A Nine-Month Plan for Getting Your Family's Finances in Order Pre-Baby
If you're an expectant parent, you have probably learned enough medical terminology to pass for a fledgling OB/GYN, grasping complexities such as alfa-fetoprotein levels and epidural anesthesiology. But studies indicate that you should be paying as much attention to the jargon of financial well-being—arcane phrases like "section 529 tax-advantaged college savings," for example, and "spousal IRAs."
According to a 2017 report from the U.S. Department of Agriculture (USDA), a middle-class American married couple spends an average of $296,684—about $17,500 a year—on raising a child from birth to age 18. And that doesn't include the cost of college tuition, now averaging $54,880 a year at private schools and $26,820 at in-state public ones. Covering those costs will be a stretch for most, since the 2016 Consumer Finance Survey by the Federal Reserve indicates that nearly two-thirds of households with young children are saving no money at all.
Those zero-digit savings begin to collide with the expanding cost of childrearing when a baby is about 6 months old, says Ruth Hayden, a St. Paul, Minnesota-based financial consultant and author of For Richer, Not Poorer: The Money Book for Couples. "Just when the baby is getting so cute and personable, a couple starts to fight over money issues," she tells Parents.
To head off trouble, she and a team of other money experts (with 26 children and 18 grandchildren between them) helped us assemble a nine-month plan for nurturing your nest egg as your pregnancy progresses. The payoff? Research shows that, given the same income, people who commit to a financial plan save twice as much money as those who just wing it.
The warm, fuzzy upside: The more financial decisions you work out ahead of time, the more fun you'll have with your new baby.
Cut down credit card debt. The first trimester is the time for cleaning up your financial act, says Jean Chatzky, financial editor of NBC Today. A good place to start is with credit cards. Balances in the thousands of dollars cost hundreds in annual interest—money you'll need for new expenses. They also hamper your growing family's ability to get loans for big-ticket buys like a home or that minivan.
Consider transferring your balance to a credit card with a lower interest rate. Visit Bankrate to compare rates and fees; once you've switched, charge as little as possible until you've paid off your debt.
Track your spending. Next, you'll need to create a new budget. From there, keep track of all of your family's expenses (both big and small) to get a better picture of your monthly spending. You can keep receipts and take notes on your phone, or in a spreadsheet. When the time comes to crunch the numbers (the third month), this careful tracking will help you determine your family's spending patterns so you can identify areas you might need to cut back on when the baby arrives.
Update your beneficiaries. Double-check for and delete any out-of-date beneficiaries on your company-sponsored life insurance and 401(k) plan, particularly if you were single when you started your job. "Whenever there's a major lifestyle change, you need to look at those beneficiary statements," Dee Lee, a certified financial planner with Harvard Financial Educators tells Parents. Your parents, siblings, or even a previous partner may still be listed rather than your child.
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Check up on your credit. Even if you pay your bills on time every month, errors can slip into your credit report. Save time and aggravation by correcting mistakes now, when your life is relatively sane. Having a strong credit score is important when you're a parent-to-be and potentially looking into big purchases such as a home or a car in the near future. Having a high credit score can help you lock in the best interest rate on a car loan or mortgage.
You can order your credit report from Equifax, Experian, or Transunion. By law, they may charge no more than $12 for a standard report. Be forewarned that applying for a free credit check from less reputable providers can be an invitation to identity theft. In addition, limit yourself to only one check per year—any more than that can hurt your rating.
Crunch the numbers. Now it's time to get down to the last step of budget-making. Take all the numbers from the expenses you have tracked the past few months and put them in a spreadsheet or budget tracking app (if you haven't already). This will give you a full picture of your current expenses—before you give them a makeover to prepare for baby.
Your goal is not to just break even, but to save money regularly, says Stephen Brobeck, executive director of the Consumer Federation of America (CFA), an advocacy and education organization in Washington, D.C. A 2019 survey by Bankrate found that one in five working Americans are not saving any money for retirement, an emergency fund, or other long-term financial goals.
When creating your new budget, keep in mind your upcoming childrearing costs. According to a 2015 USDA report (the most recent data available), the average middle-income households can expect to spend about $1,056 a month to provide an infant with basics such as food, clothing, shelter, transportation, and childcare. If you take an extended leave from work (or switch to part-time hours) you'll face the financial double-whammy of covering these new expenses on an income that is suddenly smaller.
Couples who can't seem to save their way to the recommended 10%-of-your-income mark may want to book an appointment with a certified financial planner, a pro trained to help clients set monetary goals. The Financial Planning Association explains certification and fees on its website. The CFA offers free consultations along with other budget guidance through its America Saves program.
Make a friend in HR. Get a full briefing about maternity or paternity benefits from human resources. Federal law requires you to give at least 30 days notice when requesting time off under the Family and Medical Leave Act, which entitles any new parent who works for a company with at least 50 employees to take up to 12 weeks of unpaid, seniority-protected leave. Your employer must pay the usual portion of your healthcare benefits for the duration. In addition to any paid leave you might have, federal law also entitles birth mothers to short-term disability pay (typically six to eight weeks) if their company ordinarily pays disability benefits in other situations.
