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Affording Baby: Planning for Your Bundle of Joy
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Whether the child is on the way or just a twinkle in the parents' eyes, providing for the well-being of baby—as well as mom and dad—requires a fair amount of planning before the arrival of the big day. Following a few guidelines right now can give long-term peace of mind.
Get the most from your medical insurance.
American Baby magazine recommends before the baby is born (and before conception, if possible) that you review your health insurance coverage for both mother and baby, pre- and postnatal. Consult the insurance company to find out exactly what benefits mom and baby are entitled to receive, at what facilities and for how long.
Maternity benefits and options vary from policy to policy, as do choices for childbirth facility and method, so if you would rather deliver in a birthing center rather than in a traditional hospital, for example, check first. Also make sure you're aware of the timetable of adding baby to your policy. The rule of thumb is 30 days from birth but verify to be sure.
Consider opening a flexible spending account.
Because insurance may not cover everything mom and baby may need or want, explore the possibility of a flexible spending account. Most employers offer this fund as an opportunity to spend tax-free dollars on necessary medically-related expenses like co-payments or vitamins, and they also sometimes offer such accounts for dependent-care costs such as a nanny. The only downsides are that the company may impose a cap on the contribution amount, and at year's-end, you usually lose the money you didn't spend.
Understand your leave options.
While your employer may have its own maternity leave, the federal government's Family Medical Leave Act, or FMLA, mandates that a company with more than 50 employees must grant eligible employees 12 weeks' job-protected, unpaid time off for the care of a child. FMLA is an option for both mom and dad, and a policy which supersedes that of any employer. The amount of additional leave mom may take after baby is born, and any pay she'll receive during that period from accumulated sick time or short-term disability benefits, if applicable, also depends on the employer.
Practice living on one income.
If mom or dad wants to be a stay-at-home parent on a full- or part-time basis, it's a good idea to perform a trial run of living on a reduced income. Banking the salary of the spouse who will not return to work sets the stage for the upcoming change in financial situation. It also allows you to purchase outright most, if not all, the accoutrements of babydom.
This strategy not only helps you learn to live on less but it also provides a fiscal cushion for the family. Making this arrangement work, of course, is easier said than done. Reducing obvious non-essential expenses like entertainment and take-out food is a good place to start but be careful not to cut your spending too drastically.
Set up and follow a budget.
A budget is key to making ends meet, whether or not mom or dad return to work. A U.S. Department of Agriculture study estimates that a middle-income family will spend $450,000 to raise an only child from birth to age 22, assuming an inflation rate and four years at a state university. Planning your family's financial welfare requires organization of expenses into fixed costs, like mortgage and insurance payments, which are set amounts paid on a regular basis, and variable costs, like clothing and groceries. To get a true picture of your normal expenditures and spending habits, keep a log of your purchases, from the vending machine candy bar to the new set of tires for your car. Consult a financial professional or a computer software package like Intuit® Quicken® or Microsoft® Money® if you need further direction.
Save regularly and creatively.
While savings should be an integral element in your budget, it is often forgotten, overlooked, or even ignored. You can never start saving for baby too soon and no contribution is too small. The money you once spent on diapers or formula can be now stashed into a college fund. A wise tax-free alternative is the Education IRA which allows tax-free growth as well as tax-free and penalty-free withdrawals for college expenses upon maturation. Encourage friends and relatives to donate to this IRA rather than give presents.
Increase your insurance.
Married couples without children usually require minimum amounts of life, disability and homeowner’s insurance but supplementing these before baby's arrival is extremely important. Previously it was acceptable to have enough life insurance to cover estate expenses but it's now imperative to increase coverage so that if one or both of you were to die, baby would be taken care of through college.
It's best to consult a professional to help tailor your family's needs, though most agents recommend each spouse should obtain a policy that replaces approximately ten times his or her income. While you're at it, consider updating your homeowners' policy and beefing up your disability benefits. This is also the best time to set up a will and open a safe-deposit box if you haven't already done so.