Financial Planning for a New Baby

Financial Planning for a New Baby
Eileen St. Pierre, The Everyday Financial Planner

new babyToday is Mother’s Day. My gift to all the new Moms-to-be out there is financial advice. Here are some tips on financial planning for a new baby:

Adjust your W-4 withholdings.

You now will have another dependent. Contact your payroll department at work and fill out a new W-4 form. By increasing your withholding allowances, less income tax will be withheld from your paycheck.

  • You can adjust your W-4 at any time during the year.
  • You do not have to wait until your baby is born, as long as the change is made in the same tax year as the baby’s birth.
  • Use this extra money to increase your emergency savings fund and/or purchase items needed after your baby’s arrival (diapers, furniture, clothes).

Research child care costs and options.

If both of you plan to go back to work after your baby’s birth, you will need child care. The cost of child care can be a real shock. According to the National Association of Child Care Resource & Referral Agencies (NACCRRA), the average cost of center-based daycare in the United States can range from $300 to $1564 a month.

Create a budget.

You should create both a pre- and post-birth budget. Especially if this is your first child, it’s really tempting to go on a huge shopping spree before your baby is born. Make sure you understand the total cost of diapers, clothes, and furniture. Save a set amount each month to devote to your new addition.

It’s also important to realistically look at how much income you and your spouse will make after the birth.

  • How many paid time off days will you receive?
  • Will you have to reduce your work hours?
  • Would it make more sense for either you or your spouse to stay home instead of paying for child care?

Set time aside for an insurance check-up.

Get an estimate from your health insurance company of your out-of-pocket costs for the birth. Make sure your child is added on as a dependent on your policy. If you do not have long-term disability insurance, now you have a good reason to get it.

Start thinking about college savings plans.

Like all savings goals, the earlier you start, the more time you have for your money to compound. If you think your child may one day need to apply for need-based financial aid, it is important for these accounts to be in the name of the parent or guardian (like 529 plans). On the other hand, if you want your child to have the most flexibility to do whatever he or she wants with the money once turning 18, UGMA and UTMA accounts work best. See my College Planning page for more information.

Finally, don’t forget to update your will. A will is the only document where you can name legal guardians for your children in the event of your death. It’s a subject no new parent wants to think about, but it can be one of the most important things you do for your new child. Visit my Estate Planning page for more information.