Preparing financially for a baby

Follow these tips to baby-proof your budget.

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Key takeaways

  • Evaluate your insurance coverage and investigate workplace perks.
  • Get out of high-interest debt and save for emergencies.
  • Make sure you're saving for the future.
  • Budget for time away from work.

Having a baby isn't a financial decision—but your finances will be affected. Fitting out a nursery can cost between $500 and $2,000.1 Diapers and supplies can cost about $1,000 per year.2 That's already as much as $3,000 in just the first year—not including the formula, clothes, toys, and big-ticket items like child care or time away from work that will also be needed.

For a baby born in 2015, the United States Department of Agriculture (USDA) estimated that middle-income parents will spend between $12,350 and $13,900 annually through age 17.3 Food and clothing take up a big chunk of that amount, according to the report—in addition to housing, medical care, and transportation. And then there are costs that aren't directly related to children but come into play once your family starts growing—like the increased life and disability insurance coverage you may want to consider.

Getting on top of your finances ahead of time can help your newborn, without fretting about your finances. Here are 6 money-smart moves to take before your baby arrives:

1. Review your health insurance

There is a huge amount of variability in the costs of medical care associated with pregnancy and childbirth. Your out-of-pocket medical costs could range from $0 to thousands of dollars—your insurance coverage will be the biggest determining factor. Under the Affordable Care Act, maternity care and childbirth are essential health benefits, so most health plans have to cover these benefits. But some insurance plans may require you to pay more out-of-pocket costs than others.

Review your pregnancy and childbirth coverage ahead of time and make sure your doctor, or midwife, and the hospital where you plan to give birth are in your network of providers. This should help lower costs, as in-network providers are either fully covered, or will typically have higher insurance coverage than out-of-network providers and facilities.

2. See if your employer offers any perks

Find out ahead of time what benefits are available to you, so you know how to budget. Parental leave is a vital benefit—whether it's paid or unpaid—but you may have other helpful benefits to take advantage of.

A health flexible spending account (FSA) lets you save dollars pre-tax and then spend them in the same year on medical expenses. You won't have to pay federal taxes on the money, as long as it's used for qualified medical expenses. You may be able to roll over up to $500 of unused money in an FSA for the next year—or the account may come with a grace period in the following year during which you can use money contributed from the previous year. Employers are not required to offer the rollover option or a grace period, in which case you have to use all money saved in an FSA in the year in which it was contributed—or lose it forever.

If you are adopting your baby, that comes with its own costs and considerations. Some employers may offer benefits that help with the costs and planning of adoption.

Finally, look into the life and disability insurance coverage offered by your employer. Find out important deadlines for purchasing increased coverage so you can plan ahead.

3. Pay down debt

Paying down high-interest debt (like unpaid credit card balances) is a healthy battle to fight at any point in your life, but particularly before starting a family. Once you begin adding to your family, finding the extra money to dig out of debt and save may not be as easy as it was pre-baby.

Take the time before a baby arrives on the scene to pay down credit cards.

Read Viewpoints on How to pay off debt—and save too

4. Save for an emergency

Consider preparing for the unexpected by saving up for a solid emergency fund. We suggest aiming to save an amount equal to 3 to 6 months' expenses in your rainy day fund.

Once you hit that target, keep saving 5% of your pay to cover any surprise expenses like a car repair or replacing an appliance.

Read Viewpoints on How to save for an emergency

5. Budget for baby time

Thanks to the Family and Medical Leave Act (FMLA), eligible workers can take up to 12 weeks of unpaid leave following a birth or adoption. In fact, both partners in a couple can take time off of work to bond with a new addition under the FMLA. But affording 3 months or more without a paycheck may be hard to handle for many families.

If having a baby is on your to-do list in the coming years, starting a fund to cover time away from work may be something to consider. You can use Fidelity's spending and saving rule of thumb to get started.

  • 50% of take-home pay goes to necessities (housing, medical care, debt payments, and food)
  • 15% of your pre-tax income goes to retirement savings—that includes your contributions and any contribution you may get from your employer
  • 5% of take-home goes to an emergency fund—and then an account to cover unexpected expenses

Part of the 30% that is left over could be used for your baby budget.

Read Viewpoints on 50/15/5: a saving and spending rule of thumb

6. Determine child care costs

The cost of child care can eat up a sizable portion of a family's monthly budget. A 2015 study by the Economic Policy Institute found that in 24 states and Washington D.C., the cost of child care for a 4-year-old is higher than the average cost of in-state tuition at public colleges and universities.4

If both you and your partner currently work outside the home, talk about how that might change. Will one person stay home? If not, run the numbers on child care costs in your area. For some people, given the cost of child care and commuting, it may actually be cheaper to have one parent stay at home. It all depends on the cost of child care in your area, your cost of living, and your income.

If you do go with child care, your employer and the IRS may offer a little help. Some employers offer FSAs for dependent care. Like a health care FSA, you can save money pre-tax in the account. Then as costs are incurred, you submit your eligible child care expenses for reimbursement.

You may also be able to claim the child and dependent care tax credit. You can claim up to $3,000 in child care expenses for 1 child under the age of 13 or $6,000 for more than one.5 You can put those tax savings toward diapers and formula, or other potentially big expenses.

Enjoy the time

Don't fret if you're only able to begin planning once you find out that a baby is on the way. There's always time to improve your finances from where they are today. Making smart spending and saving choices now can help put you and your new family on the path to success.

Next steps to consider

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1., "Saving Up For Baby."
2., "Top baby costs, and how to save."
4. Economic Policy Institute "High quality child care is out of reach for working families," Oct. 6, 2015.
5. The actual amount of the credit is reduced by income. The value of the credit is between 20% and 35% of the claimed expenses. Families with adjusted gross income (AGI) of $15,000 or less are entitled to claim 35% of expenses. The percentage decreases as income rises, up to an AGI of $43,000. Families with an AGI of $43,000 can claim 20% of their expenses. The value of the credit will not exceed the amount of federal income taxes paid.
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Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917.
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