When my husband and I found out we were expecting our first child, we had a lot of the emotions I expected: excitement, joy, and a little bit of nervousness. But there was also another emotion that snuck into this exciting time: financial panic.
Our money felt disorganized, which is a little embarrassing to admit as a financial professional. While there was enough for us to live comfortably on, adding another person to the mix would clearly change our finances – I just wasn’t sure how. I would lie awake at night on my phone googling: “how much do babies cost? How much do I need to save for college? How much is childcare, diapers, everything else?” The list went on (and on). Any advice I received fell into the camp of: “babies are expensive.”
I’m not much of a budgeter, but I knew that I had to wrap my head around these costs early, so that my first months of parenthood didn’t include stress about money.
Going through the four steps below forced me to not only get some really important information in order, but it helped to walk through a process that has made me a lot more confident in how money decisions will affect our new family.
Step 1: Take stock of existing financial benefits
Health Insurance Coverage
I didn’t know much about how our health insurance coverage worked and how much we’d be required to cover out of pocket. I spent a lot of time on the phone with my insurer to get a full list: my co-pay, my deductible, what was included for hospital stays, what tests were covered and at what amount.
Once I had a rundown I could estimate what we would be expected to pay out of pocket. This was helpful because toward the end of pregnancy, as the bills started coming fast and furious, I knew exactly what to expect.
I also asked for an estimate of what it was going to cost to add our new baby to our policy. I kept this information handy as I started to get an idea of what life would look like post-baby.
Get in touch with your insurer and make sure you know the ins and outs of your benefits: what they’ll cover, what you’re responsible for, and what your new policy will look like when your baby arrives.
Family Leave Benefits
I’m self-employed and was able to qualify for a small amount of family leave benefits. But for the most part, the time I took off post-birth would mean that our family income would suffer. My husband received two weeks paid through his employer and also qualified for the California Paid Family Leave Act, which would provide 6 weeks of bonding time, but at a reduced income.
It was a priority for us to be able to both have as much bonding time as we could financially swing, so figuring out what our options were (and how much it would cost) helped us to break down the trade-off.
Get a rundown of exactly what your employer offers for parental leave benefits as well as what programs your state or city may provide.
Dependent Care Flexible Spending Account or Tax Credit
If you are planning on hiring child care once your baby is born, your employer might have a flexible spending account to help manage some of the costs of these expenses. In addition, there is a child care tax credit that you may be able to take advantage of. You can spend some time looking at benefits offered by your employer asking an accountant what credits you might qualify for.
Step 2: What would make you feel more comfortable?
Disability and Life Insurance
I hate when grown-up life gets real and this is one of those topics. We’ve always had life and disability insurance, but neither my husband or I have paid much attention to it. With a baby on the way, it was time to make sure we were as covered as we needed to be.
We spent an evening pulling up our policies, talking about options, and getting estimates to increase our coverage. This bumped up our monthly expenses, just slightly, but it was peace of mind knowing that we had it taken care of.
You likely know that having an emergency savings account is key to protecting your financial health. But does that savings account need to change when you have another person depending on you?
Most experts agree that you should have 3-6 months worth of expenses tucked away into a savings account. When you have a new child joining the family and a lot of unknown expenses and lifestyle changes coming down the road, you may feel more comfortable with a cushion at the higher end of that range.
After thinking about different options and scenarios, we decided that it was best to build our savings cushion to be as close to that 6-month mark as possible before the baby arrived. While we didn’t expect to need to use it, having that extra buffer would make us feel more comfortable as we adjusted to our new family member and lifestyle.
If you have any lingering debt that you know you want to get rid of before your new baby is born, this is the time to get focused on your repayment options. Get a handle on exactly what you owe, how much you want to pay off before your baby is born, and create a plan for the highest priority debt.
Step 3: What are the big things that are coming down the road?
How Will Your Income Change?
Depending on your leave benefits and how much time, if any, you decide to take off, your income may or may not change once your baby arrives. Most people are usually faced with the decision to work (and earn) less, or spend more on child care. If you haven’t decided what your exact plan is, this is a great time to look at your income and weigh your options.
Working for myself there are some serious drawbacks when it comes to balancing earning with having a new baby. During this step, I took a lot of time debating what would be best for me, my career, and our family, and I was able to estimate how much our income would decrease if I balanced a smaller set of clients. It wasn’t a perfect estimate, but thinking about the tradeoffs early – and actually looking at the numbers – helped me to feel like I was making a well thought out decision.
What Are the Big One-Time Expenses?
Even if you have a shower given by extremely generous friends and family, there might be some big, one-time expenses that you’ll end up paying for. This could be furniture, any household renovations or refreshing that you need to do, or any courses that you want to take to help you prepare for life with a baby.
What Recurring Costs Need to Be Added?
There are a few different places where you might see your monthly expenses rise each month:
- Childcare costs, especially if you are returning to work after the birth of your baby
- Housing expenses, if you need to move into a bigger home or to a location that’s more convenient for a family.
- College or education savings, if it’s your goal to contribute to your child’s education costs
- Other items, from diapers to food, that will be added to your monthly household expenses
It can be overwhelming to get too detailed with this – I spent far too long trying to look at the cost of diapers, food, clothes, and toys, which in the end wasn’t helpful. To keep from getting lost in the details, focus on the bigger expenses and then just give yourself a very rough monthly estimate for everything else.
Step 4: How do you make this all fit?
I’ll admit, looking at the additional expenses (and the decrease in income) that was coming our way made me a little nervous. Part of me wanted to forget about this until the baby came, but I knew that I really didn’t want to stress about money at all for the first few months.
Making this new financial reality work for us meant that we would either need to make more or spend our money in smarter ways – or both.
When I was pregnant I woke up one morning with the overwhelming urge to get things done. I looked at the numbers we had figured out with steps 1-3 above and was determined to make it work. Rather than jumping straight into cutting our spending, I took a hard look at what I was earning.
For months I had put off raising my rates, but with a baby on the way, it was time to stop procrastinating. I shifted my time and energy to higher paying projects and negotiated my rates with my regular clients.
If you have been meaning to negotiate your salary at work and ask for that raise you know you deserve, use your expanding family as additional motivation to have that conversation.
Just remember: don’t negotiate your salary or your rates because you’re having a new baby – negotiate because you deserve it.
Live On Less, Early On
By going through step 1-3 above, it was pretty clear that our biggest financial challenge was going to be paying for childcare. While we were still months away from having to add childcare into our monthly spending plan, we decided to start living on less early, to help make the adjustment smoother.
We went through and removed any of those monthly expenses we had gotten a bit lazy with: a meal subscription service that we weren’t that excited about anymore, a workout app, and our over-reliance on takeout food were the easiest things to cut.
I then set up a monthly transfer to a savings account (appropriately named “baby”) for what we expected the extra monthly expenses of childcare, 529 contributions, and a few other things would be. With this money moving out of our checking account and into savings we were able to see what other lifestyle changes we needed to make in order to afford these new monthly payments.
It took a few months to find our rhythm with living on less, but with a few lifestyle adjustments, we were able to make better choices with our spending. And, as a bonus, the money that we were saving each month in our baby savings account was there to cushion my reduced income (and a lot of meal delivery) those first few months.
If you or your partner aren’t planning to hire childcare but are planning to have one person stay home, use the same approach but transfer one person’s income into savings each month. You’ll get used to living on one income and be able to see exactly what has to change to make it feel easier.
After going through these four steps, I felt so much more prepared and ready to focus on the more exciting moments of becoming a mom for the first time.
What financial prep did you do before baby?