The addition of a new baby may bring sleepless nights, but you shouldn’t lose sleep over the financial well-being of your family. Amid the countless diaper changes and unpredictable feeding schedule, make time to address the following five important financial matters to ensure your family’s security.
1 HEALTH INSURANCE Add your baby to your health insurance policy as soon as possible after the birth. Most insurers have a short time frame for adding new babies without penalty, so check your policy or talk with your company’s benefit manager for details. Also, investigate co-pays and coverage for well-baby visits, vaccinations and emergencies — the first year of a baby’s life is full of both expected and unforeseeable health issues. If you contribute to an FSA (flexible spending account), adjust your withholdings now to take advantage of tax benefits.
2 FAMILY AND INCOME PROTECTION What would happen if you or your spouse experienced a catastrophic event? Make sure the wage earner(s) are covered with both disability and life insurance. If employer plans don’t offer enough coverage, purchase additional policies to supplement those limits. Term life insurance is generally less expensive than whole life insurance. Choose longer terms — 20 to 25 years — to cover your family’s expenses at least until the new child is in college. All policies will require naming beneficiaries (as will all your financial accounts), making this an important time to review your will. If you don’t yet have a will, now is the time to make one. Not only does your will let you specify the distribution of your assets according to your wishes, it lets you name one or more primary and backup guardians for your child in the event of your death or incapacitation. State laws vary and could assign your child to be cared for until adulthood by individuals you would not have chosen.
3 EMERGENCY FUNDS Life with a new baby is unpredictable. Sometimes you cannot anticipate pitfalls, such as your sister unexpectedly moving away — along with her free, loving daycare. Start an emergency savings fund now if you don’t already have one. Begin with small amounts, and open a separate account to keep that money from being used for everyday expenses. How large should the fund be? Think about large expenses you might encounter — a car or home repair, a hospital bill, airfare for a wedding or funeral — and add enough to your emergency account to cover those expenses over time. Don’t be discouraged if you have an emergency and have to wipe out your account. Yes, you will have to start over, but the account did what it was supposed to: It covered your bills without your having to turn to high-interest credit cards or loans.
4 CHILDCARE If up until now both parents have worked outside the home, start now to plan how you will care for the new baby after employer-provided benefits such as sick leave or FMLA (Family Medical Leave Act) run out. Deciding whether your child will be cared for by a parent or an outsider (nanny, au pair, childcare center, etc.) is not only an emotional choice, but financial as well.
Evaluate the costs of converting a wage-earner to a stay-at-home caregiver by comparing actual expenses for working (childcare, commuting, lunches out, clothing, etc.) against what you can save by staying home (lower transportation costs, fewer restaurant meals, more savings through couponing, etc.). Be sure to recognize non-financial conveniences as well, such as a stay-at-home parent being able to handle doctor visits and health emergencies more quickly than a parent who is working away from home.
5 LONG-TERM SAVINGS (retirement vs. college): A new baby means more obligations in the future, including college savings. You may find college competing against retirement savings if your budget can’t handle both amounts, and you may be tempted to put everything into college. Resist the urge to shortchange yourself. Although your child may be eligible for scholarships or grants, and most certainly will be able to take out loans for college, you will not have those options for retirement. Make saving money regularly in an employer-sponsored 401(k) plan or your own IRA or Roth IRA your first priority.
For more tips on managing your finances, visit www.smartaboutmoney.org/baby.