Published in: Research | April 24, 2019
By: The Ascent Staff
You've just welcomed a baby, and you're prepared for diapers, drool, and delight. You should also be ready for financial changes. Babies come with expenses that can harm your budget unless you take action.
To maintain control of your post-baby finances, you'll need to:
We'll tell you how to take each step in this guide. With our help, you'll be able to take care of your baby and your finances at the same time. And you'll set a good example for your child while doing so.
Though it may be the last thing on your mind, one of the first steps you should take to protect the new life in your family is to address the financial problems your death would cause. By signing up for life insurance, you'll ensure that you continue to provide for your child even if something terrible happens to you.
There are two types of life insurance.
If you have space in your budget, a permanent insurance plan can be a great option. Your child will get a payout when you die, no matter when that is. But if you can't afford this option, a term policy offers critical protection.
If you have children, you likely want a term life insurance policy that lasts at least 25 years. This will cover the time period when your child is growing up as well as their college tuition.
Once you've chosen a coverage type, you'll need to decide how much coverage you need. Think about your salary and other sources of income and determine how much of that your family might need after you've passed away. If your financial circumstances will change (for example, if your spouse will need to stop working to care for children), you'll need to account for that shift as well.
When you're buying your policy, your broker can help you make good choices about how much you'll need to set aside.
You can purchase life insurance through the company that covers your home or your car. You can also look for coverage through companies that specialize in life insurance.
Just be sure to get several quotes before you make your purchase so you’ll know you’re getting the best deal possible.
Your checking account helps you cover day-to-day expenses. But what happens when you're hit with an unexpected bill? If you whip out your credit card, you're not alone. Unfortunately, interest charges can add up and strain your budget even more. It's best to have money set aside in a savings account for emergencies. Not only will the funds earn a small amount of interest, but they can enable you to cover a big expense without going into debt.
There are many different types of savings accounts that can appeal to new parents, including:
Make saving painless by designating a set amount to stash in your savings with each paycheck. You won't notice the funds missing from your checking account, and your savings will grow every time you're paid.
College is expensive, and an education can give your child much better odds of success. You can help cover that expense with a savings plan that starts early. The 529 plan allows you to grow your investment tax-free, provided the funds are used toward education.
The 529 program is administered at the state level, which means each region has a slightly different account structure and associated rules. But in general, plans like this come in two main varieties.
Visit with your bank to learn more about the 529 plans in your state, or ask your financial planner for help in finding the right program.
How much should you invest? In general, experts recommend multiplying your child’s age by $2,000. You should have that much invested in the account at that time. If you’re using a 529 plan, your return on investment could help you hit that goal much more easily. But you’ll need to keep track of your progress to ensure you have enough in the account.
Being a parent means looking toward the future, but you can't ignore the present. Children need medical care, and a health crisis in a child can eat away at your finances. Protect your family with health insurance and use health savings accounts (HSAs) to save up for other costs.
When your child is born, it's time to talk to your health insurance company. If you're covered at work, visit your human resources department. If you're self-insured or covered through the insurance marketplace, call the number on the back of your identification card to get the process started.
Be ready to provide your baby's birth certificate and Social Security number so the company can verify your baby's relationship to your family.
Typically, your coverage will start on the day your baby is born. But if you wait too long, your insurer could exclude your baby from coverage. Be sure you've started the conversation within 30 days of the birth.
Some health insurance plans cover all your expenses. Others come with a deductible (a set amount you must pay each year before your insurance coverage kicks in). If your deductible is high enough that your policy is considered a "high deductible health plan," then you're eligible to sign up for an HSA.
Typically, if you have a high-deductible plan, you'll know it. Policies sold through the marketplace are tagged as either "HSA eligible" or not, and employers that offer HDHPs tend to hand out HSA enrollment forms for their employees. If you're not sure, you can ask your HR rep or insurance company.
An HSA is a bit like a savings account. You put money in, and you can take money out when you need it. But all of your withdrawals must be for healthcare expenses, and you'll get in trouble if you break the rules.
HSAs offer various tax advantages. You can contribute funds on a pre-tax basis, you can accumulate interest on the account, and your qualified withdrawals are tax-free.
You can withdraw money from an HSA for non-healthcare expenses, but if you are under age 65, you’ll have to pay income tax on these distributions as well as a penalty. If you are over age 65 and withdraw the money for non-healthcare reasons, there won’t be a penalty, but you’ll have to pay the income tax.
Some health insurance companies sell HSAs along with their plans, and many banks and brokerages offer them, too. If you're not sure where to sign up, get estimates from several companies and compare their fees and investment options.
Up to this point we've discussed many ways you can set aside money for baby. You'll need to add all those expenses into your budget so you don't forget about them. And if you don't have a budget, this is the section for you.
To create a budget, you'll need to make a list of all your income. That may come from:
Next, you'll need to make a list of all expenses. One quick way to do this is to download your bank statements for the last two months and highlight everything you've spent. If you've incurred that cost in the past, you're likely to see it again.
Total all your expenses and compare that amount to your income.
Part of budgeting involves planning. If you notice you're spending a bit too much on one category, such as entertainment, look for a way to whittle that down to help you cover the necessities.
Budgets are living documents, and they adjust with time. Managing your finances can also take practice, and it's not uncommon for early attempts to veer far from reality.
The key is to persist. The more you understand the money coming in and the funds going out, the more control you'll have.
Keep working on your budget, and as your child grows, include them in your talks. You'll help your child learn how to do the same in adulthood, and that's a priceless gift.
What's the difference between permanent and term life insurance?
Term insurance lasts for a specific time period, while permanent insurance covers the entire lifespan. Term plans can be inexpensive, but they expire at the end of the covered period, and policyholders don't build equity.
Which is better: a savings account or a money market account?
It depends. If you don't have a lot of money to invest right now, a savings account is a better option, as you don't typically need a down payment. A money market account requires a minimum investment but can accrue more interest over time.
What's a 529 plan?
This is an investment tool you can use to save for a child's college education. Some plans allow you to prepay for a school of your choosing, while others enable you to control your investment and fund the cost of attending almost any school your child may choose.
How do I know if I'm eligible for an HSA?
Call and ask your insurance company if you're not sure. In general, you'll need to be enrolled in a plan with a high deductible to open up an account like this.
Why is it important to keep a budget?
When you know more about the money coming into and flowing out of your household, you can spot trends that help you become a wiser consumer. For example, a budget could help you realize you're spending the bulk of your income on rent, and that could prompt you to find a more affordable housing choice.
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