How to Financially Prepare for Having a Baby
Are there financial benchmarks you should hit before having a baby?
Only 25% of the parents in the Fiscal Femme community felt financially prepared to have a child. Most reported that they didn’t really know how they were going to make it all work financially but they figured it out.
I share this because if you are ready to have kids but aren’t feeling prepared financially, you are not alone.
We hear kids are expensive (to say that least), but what does it even mean to prepare financially? What can we do to prepare ourselves for this big change? Is it worth delaying starting a family if we aren’t financially ready?
There are so many factors that go into the decision to have children and the decision extremely personal. Given how hard it can be to time a pregnancy and often even conceive,the idea that we can plan for them is almost laughable.
However, information is power and if we understand some of the things we can do to prepare, we can make the best decisions for us and for our families. Here are some things we can do to prepare financially for having children.
Map out new expected expenses.
Our expenses will shift tremendously when we add a new family member. Each family's budget will look unique, but it’s helpful to look through this list of potential costs of having a baby to see which apply to you and which you’d like to prioritize.
I am a big fan of mapping out what the next twelve months will look like after having a child. Why? By planning for an entire year, quarterly or bi-annual payments (such as childcare) will be accounted for. This will also help you more accurately plan for birthdays, camps and clothing runs. This approach helps us plan for the more irregular expenses that can often add up or make cash tight.
It’s very helpful (and often eye-opening) to see if adding in these new expenses will be workable with our current income. If they aren’t, are there ways we can adjust? This might look like spending changes in other areas of our life.
You can use this budgeting spreadsheet to map it all out. (Note: this spreadsheet can help you plan out other aspects of your spending, too!)
I promise that this exercise is worth it, but I understand the hesitation to actually do it. It takes time, we might not know what certain things will cost or we’re sure we’ll forget something. Do the best you can to estimate. Ask around and look in parent Facebook groups. You might not be able to get the exact cost of something but you can make an educated guess.
We’ll always forget some expenses, or something will come up that we didn’t expect. Leave in some buffer room and we can update our spending plans at our monthly money parties.
Increase your rainy day fund.
When our expenses increase, we should aim to have that reflected in our rainy day savings. For example, if we decided to keep four months of expenses saved for a rainy day and spent $5k per month pre-baby, we’d have $20K in our rainy day funds.
If we calculate our new expected monthly expenses with a kid (and childcare costs), that monthly cost might go up to $8K. If we still want four months of expenses set aside for a rainy day, we’d want to increase our rainy day fund to $32K.
If you didn’t have your rainy day fund where you wanted it to begin with, this can feel like a daunting goal. Do not fret! Break this down into smaller savings goals to make it more doable.
If your ideal rainy day fund is four month’s worth of expenses, start with something more manageable (like one or two month’s of expenses).
Save up for one-time expenses.
There are some larger, one-time expenses associated with having a kid that may or may not apply to you and your situation. There’s the medical bills associated with pregnancy and birth, parental leave (if you don’t get paid leave or are a freelancer / entrepreneur investing in your own leave), and baby furniture.
Think about any one-time expenses that you expect to come up during the baby's first year and start setting money aside for them in a sinking fund.
As the child gets older, there will probably be other one-time expenses that you start to anticipate. You’ll want to deal with these in the exact same way.
Should I have my debt paid off?
Should I have my high interest rate debt paid off before starting a family? I hear this question a lot, and the answer is extremely personal. There are many factors that go into the decision to try to have a family and as much as we’d like to plan, the timing doesn’t always work out as we expect.
If you have high interest debt when starting a family, make sure to map out the monthly payments in your budgeting spreadsheet so that you know how the payments will impact your overall plan.
If the debt were paid down, you’d be able to put those monthly payments and interest towards other expenses and goals which may make your financial life much easier but for many, waiting until all high interest debt is paid off is not a feasible scenario.
Get life insurance.
When we have someone’s financial livelihood depending on us, it’s important to get life insurance. When we have term life insurance, we pay a monthly or annual fee so that if we were to pass away, that predefined insurance amount of money would be given to our child (or children). We can rest assured that they will be taken care of financially and will not be a financial strain on your partner or their guardian.
If your child has two involved parents, you’ll want to think through scenarios where each one passes away and then one where both pass away. I know… really fun. If one parent earns enough to take care of the child (or children) financially without the other’s income, then only the parent with the high income would need to be insured.
Get an idea of what term life insurance will cost and make sure to include that in your annual spending plan.
Time for some estate planning.
When we have kids, we now have people depending on us for their livelihood. First and foremost we’ll want to put together a will so that it’s clear where and how we want our assets to be divided up if we were to pass away.
At the same time, we will also want to appoint a guardian (and backup guardian), which is the person who would take care of your child should something happen to you before they are eighteen. This was the hardest part of estate planning for me! It’s not fun to think through situations where your child would be raised by someone else but it's really important to lay out your plans.
Enroll the baby in your health plan.
When your baby arrives you'll have a lot on your plate, but it will be really important to get them on your health insurance plan. Your health insurance is another expense that will increase now that you have a child and you’ll want to account for that in your spending plan.