Adding a child to your family brings excitement and joy, as well as additional responsibilities and expenses. Many people are unsure how to prepare financially for a baby. FCAA member agencies have compiled tips and practical advice to help.
The best ways to financially prepare for a baby include:
- creating a detailed budget of monthly expenses
- planning for expenses and changes in income from parental leave
- maximizing employee benefits and health insurance
- paying down debt
- building an emergency fund
When planning to start a family, money can be a top stressor. It can feel like you’ll never be ready for the costs of having kids! The FCAA can help. With more than three decades of helping people overcome debt and better manage their finances, young families can turn to FCAA member agencies for helpful, trustworthy advice.
“Financial stability is important for all aspects of life but particularly parenthood,” says Sam Hohman, CEO of Credit Advisors Foundation and mother to three children. “Children are a joy, but they come with pressure and stress. You don’t need the added burden of financial stress, which can be an obstacle in being the best parent that you can be.”
Preparing financially for a baby can help reduce stress and enable you to be a better parent.
How to budget for a baby
Adjusting to life with a new baby can have unexpected highs and lows, both emotionally and financially. A detailed budget of monthly expenses will help you know what to expect and how much to save before the baby arrives.
“Financially, planning for children is no different than any of your other financial goals,” says Hohman. “Have a budget, understand the costs of having a baby and put money away for future expenses.”
To create a baby budget, you must know what your income is now, what it will be after the baby arrives with parental leave, your current expenses and what they may be once the baby comes.
Add all of your pre-baby income and expenses into a spreadsheet or budget tracking app to see how much money you have available to pay down debt or stash into savings or your emergency fund.
Then, on a separate sheet, note how you expect your income and expenses to change, including baby gear and childcare. These expenses can add up quickly.
If this feels overwhelming, try the FCAA’s free budgeting calculator or contact a FCAA member counselor for a free consultation. Our credit counseling agencies can help you with a budget assessment.
Read more about how to create a budget and stick to it.
Plan for new expenses and possible changes in income
“Expenses for children start long before they are born, with medical, hospital and other birthing bills. Once born, expenses initially include diapers, formula, medical and potentially childcare,” Hohman explains. “Don’t let it overwhelm you. More than things, children need love.”
Review your health insurance plans and contact your healthcare providers to determine your projected medical bills. Some hospitals allow you to prepay for your hospital stay and offer a discount if you do so.
You won’t be able to project all of your medical expenses, but this ballpark number will help you build a baby budget.
To estimate your other expenses, consider that newborns generally need diaper changes 8 to 12 times a day. The number of diaper changes decreases somewhat as they get older, but as diaper sizes increase, the cost also rises.
Maximize your health insurance and employer benefits
Planning for parental leave includes understanding your employer’s leave policies and health insurance benefits, and how to make the most of them.
Begin with these questions:
- Are you choosing providers to maximize your health insurance benefits? Make sure you use in-network providers to minimize out-of-pocket costs.
- Are you eligible for the Family and Medical Leave Act (FMLA) through your employer? FMLA offers up to 12 weeks of unpaid, job-protected leave with the continuation of group health insurance.
- Will you receive paid leave, or will your maternity leave be unpaid? Not all states offer paid leave, but 13 states and the District of Columbia have mandatory paid parental leave.
- Do you have short-term disability coverage that includes parental leave? This may provide a portion of your salary while you are out.
- Can you save your vacation and sick days to use after the baby arrives, or do you need to use them before the baby comes?
- Can you use your Health Savings Account (HSA) or Flexible Spending Account (FSA) to cover medical expenses or childcare?
Pay down debt before starting a family
If the thought of inviting a baby into an already tight budget makes you lose sleep at night, then it is time to tackle your debt. Before you jump into a debt relief program, make sure you understand the difference between them.
Debt relief methods include debt management plans, debt consolidation and debt settlement. These approaches differ significantly:
Debt management plans combine multiple debts – like credit cards and personal loans – into a single monthly payment.
FCAA member credit counseling agencies offer debt management plans with lower interest rates and a single, affordable monthly payment for people who qualify.
Certified counselors speak with clients to create an individualized debt management plan to pay off debt, save money, strengthen credit scores and stop collection calls. Guidance, support, and financial education (learning how to avoid future debt) are big perks of a debt management plan.
Debt consolidation can be done through a debt management plan or on your own.
It consolidates debt from multiple sources into a single payment with a lower fee or interest rate and a reasonable monthly payment.
“In many young households, the DIY approach can work well for dealing with debt,” says Todd Christensen, Housing and Education Manager for Debt Reduction Services.
“First, organize your debts, noting the current balances, the date the account was opened, the interest rates and the customer service phone numbers. Next, for credit cards, call the customer service number and explain your purpose: to pay down and pay off your debts. Then ask if they would lower your interest rates to allow you to pay that debt down faster,” advises Christensen.
Not all requests are successful, but surveys show cardholders are successful about 75 percent of the time. Regardless, pay at least the minimum payment due on all your debts, decrease your expenses and focus on paying off debt.
Debt settlement is the least recommended debt relief option.
Debt settlement is when the consumer stops making payments, causing the account(s) to go delinquent. Then the consumer saves up money to make a one-time loan payoff.
Debt settlement companies help negotiate with the lender and may set up an account for the consumer to self-fund for the future payment. After a waiting period, the debt settlement company will try to negotiate lower payoff rates. The delinquency period can harm your credit score, and creditors could say no to the debt settlement attempt.
Settlement companies earn a percentage of the “savings” you receive, and you may have to pay taxes on the amount of debt forgiven.
Build an emergency fund
With a new baby on board, an emergency fund can be a lifesaver. An emergency fund is a stash of money set aside to specifically cover unforeseen expenses. You never know when you may need to go to the doctor for a croupy cough or stitches from a toddler’s fall.
Work to set aside three to six months of living expenses, including new baby expenses. Set up your emergency fund in a separate account (a high-interest account, if possible). Then, contribute to it as often as possible, and set up automatic transfers to the account.
It can also help if you or your partner decides to stay at home with the baby, or you have childcare help from family members. Avoiding expensive childcare costs can save you an estimated $18k per year!
Read more tips on how to create an emergency fund.
Are you financially ready to start a family?
“Financial independence is a great position to be in when starting a family,” says Christensen. “That includes having a home of your own (renting or buying), having a steady income, and living below your means – meaning you’re able to put something extra toward debt payments and into savings and investments each month.”
A steady income does not mean a fully funded college education or yearly Disney trips, Christensen says. Instead, spend responsibly to live within your means.
It is also important to be on the same page with your partner, both emotionally and financially, when deciding to have a child.
“Starting a family and raising children will be a joint effort. If the would-be parents have not worked on combining their finances to some degree or are unwilling to share their personal finances with their partner, they’re probably not ready to share in the joint responsibilities of having a child,” Christensen said.
Remember, though, you do not need to be in perfect financial shape before you have children. “If you’ve done your homework, understand the costs of raising kids, and have done your best to eliminate your current debt, you are likely ready,” says Hohman. “Children are one of life’s greatest joys, but take the plunge with eyes wide open.”