start or a great goal to attain in the future. With a realistic budget planned out, you can start to identify what lifestyle changes you need to make to stick to your financial goals.
Step 2: Update Your Health Insurance
You have 30 days after giving birth to add your baby to your health insurance and make any necessary policy changes
If you don’t have health insurance yet, now is the time to start thinking about it. With many health insurance plans, you must wait until an open enrollment period to add anyone to your policy or make changes. Certain qualifying events can open special enrollment, but pregnancy isn’t one of them. That being said, the birth of your baby is a qualifying event. After giving birth, you can buy health insurance for you and your baby within 60 days of giving birth if you are purchasing from a marketplace. If you already have health insurance, you will have a 30-day special enrollment period to add your baby to your policy and make any updates to your coverage that you may need. But, if you’re under the age of 26 and are still on your parent’s insurance, you won’t be able to add your baby to the policy. Because of this, you will need to purchase a separate policy for your child.
When updating and understanding your health insurance coverage, you must understand the cost associated with your childbirth. While most health insurance plans will cover the cost of delivery, there may be some out-of-pocket expenses you will be expected to pay. Call your insurance company a couple of months before your due date to get a list of any expenses so you can prepare ahead of time.
Step 3: Purchase a Life Insurance Policy
When you get a life insurance policy, your family will have more financial security in the event of an untimely death
Getting a life insurance policy may not be at the top of your priority list, but it is absolutely something to consider when growing your family. While the idea of you or your partner passing away is devastating, you now have to consider your child’s future if a tragedy would occur. When you have a life insurance policy, the benefits paid if you or your partner pass away would help supplement your family’s income, pay off outstanding debts, and set aside money for your child’s future.
When it comes time to find life insurance policy quotes, you first need to understand how much coverage you need. Consider your debts—including any mortgage or student loans—your partner’s financial contribution to your family, and the amount of money you would like saved for your child’s college education. Life insurance coverage is not one-size-fits-all, so understanding the financial needs of your family is crucial when you get life insurance.
After understanding your coverage needs, it’s time to start thinking about what type of life insurance would best suit your family’s needs—term life insurance or permanent life insurance. Especially for young couples, term life insurance is generally the top choice. Term life insurance covers you for a specific period—be it 10 years or 40 years. Premiums are determined by the insurance company and are based on your health, age, and policy value—among other factors. You may have to undergo a medical exam or disclose your medications or family health history to get a life insurance policy. If you or your partner die during the policy term, your beneficiaries will be paid the face value of your policy. If your policy expires before your death, your beneficiaries do not receive a payout, so you must select the appropriate coverage term length or renew your term policy upon expiration.
On the other hand, permanent life insurance covers you for the entirety of your life. Permanent life insurance differs a bit in terms of the cash value of the contract. With this type of life insurance, you can borrow against the savings portion of your policy. Premiums for permanent life insurance are generally higher in price, though, so you and your partner should sit down to understand which life insurance type best suits your needs.
Step 4: Set Up a Savings Account For Your Baby
Figure out the best savings plan to financially help your child down the road
It’s never too early to start saving for your baby’s future—especially if you are in the financial position to start setting money aside now. While getting life insurance will help your family financially if you or your spouse pass away, you still may want to start saving money for your child to help them prepare for big life events, like going to college or buying a house, later in life. Setting up a savings account for your baby early on gives you a place to start designating the money you want to set aside for your baby while also accruing interest on the account balance to make your contributions go even further.
When searching for the best bank to open a savings account, you’ll want to find a high-interest account with low or no fees. To avoid fees, you may want to consider opening up an account at a financial institution in which you already have an account established.
Another option to help you financially plan for your child’s future is a 529 College Savings Plan. With this plan, anyone can contribute money to the account while receiving some great tax benefits. Once your child is of age to pursue higher education, they can use the funds in the account for qualified educational expenses, such as tuition, books, or equipment. No taxes are taken out on the growth of the investment when the money is put towards these qualified expenses. Keep in mind, though, that if your child uses these funds for non-educational expenses, they will have to pay federal income tax on the growth of the investment. If your child decides against pursuing higher education, the account owner can designate a different beneficiary as long as they are immediate relatives or descendants of the original beneficiary. No matter which savings plan you prefer, you can start making contributions now to save for your child’s needs down the road.
Step 5: Re-Evaluate Your Emergency Fund
Update your emergency fund to account for new expenses to care for your baby
With or without a newborn on the way, unplanned expenses are bound to pop up. No matter if you lose your job, need expensive maintenance service for your car, or have unforeseen medical expenses, setting aside money in an emergency fund can help you prepare financially for unexpected financial obligations. Especially if you already have a high amount of debt, an emergency fund can help you pay for these expenses without relying on credit cards or loans. While there is no “right” amount of money you should save for emergencies, in the most ideal circ*mstance, you should save at least 6 months’ worth of projected life expenses.
No matter if you already have some money set aside for emergencies or you’re just getting started with your emergency fund, you should re-evaluate your savings goals when considering the expenses of raising a newborn. Just as you do when creating a budget, think about how much money you may need for food, clothing, diapers, and any out-of-pocket expenses that could come up. How much would you need to save up if you or your spouse were unemployed for a month? How much would you need to save up if you or your spouse were unemployed for three months? After understanding how much money you may need on a month-to-month basis to support your child, then you can identify where you can lower unnecessary expenses so you can start putting more money aside for your emergency fund. With this fund set up, you will have some wiggle room in your finances to cover your financial needs as you pay for any unexpected expenses.
Step 6: Create a Will
Establishing a will helps ensure that your assets are transferred and guardianship of your child is set
Establishing a will is often overlooked by young, new parents. People more commonly wait until they are a bit older to create a will. If you or your partner were to die without a will, transferring assets can lead to a costly legal battle for the family members still living. On top of that, a will allows parents to designate guardianship for their children if both parents pass away prematurely—which is why new parents must establish a will sooner rather than later.
To get started with your will, you’ll have to decide if you would like to work with an estate planning attorney or do it yourself using online software programs. In most cases, it’s best to work with an attorney to make sure that everything is filled out and notarized properly. You will select your beneficiaries and determine who gets what assets you will leave behind. When it comes time to designate a guardian of your child in your will, it’s best to assign multiple guardians in the case who you name cannot accept the responsibility of guardianship. Once you’ve reviewed your will, you must sign the will properly—otherwise your will may be deemed invalid. You must have a witness sign your will as well. Depending on your state, the witness cannot be someone who will stand to inherit anything from the will. It’s best to select a witness who is likely to be around in case your will is contested. By establishing a will, parents can rest assured that their children will be taken care of in event of an unexpected death.
Preparing for a newborn is an exciting yet stressful time—especially when it comes to finances. From updating your health insurance policy to getting life insurance, it can feel overwhelming to make sure you have all of your bases covered. We hope that by following these steps, you feel better financially prepared to welcome the newest member of your family into the world.
