Nobody needs to be told that babies are expensive. Numerous organizations publish regular reports revealing what the average cost is to raise a fresh human from infancy to independence, and there are online calculators, too -- but those figures are frankly nonsensical. It's not a case of your mileage "may" vary, it's a case of your mileage "will" vary. How much? Well, however much you can afford, figure it'll probably be about 10% more than that. But that's life -- literally. All of which leads to the inescapable conclusion that most folks could probably use all the help they can get when it comes to setting up their finances for parenthood. So for this Motley Fool Answers podcast, co-hosts Alison Southwick and Robert Brokamp have invited a special guest to help them dole out those details: Dan Messeca, a financial planner with Motley Fool Wealth Management.
In this segment, Messeca digs into a host of areas where your financial priorities, needs, and default decisions may change significantly after you bring home baby. Among them are how to adjust your health insurance, flexing your Flexible Spending Account, why you need a bigger emergency fund than you think, why you shouldn't discount disability insurance, and more.
A full transcript follows the video.
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This video was recorded on March 12, 2019.
Alison Southwick: Let's move on and talk more about work stuff that you've got to deal with.
Dan Messeca: I think to start off -- to transition from life insurance into work benefits -- most people do get some life insurance through work, so it's good to check and see what you may already have in place before you go off shopping. Then you can often choose to buy insurance through your work plan in lieu of going out and finding an insurance salesman and buying it on your own.
Southwick: That's what we ended up doing -- doing it through the Fool.
Robert Brokamp: And depending on the situation, it may be more expensive or may not, but what is really appealing is if you have health issues and you're going out on your own, to get a policy could be very expensive. It might be easier or less expensive if you do it as part of a group plan.
Messeca: And I found the reverse scenario to be true, where if you're healthy and young, it's usually cheaper to go off on your own and separate yourself from a big group to benefit from your own age and health. That's No. 1.
The other thing is health insurance. Don't forget to add your newborn to your plan, because they cost a lot of money.
Brokamp: Because you're going to need it, buddy.
Messeca: Yeah. Actually, in the first month after the baby was born, I got a bill from our insurance provider for like $19,000. I thought I screwed that up. I was like, "Oh, man, did I forget to do something that our HR person told me to do months and months ago?"
It turns out that wasn't the case. There's like a coordination of benefits thing that they call for every year to make sure I don't have other insurance. They still pay out and I guess they never got me and were like, "OK, let's just bill him for the whole thing and see if he pays."
Brokamp: It could still happen. Maybe we'll get a check.
Messeca: So you want to log into your account or call your service provider and just make sure that you add your dependent as soon as you can so that they're covered for all their hospital visits, too.
Southwick: We had this nightmare scenario that was suggested to us during the baby classes. You've got to go to the hospital and you learn to breathe through the pain and whatever. So the woman had opened it up to the class for questions. Someone raised their hand. He didn't have a question, but he wanted to point out that when you go to the hospital to [have] a baby, the hospital may be within your network, but the anesthesiologist, for example, may not. So you may get your hospital bill taken care of, but you're going to get drilled by the anesthesiologist for tens of thousands of dollars if they're not in your network or in your coverage.
That's just a terrifying little tidbit that I like to share with people to think about. Unfortunately there's not a whole lot you can do. It's not like you can necessarily schedule your birth (maybe if it's a C section) but you get stuck with whatever anesthesiologist is on call. But just something to think about is that there's a number of fun ways where you can get a big bill.
Messeca: Yes, honey, we're doing home delivery natural birth.
Southwick: Because I am in coverage, my bills are very cheap.
Brokamp: The house is in network.
Southwick: We covered health insurance. How about flexible spending?
Messeca: One thing you may want to plan ahead for -- and as years go on and you have more experience with your child you'll know exactly how to use this to the best of its ability -- is you can actually defer dollars into a flexible spending plan for dependent care. The benefit of that is you get to defer dollars pre-tax so your dollar goes a longer way. And whenever you have an eligible expense for child care, you can reimburse yourself through that plan. And I believe you can do up to $5,000 every year. The only thing is it's use it or lose it, but it's a way to make your dollar go a little bit further as you pay for child care.
Brokamp: Of course, there's healthcare flexible spending, as well, and your healthcare bills will likely go up. And the other thing is that in many of these types of programs through your employer, you can only sign up at one time during the year (during the enrollment period); however, in most situations if there's a major life event that allows you to redo that, having a kid usually qualifies, so you can change how much you contribute to these plans.
Southwick: What about disability insurance?
Messeca: A child is a good opportunity to make sure that you're covered if you were to become disabled. Suppose you have a spouse or a significant other with you. You might be able to cover all your needs on one income during that period; but, if you're taking care of a baby your expenses are going up, so you want to make sure you know how much you'll have covered if something were to happen to you to make sure that's enough buffer for you to meet all your other expenses, whether it be child care, food costs, clothing, etc. that will come your way.
Brokamp: Disability's a tough one. First of all, most people get some through their employer...
Brokamp: ...if you work for a larger employer. That's good, although it doesn't last forever, generally speaking. Buying it on your own is really tough. It's really expensive because the odds are much higher that before age 65 you'll become disabled and then you'll die, which is why life insurance is relatively cheap and disability insurance is not.
Messeca: Right. In my history, anytime I've seen someone shopping for it individually, they've decided maybe I'll take the risk. But it's actually a risk you want to make sure is covered. Thankfully most employers do cover it to some extent. Just verify to what extent that is.
Then an interesting wrinkle there is also it can be taxable or non-taxable, depending on how it's paid for. If you're paying out of pocket, usually your benefits are after-tax, but if it's being paid for you by an employer and therefore not taxed, it's taxed to you as income when you receive it.
Brokamp: Right. And anyone who's working has some disability insurance through the Social Security system. The thing is it's pretty hard to qualify for that. If you're worried about a broader range of possible disabilities, it's better to have your own policy.
Southwick: Let's move on. The baby's home. Now what?
Messeca: Yeah. For us, my wife stayed home for a long time after the baby was born. One of the biggest things that we were worried about was having a big-enough emergency reserve because the scope of unknowns becomes infinitely larger. We don't know what we need to buy to take care of the baby. If something happened and I needed to stay home longer, how would we cover these expenses? So revisiting your emergency reserve, which hopefully you already have in place, is step No. 1. And maybe contributing more than you would just to build an extra buffer in place of what you had before would be my first recommendation.
The way that it can impact you on a daily basis, from a tax perspective, is there are certain tax credits that come with having a baby, which could help you, and that can be a nice opportunity to revisit your withholdings and get more of your dollars flowing through to you throughout the year instead of living on less and then waiting for a refund at the end.
There's a child tax credit which is now $2,000 per child which can help you out. There are also some other things like a child care tax credit where if you're not using that flexible spending account you might have an opportunity to get money back in your taxes, as well. But revisit your taxes. Check your withholdings. I'd rather have my dollar today than tomorrow.
Brokamp: And it's especially true, too, if one parent decides to stop working and stay at home. Then your tax situation changes considerably and it's another reason to revisit that.
Messeca: Right, absolutely.