Practice austerity. Last month you set a new budget; now you may be tempted to put it on hold and enjoy the good life until the baby comes. That would be a mistake.
"In the second trimester, you need to make sure you're putting something away," says Chatzky. Start by earmarking funds to offset the loss of income you expect from any unpaid maternity leave. "Figure out what the gap will be and then try to make up for it beforehand," she says. If you also plan to furnish a nursery from scratch—or purchase pricey baby gear—set aside additional savings toward that goal. Put the amount you'll soon spend on the baby into short-term CDs or money-market accounts. You should have a tidy sum by your due date—if you begin today.
Do the daycare shuffle. Your second trimester is a great time to evaluate childcare options—before your energy wanes and mobility becomes complicated. Child Care Aware offers a free service that will link you with a local resource and referral agency. These nonprofit agencies keep close tabs on the types of childcare available in their region, including center-based and family care, and fees charged by local providers.
To get the most bang for your buck, check nannies' references. Confirm that daycare administrators have degrees in early childhood education, and that staffers receive child development training—and that caregivers don't come and go with the seasons.
Buy life insurance. Most expectant parents should insure themselves for at least six to eight times the amount of their gross annual salary to cover the anticipated dependent, says James H. Hunt, a retired life insurance actuary for the CFA. Cash-value policies like whole life, variable life, and universal life are quite complicated and often a bad deal—especially when you can earn interest through other means, such as tax-deferred and tax-free investments like retirement accounts and college savings plans. Hunt advises parents to stick to term life, preferably 20 years or less. A 30-year-old woman in good health can buy $750,000 worth of coverage for about $300 a year. Compare insurance rates at www.term4sale.com.
Write a will. Though you may be loathe to decide who would raise your child and manage their finances should both parents die, it's easier to write a will and choose a guardian before the baby is born. This way, you can focus solely on the baby when they arrive and not about writing a will. You can expect to pay between $500 and $1,000 on average to hire a lawyer to draft your will.
Do the Upromise prelims. Enough doom and gloom! The popular college savings program Upromise, with 3 million members and counting, lets you jump-start an education fund when you shop for basics like groceries and gas—and when you eat out at restaurants. Best of all, you don't need to list a beneficiary to open an account, so expectant parents can start saving for their future scholar before they've even settled on a baby name.
To sign up for the free service, visit www.upromise.com and register your credit cards. After that, a portion of what you charge to the cards (up to 5% at certain retailers, 10% at some restaurants) automatically goes to your child's account.
Learn these numbers: 5-2-9. If your new budget leaves any room for college savings, tax-advantaged 529 investment plans are too attractive to overlook since they allow you to accumulate anywhere from $300,000 to $500,000 per child (depending on the state) and not pay taxes on the earnings. The options can be overwhelming—all 50 states offer a plan, and you can currently pick and choose from about 67 investment strategies—but you'll have more time to go over them now than later, says Joseph F. Hurley, chief executive officer of www.savingforcollege.com and author of The Best Way to Save for College.
You can even open up an account now; most plans will give you up to six months to add a social security number when the baby is born. If you'd like family and friends to shower you with college money instead of booties and rattles, have them contribute to your child's college fund and put that cash straight into the 529 account.
Factor in friends' benevolence. Right now, some of your mom's friends are almost certainly crocheting yellow blankets in honor of your baby's arrival. Your pals are also busy organizing showers behind your back. People tend to be unbelievably generous when a child is born, so you may want to see what you receive before you buy any but the most basic baby goods.
You should also take a moment to open a safe-deposit box at your bank. Some people might send savings bonds to celebrate your baby's birth. You'll want to keep them—and the birth certificate—in a safe place. Common Series EE bonds and inflation-protected Series I bonds are great because you can cash them in tax-free to pay for education expenses. But this provision works only if the bonds are in your name—not your baby's. Before you stash the goods in the vault, make a note of your bonds' vital statistics (series, denomination, issue date, and serial number). You can then track the earnings online using Treasury Direct.
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Keep your eye on retirement too. With nursery walls to paint and breathing exercises to practice, your third trimester is not the obvious time to be saving for retirement—but it is an important goal to prioritize. Hayden advises parents who plan to stop working, even for only a few months, to vow to continue budgeting money toward their retirement.
Parents who stay out a year or more can pay into a special retirement plan known as a spousal IRA. The IRS allows a nonworking spouse to set aside up to $3,000 a year and to deduct the amount from the family's taxable income—even if the spouse funds a 401(k) plan at work.
Ninth Month & Beyond
Cover your baby. Most health insurance companies allow new parents 30 days after delivery to add their newborn to their policy. Check with your carrier or human resources. In any case, it makes sense to start filling out the enrollment form now, leaving blanks for the baby's name and birth date. Assign your partner the task of adding those details and getting the paperwork to HR as soon as you and your baby come home from the hospital.
Aside from that, if you've followed our planner, the final month of your pregnancy is time for putting your feet up, both fiscally and literally. Relax, pour a cup of tea, and pat yourself on the back for preparing your family's finances for your new arrival.
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