Baby Proof Your Finances

Are you ready, financially speaking, to welcome a baby?

Preparing for a baby can be thrilling yet nerve-wracking, especially when considering the financial implications. My husband and I are currently expecting our second child, which has brought me right back to that headspace of “what do we need to do to get financially ready?” It’s been three years since we last went through this, and a lot has changed.

Buckle up! This is gonna be long but definitely insightful! 

_{👉🏻 Prefer watching instead of reading? Here’s the video version of this blog where I dive into the same strategies: Watch the video}

The Backstory: Preparing for Our First Daughter

Three and a half years ago, we found out we were expecting our first daughter. The joy was immense, but so was the responsibility. We knew that preparing financially was not just for us but primarily for her. Through diligent planning and investing, we’ve positioned her to potentially be worth over $4 million by the time she reaches adulthood. This isn’t just about numbers—it’s about setting a foundation that allows her to succeed without financial constraints.

We achieved this by creating and meticulously managing three separate investment accounts, specifically aimed at building her wealth. This was possible because we first secured our financial health, allowing us to be more generous and impactful. Our goal was to create real generational wealth, and we began this journey even before she was born.

Step 1: Understand Your Cash Flow with a Zero-Based Budget

Understanding where every dollar goes was our first step. We established a zero-based budget, where every dollar coming into our household had a role. Income at the top, all the expenses, including savings, including debt payments, what comes out of the bottom is zero. This strategy was crucial when preparing for the added expenses a baby would bring and helped us allocate funds efficiently.

Step 2: Parental Leave Planning

Navigating parental leave was next, especially tricky in the medical field known for minimal leave pay. We had to understand the coverage offered by our employers and the limitations of our short-term disability policies. It’s essential to understand that the Family and Medical Leave Act (FMLA) does not guarantee paid leave; it only ensures that your job will be held for you in your absence. Here’s how to tackle this:

1. Determine Your Eligibility for Paid Leave

First, confirm whether you’re entitled to any paid leave directly through your employer. Not all employers offer paid parental leave, and your eligibility may depend on various factors such as your tenure at the company or the company’s size.

2. Understand Short-Term Disability Policies

Many employees rely on short-term disability (STD) insurance to compensate for income during maternity leave. It’s crucial to know if you are covered under such a policy and what it entails. Typically, these policies cover up to 60% of your earnings; however, this is often capped at a certain amount and may not specifically cater to maternity needs the same way it provides for other “disabilities”.

3. Examine the Specifics of Your Coverage

Often, the details of STD policies are outlined in a document—usually a PDF—that specifies benefits, limitations, and coverage terms. These documents might note that pregnancy or childbirth might be treated differently than other conditions. For example, my policy advertised covering 60% of my earnings but actually capped the payment at around $1,000 per week, which was less than expected.

4. Check for Coverage Caps

It is crucial to call your insurance provider to confirm any caps—whether weekly or monthly—on the benefits. Understanding these details will help you gauge the financial impact during your leave.

5. Coordinate with Your Partner

If you have a partner, it’s beneficial for both of you to make similar inquiries. This way, you can comprehensively understand the total potential loss of income during the leave period.

6. Make an Informed Financial Plan

Knowing how much you will be compensated during your leave is vital for financial planning. With an accurate picture of your expected income, you can adjust your budget accordingly and ensure that your financial needs are met during this transitional period.

If you're electing to take more prolonged time off, take a look at the income loss projected by The American Progress project:

Step 3: Health Insurance and Medical Costs

We also revisited our health insurance to anticipate potential medical expenses. With a high-deductible health plan, we ensured our Health Savings Account (HSA) was adequately funded to cover out-of-pocket expenses related to the pregnancy and birth.

Step 4: Realistic Planning for Baby Essentials

Focusing on necessary baby essentials, we resisted the urge to overspend. Decide on a realistic budget and focus on big-ticket items like the crib, car seat, stroller, and nursery furniture. 

You can find more affordable options—like used strollers on Facebook Marketplace for around $100—or splurge if it fits your budget. If you’re having baby showers or registries, factor those into your plan. The key is to know the all-in cost before you start buying, so you avoid overspending on non-essentials.

Step 5: Childcare Costs

Understanding childcare costs early on was essential. We researched and budgeted for daycare, including necessary deposits, which was one of the largest adjustments to our monthly expenses.

When calculating your budget, account for all key expenses: missed income, medical deductibles, and major baby items. For example, if you usually earn $3,000 a month but receive only $2,000 during parental leave, that’s a $3,000 shortfall over three months. Keep your budget reasonable—don’t overspend on baby items if it means compromising your long-term savings or retirement goals. Prioritize essentials and consider secondhand options if needed, so you’re financially prepared now and in the future.

Step 6: Assessing Insurance and Overall Financial Strategy Post-Baby

After ensuring your immediate financial needs are met, it's crucial to plan for the long term, which includes post-baby budgeting. When both parents return to work, consider the type of childcare required and ensure it fits into your financial plan without compromising your ability to manage other essential expenses like student loans.

Insurance Adjustments

Check whether your insurance plan will be more cost-effective under your or your partner’s policy once your baby arrives. Additionally, start looking for a pediatrician early on to avoid last-minute decisions.

Financial Projections

Determine what your new monthly cashflow will look like post baby, with the new added expense of childcare. If one or both partners will have changes in hours or compensation, factor this in. If you do not have a student loan strategy in place AND an investing strategy that creates your financial independence goals, you don’t have an adequate cashflow system.

Realistic Spending

Understand the cost of necessary baby items that will also be added to the budget, like diapers and formula. These additions are actually smaller than you think. The primary driver of cashflow changes is childcare as above.

Long-term Financial Health

Managing high-interest debt is crucial; it can cripple your financial stability. Pay off your high interest debt, build an emergency fund of 3-6 months, create a definitive student loan strategy, and never let your investing rate drop below 20%.

Additional Financial Considerations

As new parents, the last thing you want is to stress over finances when you are sleep-deprived and adjusting to your new life with a baby. Here are some further steps to ensure you're well-prepared:

• Life Insurance: Secure term life insurance that covers 10 to 12 times your annual income. Avoid relying solely on workplace policies, as they typically provide inadequate coverage at only 1X annual income.
• Estate Planning: Set up a will or estate plan to ensure that your child is cared for in the event something happens to you. Minors cannot control assets, so it’s vital to have a clear plan in place. You should also have someone designated to care for your children in the event you are deceased.
• Investment Strategy: Only consider investing for your child’s future if your own retirement plans are secure. This can include 529s, custodial Roth IRAs, UTMAs, and more.

Our financial preparations not only made the transition to parenthood smoother but also allowed us to set up a substantial financial legacy for our daughter. As we prepare for our second child, we’re applying the same principles, ensuring each step is carefully planned and executed.

Preparing for a child is about more than just the immediate needs—it’s about setting a stage for their future success and ensuring they have the resources to thrive. By sharing our journey, I hope to inspire and guide other parents on how to effectively prepare for the financial aspects of parenthood.