Diary of a CFP®: Preparing Financially for a Baby
By Marguerita Cheng, CFP® Board of Directors
December 2020 — The arrival of a new baby into the world is an exciting time. However, it can require planning and preparation as you consider what to expect when you’re expecting financially.
Babies are cute, loveable, exciting, and expensive. But it’s important to know what you might encounter before and after the baby is born. Preparing financially for a baby before it’s born is the best way to ensure a smooth transition and gain financial confidence.
Before the Baby Arrives
Babies cost money before they even make their appearance. Medical expenses are significant expenses right from the start. You’ll need a checkup to ensure you don’t have underlying conditions that might impact your pregnancy, and you’ll schedule many prenatal appointments after you conceive.
Start by carefully reviewing your health insurance. Do you have prenatal coverage? What about labor, delivery and hospital costs, and newborn care? Make sure you understand your deductible, copayments, medical products, processes, procedures, and facilities your insurance covers.
Also, consider the effect of having a baby on your employment. If you’re currently employed, think about how much maternity or paternity leave you’ll take. Talk to your employer about when you plan to return to work and whether you’ll receive compensation during your leave.
Look at Your Pre-Baby Budget
Before you become pregnant, or during the early months of your pregnancy, look closely at your budget. Add your anticipated medical costs to your spending plan, including copays and out-of-pocket expenses for all prenatal care, testing, labor and delivery, hospital and newborn care. Other potential needs might include childbirth classes or a lactation consultant.
It’s a good idea to save now for the basic items that a baby might need. Consider:
- Diapers
- Infant formula
- Breast pump
- Crib
- Stroller
- Car seat
- Diaper bag
Focus on the necessary items first, such as diapers and a car seat. Well-meaning friends and relatives may push gadgets and accessories that might be nice to have, but that might be expensive.
Start with the basics and plan for the cost of the more expensive items. As long as you budget for diapers, formula, a breast pump, and other ongoing expenses, you’ll figure out what you need (and can afford!) as time goes on.
Plan for Emergencies
It’s impossible to know what to expect when you’re preparing financially for a baby 100% of the time. Life is unpredictable, and emergencies, accidents, and unforeseen events can happen.
To protect your finances, plan for the worst by building up an emergency fund. Your emergency fund can cover unexpected medical bills, long-term hospital stays, therapy for postpartum depression, and incidental services that can threaten to throw your budget off.
The last thing you want is financial worries when you’re already stressed and anxious about medical decisions or unexpected occurrences.
Budgeting for Childcare
Childcare is another substantial expense to consider when you’re expecting. Think about your plans after birth. Will one parent stay home to care for the baby, or will you need to budget for childcare services?
According to a 2020 childcare survey from Care.com, childcare’s average weekly cost is $215 for daycare and $565 for a nanny. That is more than $11,000 per year for daycare and nearly $30,000 per year for a nanny. Whichever option you choose, it could account for a substantial portion of one parent’s salary.
Even if you ask grandma or another relative to watch the baby, you’ll need to have a backup if your primary caregiver is ill or unavailable.
Raising a Child and Insurance Costs
Delivering your baby and ensuring its health is just the beginning of what to expect when you’re preparing financially for a baby. Now you have a new mouth to feed, body to clothe, and person to care for — and it’s not cheap.
In an Expenditures on Children by Families report from the U.S. Department of Agriculture, middle-income families spent between $12,350 and $13,900 annually per child from birth.
You may also see an increase in insurance costs:
- Insurance premiums can go up when adding a child to the plan.
- Your policy may require you to meet a separate deductible for your child.
You’ll want to revisit your life insurance and disability insurance coverage to account for your new child.”
Sit down and make a list to review the numbers. If your budget doesn’t look as good as you had hoped, think about changes you can make. You might go out to eat less, reduce spending on clothes, cut back subscriptions, and spend less on entertainment.
Adding a new member to your family is a wonderful event. It also comes with a lengthy list of responsibilities. When you prioritize your spending and savings goals to make room for the baby, you’ll set your family up for financial success for years to come.