Planning for the birth or adoption of a child is exciting and being proactive about your financial stability can be paramount when expanding your family. However, no matter your current financial status, you can find ways to plan to get ahead financially.
Let’s look at ways you can prepare financially.
1. Pay down high-interest debt
It's a good idea to plan to pay down your high-interest debt as much as possible before expanding your family. Consider narrowing down what method you want to take to tackle your debt. For example, strategies for deciding how to apply extra payments: The avalanche method begins with paying the highest interest rate first. The snowball method starts with paying the lowest or smallest balance first. With the avalanche method, once you pay your balance with the highest interest rate, you move to the next, which may mean saving more money, in comparison to the snowball. With the snowball method, you pay off your smallest balance first (by paying the minimum balance or more) then move to the next.
Equally important, once you've reduced your debt or are out of debt, it's a good idea to track your spending and be cautious of your purchases. You may realize that you need to adjust your budget or cut back on spending. Every situation is different and there are no hard rules or set laws when it comes to saving and paying down your debt. The first place to look is often discretionary things like eating out, entertainment, and travel. However, having a plan and decreasing some expenses can help you enjoy the things you love while staying on top of your cash flow needs. You could also look for ways to save money on some types of insurance like car, homeowners, or life insurance simply by shopping around.
Managing your money doesn't have to be complicated. Fidelity’s Plan Your Pay (PYP) guideline offers a simple starting point or a target you can gradually work toward to strengthen your financial foundation.
2. Save for an emergency
An emergency fund is crucial to financial planning and preparation for a baby. It's a good idea to create a budget and build an emergency fund. As a benchmark, Fidelity suggests starting by saving $1,000, then aim to save 3 to 6 months' worth of essential expenses by funding your emergency savings, as you would for a bill. This can be a cushion in the event of unexpected expenses. Also, setting aside 10% of your monthly take-home pay can help save for both significant events and smaller, unplanned expenses.
Try to save in an account that pays interest but preserves liquidity. For example, a savings account can be a convenient and accessible option. Money market accounts can be too. Other alternatives to consider are money market funds and certificates of deposit (CDs).
You could also automate your savings or set up direct deposits in a dedicated account to ensure consistent savings for upfront purchases like for a car seat, crib, and clothes. You could also try and keep cash on hand to cover basic expenses. This could be a big help in the event of any financial hardships.
As you expand your family, naturally, your budget will change. Restructure your budget to include your new addition and look for expenses that you can cut, to save more. Look for ways to save to add to your emergency fund. For example, second-hand items can be a great way to save, especially as your child is rapidly growing — newborn, infancy, toddler, and beyond. Consider double checking to be sure it's coming from a reliable or trusted source. Some online platforms allow buying and selling locally and more. Take note of items you'd be willing to sacrifice and use second-hand instead of brand new.
Being financially prepared can help you feel more confident, help you contribute more toward your emergency fund, and make you less likely to pay for things by adding to an existing credit card balance—creating more debt.
3. Think about childcare and education costs
It's wise to factor childcare plans into your budget. It's a big expense and can be even more costly during infancy and if you have multiples. Also, consider what type of care is best for you and your family, for example a daycare center, nanny, family-based care, or preschool. Depending on your location, age of your child, and type of care, cost vary. It's a good idea to vet your childcare centers and compare estimates.
Although you may be thinking about immediate expenses like diapers, you should also keep in mind the type of education you wish for your child—private or public school. If you're considering private school (K-12), those costs vary widely throughout the U.S. and are likely to keep increasing over the years. Do your research, gather estimates, and compare—choosing which option works best for you and your family situation.
Saving early can really help education costs for children during preschool, middle childhood, and during adolescent years. Set up direct deposits in a dedicated account to ensure consistent savings or consider a 529 plan, or other types of education and college savings plans.
4. Check your health coverage and plan paternity leave
It's a good idea to evaluate all your health insurance options and find a plan you can afford that reduces the risk of unreimbursed medical bills.
Tip: Check the Summary of Benefits and Coverage provided by your health insurance company to understand what your health insurance policy covers. (Under the Affordable Care Act, maternity care and childbirth are essential health benefits, so most health plans must cover them.)
Parental leave (including maternity and paternity) is for both parents, including for adoptive parents. Up to 12 weeks of unpaid family leave is guaranteed by the Family Medical Leave Act (FMLA) for many employees who work for an employer with 50 or more employees.1 It's important to find out your employer's policies on parental leave, including for adoptive parents.
Tip: Having a baby or adopting a child qualifies for a special enrollment period outside the yearly open enrollment period. After your birth or adoption, you’ll have:2
- 30 days (or 31) to make changes to your employer health insurance and benefits.
- 60 days to enroll in a Marketplace plan, add your child to an existing plan, or buy a new plan.
5. Review other employer benefits for new parents
When you’re preparing to bring a new member into your family, it’s a great time to make sure you’re taking advantage of all the benefits your employer has to offer.
Potential benefits may include:
- Health flexible spending account (FSA) lets you save pre-tax dollars and spend them in the same year on medical expenses.
- Adoption assistance Some employers offer benefits that help with the costs of adoption (either paying for or reimbursing you for expenses associated with adoption), group legal benefits (that may help reduce the cost of hiring a lawyer), and consultations with adoption specialists or referrals to adoption agencies.
- Dependent care flexible spending account (DCFSA) allow you to save money pre-tax up to a certain limit to help pay expenses like daycare or summer camp. As costs are incurred, you can submit your eligible childcare expenses for reimbursement.
- Health savings account (HSA) If you have a high-deductible health plan, saving in an HSA can help you pay for qualified medical expenses now or in the future. Contributions are made pre-tax. Withdrawals of contributions and earnings are tax-free when used for qualified medical expenses. Although state taxation may vary, most states follow the federal tax law.
- Life and disability insurance coverage If you're giving birth and have short-term disability insurance coverage, you may be able to claim benefits to help you recover from labor and delivery, or if you experienced pregnancy complications and you're unable to work. Rules vary by state and by employer—and insurance policies may have specific rules about qualifying circumstances.