5 Money Moves to Make When You Have a New Baby
When you’re an expectant or new parent, people may joke about how much you’ll spend on diapers. And it’s true: At about 25 cents a diaper, you’re going to be spending close to $1,000 a year on them. It’s easy to fixate on those immediate, tangible expenses of having a newborn, but the crucial elements of financial planning after baby are intangible. There’s childcare, health insurance and educational expenses, both in the near and long term. And don’t forget ice skating lessons, coding camp and whatever other extracurriculars your little one is totally into when they get a little older.
So, where do you begin? While saving for college is a pressing concern for even brand-new parents, it’s just as important to get other parts of your financial life in order. Experts suggest focusing on these five essential steps to start. And take a deep breath: While the list may seem daunting, taking small actions now can help shore up your finances and help you rest easier—3 a.m. feedings aside.
As if new parents don’t have enough to do and think about, you have a short window of time after baby’s birth to take care of a few important logistics. The most immediate is claiming your child as a dependent for tax purposes. To do this, you’ll need to file a new W-4 form with your employer (or your partner’s) within 10 days, even if you’re on parental leave. You have a bit more wiggle room (30 days) to request your or your partner’s employer to add baby to your health insurance plan, which will cover them retroactively.
It’s also a good idea to see if you qualify for child-related exemptions, taxes and credits or are eligible to open a flexible spending account. (A dependent care FSA allows you to set aside up to $5,000 pretax to pay for qualifying childcare expenses, such as day care tuition or a caregiver’s salary.) Eligibility for these is contingent on several factors, including your household income and number of children, and you can often only utilize one of these benefits. Set aside time to research which makes the most sense for your family, or check with a tax professional if you’re unsure.
And it’s critical to create or update your estate plan, including drafting your will and appointing a guardian. “It’s a good idea to get a legally binding document in place as soon as possible,” says James Brewer, CFP, founder of Envision Wealth Planning in Chicago. There are online platforms that make it simple to construct an estate plan without an attorney, but if you go this route, be sure to get your plan notarized to make sure it’s binding and store it in a safe place.
It’s not something you want to think about, but life insurance provides some reassurance for the “what if we die” questions that seem to come hand in hand with little sleep. Life insurance is a contract that guarantees a payout of money—known as a death benefit—if you were to pass away during the time you’re insured. This money usually gets distributed in a tax-free lump sum that can then be used by beneficiaries to pay for current and future expenses, like funeral costs, the mortgage, bills, childcare and education.
While you may have life insurance through work, that coverage may not be enough, says Roger Ma, CFP, author of Work Your Money, Not Your Life, and a new parent. “Many employer-sponsored life insurance policies only cover a certain amount, such as one or two years of salary.” Plus, employer-sponsored plans are generally not transportable, which means you’d no longer be covered if you were to get laid off or leave the company.
Instead, Ma recommends new parents consider getting term life insurance policies that are independent from your employment. The cost of term life insurance varies depending on age and health and will be lower the younger and healthier you are. Since these monthly premiums are locked into place for the length of the term (usually 10, 20 or 30 years), it’s usually a good idea to get a life insurance policy as soon as possible. (Note: There are other life insurance options, such as whole life insurance, that include a savings component. This may be an appropriate choice for people who already have robust savings and investments, but these policies can require higher premiums.) Whatever option you go with, choose a policy with a premium you can afford every month, no matter what, since you’ll lose your coverage if you stop paying.
Families with two parents may consider getting policies for each parent, even if only one is currently employed. A partner who doesn’t take home a paycheck still provides significant value to the family, including childcare, that would need to be covered if the worst were to happen.
“I often have clients come to me who are eager to start a fund for their child’s education, but they still have student loan debt of their own,” Brewer says. “When I hear this, I bring out the oxygen mask analogy: Before you take care of your children, you’ve got to take care of yourself.”
It’s okay to temporarily reduce your 401k contributions to speed up your debt repayments, but it’s still crucial to have a plan for retirement. While there are loans for college, that’s not the case for retirement, so you want to make sure you’re in a healthy financial position before you start contributing to baby’s college fund. After all, the last thing you want is for your adult children to be financially responsible for you because you didn’t save enough. Paying down debt sooner rather than later can also boost your credit score, making it easier to achieve near-future family goals, like buying a house or a car with more favorable interest rates.
Speaking with a financial planner can help you understand where you are now and come up with a map to get where you want to be. Ma suggests looking for a planner who charges by the hour or charges a flat fee for planning, as opposed to a planner who is commission-based. That way, you know you’re not getting sold services you may not need and can come away from the meeting with clear plans and next steps.
Truth: College is expensive. A 2020 survey by education loan company Sallie Mae found that families spent about $30,000 on average for college last year. The same survey found that more than one-third of families paid for it with money saved in a college savings account, like a 529 plan. Suggesting that birthday and holiday gifts be given to your child’s college savings account is one low-touch way to beef it up. You can also look into college savings reward credit cards—just be sure to pay back the balance in full each month to maximize these rewards.
But 529s aren’t the only way to save for the future, Ma says. “Higher education is changing a lot, so it may make sense to look beyond a 529 for maximum flexibility.” You can also consider putting savings in a Roth IRA, which can be used as retirement income for you, as well as educational expenses for your kids. This can give you flexibility in the event college isn’t part of the picture for your child, notes Ma. That said, Roth IRAs have lower limits for how much you can contribute each year before it’s taxed.
As recent events in the world have shown us, you can’t predict what’s going to happen in the years, or even months, ahead. The good news: It’s never too late to start healthy money habits, like budgeting. And this is especially true when you have a baby. Understanding the new expenses coming down the pike can help you comfortably adapt to changing financial needs. “Becoming parents is a good time to [evaluate] and see where you might be able to trim,” Brewer says. “I don’t like using the term ‘budget,’ which sounds restrictive, but I do like using the term ‘spending plan,’” he says.
And making one doesn’t have to be painful. Consider scheduling a regular “money date” with your partner. Once baby is asleep, review your expenses to make sure you’re on track and look over your financial to-do list. Come up with some clear action items you can each take responsibility for, whether it’s paying your credit card bills, comparing day care costs around town, or getting the paperwork from HR to set up an FSA.
Through all of these changes, “it’s important to really have a sense of what’s important to you and your family,” Ma says. For example, while there are a lot of benefits to homeownership, you don’t have to own a house to be financially secure, reminds Ma. By letting go of some expectations, you can assess what your family needs—and what you feel comfortable with. This may be making sure you have a robust emergency fund to withstand a layoff, or it may mean trimming expenses or downshifting from an overpriced rental to be able to afford a down payment in a few years. “It’s important to be flexible, and know the best laid plans can change,” Ma says.
About the Experts:
James Brewer, CFP, is the founder of Envision Wealth Planning, a financial planning firm based in Chicago, Illinois. Brewer has been named one of the 20 Best Financial Advisors in Chicago several years in a row and does media appearances and workshops to address the gender and racial disparity in retirement planning. His financial advice has appeared in The Wall Street Journal, Forbes and others.
Roger Ma, CFP, is a New York City-based financial planner and author of Work Your Money, Not Your Life. He was named one of Investopedia’s Most Influential Financial Planning Advisors. His financial advice has appeared in The Washington Post, Bloomberg and others.