Congratulations! You're Having A Baby! Now What?!
Getting the news that you are having a baby is the GREATEST & SCARIEST piece of news you will ever receive.
If you are anything like me, your brain went right into prep mode.
So many things to do, so many things to buy... so many things to plan.
Having been there and done that a couple of times (and on two different continents no less!), I am here ready to provide you a quick overview of some of the financial topics that you need to consider as you begin to plan out the big day that's coming up much sooner than you think.
Insurance
HEALTH INSURANCE
THE BIGGEST THING YOU MIGHT NEED TO MAKE SURE IS IN ORDER IS YOUR HEALTH INSURANCE.
If you find out you are having a baby and are expected to have it in the same calendar year, then there might not be anything to do without another qualifying event to allow you to change your coverage.
If you are expecting to have your baby in the next calendar year (or insurance year, depending on when your open enrollment and the timeline of your company is), then there may be some things to consider in order to save as much money as possible on the whole process.
***Note: This also applies to women who are trying to get pregnant***
When it comes to open enrollment time, you should look at your plans and compare the potential out of pocket costs to you, and opportunities for tax savings along the way. The easiest way to do the comparison is to plan for the worst and take into account the maximum out of pocket costs, rather than the deductible. Doing so means you cannot go wrong, and anything less than that figure that you spend is a bonus.
I think the easiest way to explain this is with our personal example from when we had our son here in the US.
There were two realistic choices for us on my wife's insurance plan: a standard PPO (silver) plan, and a high deductible PPO (bronze) plan. The figures worked out like this:
Silver Plan:
- Premium: $350ish every two weeks
- Max out of pocket: $9,000
- Lower deductible
- Not HSA eligible
Bronze Plan
- Premium: $275ish every two weeks
- Max out of pocket: $7,000
- Higher deductible
- HSA eligible (yearly limit of $7,000)
Since my wife had a C-section the first time, we could reasonably expect that the second time around that would be the case as well... and as such extremely expensive (this is a time we definitely missed our European healthcare!). As such, it was just more practical for us to plan spending the max out of pocket.
It really was a no brainer for us that we should go with the worse level of coverage for our situation. By going with the Bronze Plan, we saved on premiums and limited our out of pocket costs to the tune of right around $4,000. Not only that, we got to take advantage of one of the most powerful financial tools there is, the Health Savings Account (HSA). The maximum funding for an HSA is currently $7,200 (2021). By fully funding that in the months leading up to the birth, we were able to pay ALL of our expenses out of that account TAX FREE! Silver level plans are generally not considered High Deductible Plans, so are not HSA eligible.
Saved on premiums, saved on out of pocket expenses, paid for all of the expenses with tax free money. All-in-all it was around $6,000 in savings by choosing the (on the surface) worse plan.
Again, planning for the max out of pocket costs will always be the more prudent way to plan for a baby. However, this is highly personal situation. Many people will have normal, easy births without any extenuating circumstances or longer stays or anything like that. In those cases the Silver (or better) Plans may end up being cheaper. But, for us, it made sense to use the advantages of the Bronze plan for our son.
If you want help comparing plans, Snowcap Financial can certainly help you with that assessment.
FLEXIBLE SPENDING ACCOUNTS
If you have access to them through your employer, it is also extremely important to consider Flexible Spending Accounts (FSA). There are generally two that you could have access two: Healthcare FSA & Dependent Care FSA
Healthcare FSA
This account works a lot like a HSA. You can put money into it tax deferred, and take it out tax free as long as the money is used for healthcare expenses. The limit is lower at $2,750 (2021), but if your employer offers it you can access it without having health insurance through that employer.
There are some limitations to be aware of though. First, the money expires at the end of the year or when you leave the company, whichever comes first. So don't load up a FSA unless you know that you will have the expenses in the same year, and you aren't leaving the company.
A HSA you can always roll the account with you when you leave and you never have to spend it.
Despite the limitations, it is a nice tax savings tool for those that don't want to have or it doesn't make sense to have a High Deductible Plan with a HSA.
Dependent Care FSA
The most painful checks we have to write were not to pay the medical bills for the birth of our son, but the weekly checks to take care of the daycare expenses for now two kids! Childcare costs are extremely high, and will eat a large portion of your budget. One of the best ways to take advantage of some tax savings around these expenses are through a Dependent Care FSA.
These accounts follow the same general structure as a Healthcare FSA, money goes in pre-tax and comes out tax free if spent on the certain items, in this case childcare. The max you can put into one is $5,000 for a couple that is married filing jointly, and $2,500 for married filing separate or single filers (2021 the limit was raised for 2021 only to $10,5000/$5,000 respectively).
If it is open enrollment time, then consider taking advantage of this benefit and load it up to the max (or the amount you think you will spend on childcare in the coming year) to get full advantage of tax free money there.
LIFE INSURANCE
This is also hugely important. You are now planning for someone that is going to be dependent on you for the next 18 years. You must do what it takes to ensure that they will be healthy, happy, and well taken care of no matter what happens to you.
Unless you are independently wealthy, then the best vehicle for this is life insurance. The cheapest method for meeting the need is term life insurance.
Along with some basic estate planning, life insurance will create a pool of money that can make sure your kids will have the resources to be taken care of no matter what.
If you don't already have insurance, do not wait a single day to get it taken care of. Term insurance is cheap. Both parents need it. Mothers-to-be, you can generally get coverage in the early months of the pregnancy without much of a hassle or effect on the rates you pay.
Please don't wait on this.
Emergency Fund
Save as much as possible from the moment you start planning to have a kid, or find out that you are pregnant, then start saving right away. Cut expenses where you can, and funnel as much extra money into your accounts as possible.
This is important because having a pile of cash gives you flexibility.
If something, heaven forbid, happens to you or the baby and you need to take more time off (or just want to take time off) having funds to cover your bills allows you to do so. Instead of rushing back to work, you can take the full FMLA allotment and go back when you are ready.
You also just never know when/where unexpected costs will come from at any point in time in life, let alone when you add another human to the household. It is always nice to have some buffer.
Budget Early
It is easy to go out and start buying all of the cutest things (especially if it is your first). DON'T DO THAT. Sit down, write a list of the things that you know you will need (you can find numerous resources for this online too), and then start price shopping them.
Focus on the bare minimum of things you must have, and work up to the nice-to-have's from there. Add prices to the list and then you can start having a realistic expectation of what you can and need to spend for stuff for the baby.
Also, remember that babies don't care how much you spend on any furniture for them. As long as it is safe and helps them sleep, you'll be fine no matter where you get something or how much you spend on it.
Here is where you also have to factor in the healthcare costs as well. That is a reason I like planning for the out of pocket max, it just makes the calculations easier.
If you do these things, and are really diligent about not overspending on stuff for the kid, you will be off to a good start in planning financially of the kids
Have A Financial Plan
If you have a solid Financial Plan, it is easy to slot a lot of the things covered in this article into it. A good Financial Plan serves as the backbone of your financial lives and helps to guide you to make all of your financial decisions.
An exceptional planner will help you figure out which path to take on the items discussed here, and any other as situations come up. They will be there as a sounding board for ideas, and take the pressure of having to navigate this season on your own off of you.
Consider finding someone that is able to walk with you and be there as a resource when you need it most.
Let's Make Sure Your Family is Prepared!
All written content on this site is for information purposes only. Opinions expressed herein are solely those of Snowcap Financial, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to other parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.
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