Having a baby? Nine financial considerations for new parents
My friend recently had a baby girl and she told me about the costs for a normal pregnancy and delivery. To say the least I was a bit flabbergasted that over $25000 was charged for a delivery with no complications. Since I want to have children in the future, I did a bit of research into the financial preparations one can do for a baby's arrival. Hopefully this will be helpful for all the potential parents out there.
1. Health insurance coverage - If you do have health insurance you could still end up paying quite a bit out of pocket depending on what happens during delivery and what type of insurance you have. You should definitely check the policy for what your out of pocket expenses are for hospital stays and major surgery in case of a C-section. If your work has multiple insurance options it is possible to switch into a slightly more expensive policy that covers more during a pregnancy and subsequent delivery. If you do not have health insurance and you are pregnant then it is very hard to buy insurance since insurance companies treat pregnancy as a pre-existing condition. However, it is possible for pregnant American women to apply for Medicaid before delivery. Any insurance is better than none since a delivery could cost anywhere from $10000 to $30000. Additionally, a newborn is very susceptible to disease so having medical coverage for the baby is very important.
2. Set up a flexible spending account if available - Flexible spending accounts allow you to contribute pre-tax money from your paychecks and pay for medical expenses or dependant care. The only disadvantage is that you must spend what you put into the account within the "Benefit Period" or lose the money you put in. The Benefit Period begins January 1st and ends March 15th of the following year. The great thing about flexible spending accounts is that the full amount you intend to contribute over the year is available for your use immediately even if the year is not over. So for example, if I tell my employer that I need to set aside $2000 next year, that entire $2000 would be available to me on January 1st even though I have not had any paycheck deductions. This is especially beneficial for expectant mothers who intend to quit working after the birth of a child since they could use the entire amount set aside by the employer for hospital expenses and not return to work to pay it back. That money is also not taxed as income
3. Pay off major debts - Once a baby arrives most families' expenses go up so it would be harder to pay off debts. I do not think that people necessarily have to pay off every cent of debt they have before having a baby, but paying off as much debt as possible before a kid arrives could relieve quite a bit of stress later.
4. Do not shop too much for the baby before it is born - This is some advice I got from moms I know. Quite a few women said to me that babies grow so fast that buying every cute outfit out there is a waste of money. It is much cheaper to ask for old clothes from friends and relatives who also had babies. For example, one woman got bags full of baby clothes from a sister in law who had a baby a year prior. Another piece of advice I got was that newborns do not really need toys or shoes so money is better spent on more useful things like bottles and diapers. It is also a good idea to stock up on a variety of diapers during sales before the baby is delivered since inflation will make everything more expensive a year or two down the road.
5. Life and disability insurance - The general accepted advice is to buy term life insurance for yourself before you have a child so it protects your child in case you die before his or her adulthood. For more about choosing a life insurance policy, Julie Rains wrote a good article about term and whole insurance here . She also wrote about why you do not need to buy life insurance for your child .
6. Raise your income if you need to - Do you need more income to support a new addition to the family? If so, it is probably best to find ways to earn more money before the baby arrives. This could mean asking for a raise, finding a better paying job, or setting up a income generating side business. Once a child arrives you may find that being a new parent is stressful enough without additional money making pursuits.
7. Housing - Many families buy a new house or rent a bigger place before or during pregnancy, but that may not be the best thing to do if the cost of the new space is unaffordable or much higher than before. Babies do not need that much space before they start walking so there is time to search for larger housing after delivery. You could save thousands of dollars by delaying the housing upgrade by a few months or years.
8. Prepare for leave from work - Most American companies do not have very generous maternity or paternity leaves, but most employees can take a 12 week unpaid leave to bond with a child under the Family and Medical Leave Act without losing their jobs. Since the leave is unpaid you need to figure out if you have enough cash to cover the leave. Also it is important to inform your manager a few months before you go so that you can train someone to fill in for you while you are on leave.
9. Childcare - This is something that needs to be thought about before the baby arrives. Who will take care of the child? Will one parent stay at home? This is probably the most important thing to figure out before the baby arrives. One thing is for sure, good childcare is never cheap.
A child is an incredible responsibility, and a bit of planning goes a long way. This is not an exhaustive list of the financial preparations new parents should be aware of before welcoming a baby, but it is a start. After a child is born there are many other financial concerns such as paying for college and adding them as beneficiaries to your will and retirement accounts. Anyway, I think parenting never really ends, but being financially prepared from the start will give you more time with your child.
What would you add to this list? Feel free to give advice to future parents in the comments!