A Nine-Month Plan for Preparing Your Family’s Finances Before Baby Arrives

It’s essential to get your finances in order before your baby is born. Here are steps to ensure financial stability.

If you are expecting a child, you may have become familiar with various medical terms but don’t forget the importance of financial preparedness. Understanding financial terms like “section 529 tax-advantaged college savings” and “spousal IRAs” is crucial.

According to a 2017 report from the U.S. Department of Agriculture (USDA), the average middle-class American couple spends around $296,684, approximately $17,500 per year, on raising a child from birth to age 18, excluding college tuition costs.

Meeting these expenses can be challenging for many families. A 2016 Consumer Finance Survey by the Federal Reserve revealed that nearly two-thirds of households with young children are not saving any money for college or other child-related expenses.

Managing Finances as a Parent

Those zero-digit savings start becoming a concern when a baby reaches around 6 months old, according to Ruth Hayden, a financial consultant and author based in St. Paul, Minnesota. She points out that just as the baby becomes adorable and engaging, couples often find themselves arguing over financial matters.

The Importance of Planning

To prevent potential conflicts, Hayden, along with a group of financial experts who collectively have 26 children and 18 grandchildren, has devised a comprehensive nine-month plan to help couples secure their financial future during pregnancy. Studies have shown that individuals who follow a structured financial plan are able to save twice as much money compared to those who do not.

Enjoying the Rewards

On a positive note, by making financial decisions in advance, parents-to-be can free up more time and energy to have quality bonding moments with their newborn baby.

First Month

It is crucial for parents to begin organizing their finances as soon as possible. Upon receiving a positive result on the pregnancy test, it is an opportune moment to initiate preparations for the forthcoming expenses associated with raising a child.

Reduce credit card debt.

The Positive Parent recommends focusing on improving your financial situation during the first trimester. One essential step is addressing credit card debt. Maintaining high balances on credit cards results in substantial annual interest costs, impacting your ability to manage new expenses for your expanding family effectively. Additionally, it can hinder your family’s future financial goals, like securing loans for significant purchases such as a home or a family vehicle.

It is advisable to explore transferring your balance to a credit card with a lower interest rate. Websites like Bankrate can help you compare rates and fees. After transferring the balance, it is prudent to limit new charges until you have successfully paid off the existing debt.

Monitor your expenses.

Initially, you should establish a new budget and start monitoring all your family’s expenditures, no matter how small. This practice will give you a clear overview of your monthly spending. Save receipts, jot down notes on your phone, or use a spreadsheet for this purpose. By the third month, this diligent tracking will enable you to understand your family’s spending habits, allowing you to pinpoint areas where you could potentially reduce costs in preparation for the baby’s arrival.

Second Month

In the second month of pregnancy, parents should maintain a record of expenses and ensure that beneficiaries are up to date.

Update Your Beneficiaries

Review and remove any outdated beneficiaries listed on your employer-sponsored life insurance and 401(k) plan, especially if you were single when you enrolled. According to Dee Lee, a certified financial planner at Harvard Financial Educators, it is crucial to revisit these beneficiary designations whenever there is a significant life event. Make sure that your child is designated as the beneficiary, rather than your parents, siblings, or an ex-partner.

Third Month

During this period, parents should prioritize checking their credit score and utilizing the spending data gathered to establish a structured budget plan.

Monitor Your Credit Score Regularly.

Even if you are diligent about paying your bills on time, mistakes can still occur on your credit report. It is crucial to address any errors promptly to avoid unnecessary stress. Maintaining a good credit score is especially vital for Positive Parents as they plan for major life purchases like a house or a car. A high credit score can secure favorable interest rates on loans, ensuring financial stability for your family.

Obtain your credit report from reputable agencies such as Equifax, Experian, or Transunion for a nominal fee. Be cautious of sketchy providers offering free credit checks, as they may pose identity theft risks. Furthermore, it is advisable to limit credit inquiries to once a year to prevent negative impacts on your credit score.

Analyze the figures.

Now, it is essential to move on to the final stage of budget creation. Compile all the financial data gathered over the past months and input them into a spreadsheet or budget management application (if not done already). This step will provide a comprehensive overview of your current expenditures—before undertaking any adjustments in preparation for welcoming a new baby.

The objective should not only be to break even but to establish a regular saving habit, emphasizes Stephen Brobeck, the executive director of the Consumer Federation of America (CFA), a Washington, D.C.-based advocacy and education organization. A survey conducted by Bankrate in 2019 revealed that one out of five employed Americans is not putting aside any funds for retirement, an emergency fund, or other future financial objectives.

When formulating your new budget, take into account the upcoming expenses associated with raising a child. As per a 2015 report from the USDA (latest available data), middle-income households on average can anticipate spending around $1,056 per month on providing basic necessities like food, clothing, housing, transportation, and childcare for an infant. Should you decide to take an extended break from work (or transition to part-time employment), you will encounter the financial challenge of managing these additional costs with a suddenly reduced income.

Seeking Financial Guidance

Couples struggling to save the recommended 10% of their income may consider consulting a certified financial planner. These professionals are experts in helping clients establish financial goals. The Financial Planning Association provides information on certification and fees on their website. Additionally, the CFA offers complimentary consultations and budget advice through the America Saves initiative.

Fourth Month

During the fourth month of pregnancy, it is essential to evaluate the financial aspect of covering your baby’s future expenses and considering the duration of your maternity or paternity leave from work.

Connect with HR Personnel.

Obtain a comprehensive overview of maternity or paternity benefits from the human resources department. It is mandatory to inform your employer at least 30 days in advance when requesting time off under the Family and Medical Leave Act. This act allows any new parent working for a company with a minimum of 50 employees to take up to 12 weeks of unpaid, seniority-protected leave.

