“It's not about having it all. It's about having what you value most."
- Jean Chatzky
This post is the third in a series about preparing financially for five BIG life events. Read post #1: Buying a House, post #2 Job Transition Checklist, and post #3, Getting Married
Of all the events in life, a new baby is one of the most joyous. But beneath the excitement of a new baby is the realization that carrying, delivering, and raising a child is expensive. So it’s important to be financially prepared. As a first-time mom, I know these were all things I started thinking about when we knew our little boy was on the way.
To make sure you’re ready for the reality of the pre-and post-baby financial hits, we’ve put together a list of financial considerations and expenses that you can expect to encounter on your parenthood journey.
Pre-Delivery Planning
Prenatal
Before the process of delivering the baby begins, the mother needs to focus on staying healthy and making sure the baby is too. For that purpose, prenatal checkups are a necessity.
With typical employer-provided health insurance plans, prenatal and delivery care for an uncomplicated birth will have an out-of-pocket cost of around $2,250, which includes doctors' visits, routine urinalysis, blood tests, and an ultrasound.
If In Vitro Fertilization (IVF) is required, the cost increases exponentially. There is a lot of variation with how much IVF is covered by insurance (and often it is not covered at all), so check your policy for more information. The average cost of in vitro fertilization in the U.S. is currently $11,000 to $12,000.
Maternity clothes will also be necessary, so be sure to build that into your budget too (about $500).
Delivery
When the big day arrives, you will likely face a few days in the hospital. Here are a few things to find out in advance from your insurance company to anticipate the costs:
Do I have a copay?
What is my deductible and what will I be responsible for paying?
What labor and delivery expenses will be covered?
What are our out-of-pocket maximums for the year?
What if I have a C-section?
The average stay in the hospital is 24-48 hours–longer if a Cesarean section is necessary. Cesarean or C-section births range from $7,500 – $14,500.
After Baby Arrives
Plan for Maternity/Paternity Leave.
Knowing how much time your employer offers for family leave will also factor into your finances. Many times companies offer a limited amount of paid time off, with the option of extending it into some unpaid leave time. Check with your HR department for your employer’s policies.
Baby Accessories
Babies require a lot of extras. Strollers, car seats, nursery furniture can add up, but often they can be found less expensive through Craigslist or friends who no longer need them. Here’s a list of major purchases you may want to consider.
Crib, Mattress, & Bedding: $500
Changing Table: $250
Rocker: $350
Dresser: $300
Decor Items: $100
Baby Clothes: $600
Diapers & Wipes: $900 * save with subscriptions from Amazon
High Chair: $200
Toys: $150
Baby Food & Formula: $300
Stroller, Car Seat, & Carrier: $500
Miscellaneous: $500
This resource from BabyCenter will also help you determine which additional expenses you should plan for.
Medical Expenses
Infants require several well-baby visits. These visits are typically covered by insurance, but again, double-check your policy. Babies also have a tendency to get sick. Factoring co-pays for these visits into your finances is important as well.
Food
Breastfeeding is free, of course, but if you plan to nurse, you will likely want a breast pump, nursing bras, and tops. You may also need to supplement with formula, which can cost up to $100 per month–more if you decide to forgo breastfeeding altogether. Once the baby is about 4-6 months old, you’ll also need to factor in the cost of baby food.
Tip: Don’t buy a breast pump until you contact your insurance provider. Many insurance providers will pay for it.
Childcare
Assuming you and your partner both plan to work at least part-time, child care needs to be included in your financial plan. Even if you work from home, having someone on hand to help with the baby will help you focus and reduce your stress level.
Good quality childcare can be expensive. For nanny or au pair care, expect to pay $400-$800 per week. Daycare providers will be less expensive, but may still take a significant portion of your paycheck. To see what it costs in your state, use this calculator from the Economic Policy Institute.
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REMEMBER TO DO THESE AFTER BABY ARRIVES:
Update your health insurance to include the baby
Update your will to make sure your family is well cared for.
Buy Term Life Insurance (to financially protect you and your family against worst-case scenarios) or update your life insurance to include children as beneficiaries.
Adjust your HSA contributions if you have an account.
Add an FSA account for childcare expenses. These accounts are funded with pre-tax dollars, so using them effectively lowers the cost of child care expenses and also helps reduce your total taxable income.
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Prepare Your Finances
With all the expenses of raising a child, there is one bit of good news: the US Government offers a child tax credit of up to $3,600 per qualifying child under 18. And starting in 2021, parents may be able to get some of that in the form of monthly advanced payments if your modified adjusted gross income is under $75,000 for single filers, $150,000 for married couples filing jointly, and $112,500 for head-of-household filers. The child tax credit phases out above those income thresholds. Use this IRS tool to see if you’re eligible.
Need More Room?
When you bring a baby home, you will find that your house will become full of things like bouncy swings, play areas, and toys. The balcony you once loved will look more like a potential risk for your baby, or the schools in your current neighborhood may leave a bit to be desired. That’s when people start considering a home upgrade. If you think you may be in this category, financially planning ahead for an upsize should start early.
Financial Planning
Along with an emergency fund, you may want to consider a few other important savings accounts to grow as your child grow up:
College Savings (529 plan)
College will seem like a long way off when you’re holding that sweet baby, but freshman year will come faster than you think. To prepare for that day, most states offer 529 plans which are a type of savings and investment account in which money grows tax-free plans for qualified education expenses. However, you don’t have to contribute to your own state’s plan. In reality, you’re free to choose any plan you’d like, so it’s worth comparing your options (and some states offer more than one 529 plan).
Custodial Accounts
Setting up a custodial bank account for your child is a way to save money for them until they reach adulthood (age 18), or to get them started on good savings habits. There may be tax implications for accounts over $950 however. If you plan to give more than $15,000 individually ($30,000 as a couple) in a year, it will be subject to gift taxes.
Trust Funds
To create a long-term financial solution for a child when they reach adulthood, trust funds offer options. There are specific types of trusts available, each with its own strengths and weaknesses. A revocable trust or living trust allows the grantor to modify the assets throughout their lifetime. The most common use of a revocable trust is to pass assets down to children or grandchildren.
Savings Bonds
You may receive monetary gifts for your little one in the form of savings bonds. A savings bond is a government bond that is a way of raising public funds in exchange for a guaranteed return on investment. They reach their full value after 30 years, but typically the bond has accrued enough interest after 20 years to reach their full value, making it a way to help finance college.
Roth IRAs
A Roth IRA in particular is great for children. Your contributions to the fund will grow tax-free and can be pulled out at any time. The investment growth can not only be pulled out for their retirement, but also for education expenses or a home purchase.
Regardless of how you plan to budget, save, or invest for your new bundle of joy, Merino Wealth is here to help you grow your family and your future. Contact us to get started.