Your employer is required to continue paying the regular portion of your healthcare benefits throughout the leave period. Moreover, apart from any paid leave entitlements, federal regulations also stipulate that birth mothers are eligible for short-term disability payments (usually lasting six to eight weeks) if their company typically provides disability benefits in other circumstances.

Practice Frugality.

After establishing a new budget last month, it might be tempting to relax and indulge until the baby arrives. However, this approach is not recommended.

According to Chatzky, during the second trimester, it is crucial to start saving money. Begin by allocating funds to cover any anticipated loss of income due to unpaid maternity leave. Plan ahead to bridge the income gap before it arises.

If you also intend to furnish a nursery or purchase expensive baby gear, allocate additional savings for these expenses. Consider investing the money you would spend on the baby in short-term CDs or money-market accounts to accumulate a substantial amount by the due date with an early start.

Fifth Month

Approaching the halfway mark of pregnancy, it is advisable to begin exploring childcare choices and financial planning for the same.

Explore Daycare Options Early.

The second trimester presents an ideal opportunity to assess childcare choices before facing fatigue and physical limitations. Consider utilizing the services of Child Care Aware, a free resource connecting you with local childcare agencies that track available options, costs, and service types.

Prioritize quality by thoroughly vetting nanny references, ensuring daycare staff have appropriate education in early childhood development, and maintaining consistent and qualified caregivers for your child.

Sixth Month

At this stage, it is important for parents to address essential matters such as life insurance and drafting a will.

Purchase life insurance.

According to James H. Hunt, a retired life insurance actuary for the CFA, The Positive Parent should consider insuring themselves for at least six to eight times their gross annual salary to provide for their expected dependents. Cash-value policies like whole life, variable life, and universal life are often overly complex and not as beneficial as other investment options like tax-deferred and tax-free savings plans.

Hunt recommends that parents opt for term life insurance, ideally for 20 years or less. For example, a healthy 30-year-old woman can obtain $750,000 in coverage for approximately $300 annually. It is advisable to compare insurance rates on websites like www.term4sale.com.

Create a will.

While it may be difficult to decide who will take care of your child and manage their finances in the event of both parents’ passing, it is advisable to create a will and select a guardian before the baby is born. By doing this early, you can avoid worrying about it once the baby arrives and focus on your new family member. Typically, hiring a lawyer to draft your will can cost between $500 and $1,000 on average.

Seventh Month

During the seventh month, parents should think about initiating a college fund for their baby.

Register at Upromise.

Tired of negative news? Upromise, a popular college savings program with over 3 million members, allows you to kickstart an education fund by simply shopping for essentials like groceries, gas, and dining out. The best part is, you can open an account without specifying a beneficiary, making it possible for expectant positive parents to save for their future scholar even before choosing a baby name.

To join this no-cost program, simply visit www.upromise.com and register your credit cards. Subsequently, a percentage of your card charges (up to 5% at select retailers and 10% at certain restaurants) will automatically contribute to your child’s account.

Learn these numbers: 5-2-9.

If your new budget allows for college savings, consider tax-advantaged 529 investment plans. These plans offer the opportunity to accumulate between $300,000 to $500,000 per child (depending on the state) without paying taxes on the earnings. With all 50 states offering a plan and around 67 investment strategies to choose from, the options may seem overwhelming. However, Joseph F. Hurley, the CEO of www.savingforcollege.com and author of The Best Way to Save for College, recommends taking the time now to carefully review your options.

You can open an account in advance, as most plans allow for up to six months to add a social security number once the baby is born. To encourage family and friends to contribute to your child’s college fund instead of traditional baby gifts, consider having them deposit funds directly into the 529 account.

Eighth Month

Consider the Generosity of Friends

Currently, some of your parents’s friends are likely creating handmade gifts to celebrate the birth of your baby. They may also be organizing surprise baby showers. People tend to be incredibly generous when a child is born, so it’s wise to wait and see what gifts you receive before purchasing anything beyond the essentials for your newborn.

Opening a safe-deposit box at the bank is also a good idea. Some individuals might gift savings bonds to mark the occasion of your baby’s birth. It’s important to store them safely alongside the birth certificate. Popular options include Series EE bonds and inflation-protected Series I bonds, as they can be cashed in tax-free for educational expenses.

However, it’s crucial that these bonds are registered in your name, not your baby’s, to take advantage of this benefit. Keep a record of important details such as series, denomination, issue date, and serial number before storing them securely. You can conveniently monitor their growth and value online through Treasury Direct.

Focus on your retirement savings.

During the third trimester, while preparing for the arrival of your baby, it may seem challenging to think about retirement savings. However, it is crucial to prioritize this goal. Hayden suggests that parents who plan to take a break from work, even for a short period, should commit to continue allocating funds towards their retirement savings.

Parents who take a year or longer off from work can contribute to a spousal IRA, a special retirement plan. The IRS permits a nonworking spouse to save up to $3,000 annually in this account and deduct the amount from the family’s taxable income, even if the working spouse already contributes to a 401(k) plan at their workplace.

Ninth Month & Beyond

Approaching the due date, parents should maintain their budget discipline and strive to increase savings. It is essential to make arrangements for securing insurance coverage for the newborn.

Obtain insurance coverage for your newborn.

Parents typically have 30 days post-delivery to include their newborn in their health insurance plan. It is advisable to check with your insurance provider or HR department. Consider completing the enrollment form early, leaving space for the baby’s details like name and birth date. Delegate this task to your partner or a support person to submit the paperwork promptly once you are back home from the hospital.

Moreover, following our planner, the last month of pregnancy should be a time to unwind both financially and physically. Take some time to relax, enjoy a soothing beverage, and acknowledge yourself for organizing your family’s finances in readiness for the new addition.