Planning

Financial Moves for Expecting Parents

A Cute Baby Looking at Piggy Bank

So you’ve just found out you’re going to be a parent. Congratulations! It’s a wonderful experience but with it comes a whole new set of financial responsibilities.

You should start getting your financial house in order long before your child is born because the sooner you do, the easier the road will be.

Financial advisors and parents say checking insurance deductibles, paying down debt and saving money before the birth can go a long way in improving your entire family’s financial future.

Here are 5 things you should do now:

Check your health insurance deductibles.

You’ll want to start looking over mom’s insurance coverage to get a general idea of how much you could be on the hook for. Robert Henderson, President of Landsowe Wealth Management in Mystic, Conn., says while many group health insurance plans through employers carry maternity coverage, most individual plans do not.

Contact your benefits department or insurance company to get an idea of how much you might have to pay out of pocket for deductibles and co-pays.

“How much you have to pay out-of-pocket can vary widely depending on your coverage. It can really add up, so you should try to get an idea of what it might cost,” says Henderson.

According to the U.S. Agency for Healthcare Research and Quality and the American Association of Birth Centers, the average cost of a vaginal delivery with no complications in 2010 was $10,166. For a cesarean section with complications, that average was as high was $23,111.

While the mother can’t know what’s going to happen until the last month of her pregnancy, having a ballpark figure can help know how much to save.

Mari Adam of Adam Financial Associates in Boca Raton, Fla., also says it’s important to see how long the health insurance may cover the child before they need to be added on the policy. In many cases, it’s a month from birth but it varies by state and employer.

You’ll also have to plan for the increased premium for the child coverage and prepare for any expenses that may not be covered. That can often include circumcision and vaccines.

“There are a lot of things that won’t be covered. You need to check over your insurance so you know what to expect so that you can prepare for those bills,” says Adam.

Pay off credit card debt.

Being a parent is already hard enough on your wallet. It’s going to be a lot harder if you’re also carrying credit card debt at a 22% interest rate. Adam says you should take the next eight to nine months to try to knock out some of your high cost debt. Doing so might seem tough initially but it can pay off in the long run.

“It’s going to be a lot harder to do once the child is born and paying down that debt might free up some money in your budget when the baby comes,” says Adam.

If you’re carrying a $5,000 credit card balance at 22%, you could be blowing up to $1,000 per year in interest payments. By making a minimum payment of interest plus 1% of the balance it will take you 281 months to pay off that debt. By then you’ll have paid more than $8,500 in interest.

By making a payment of $300 per month, you’d pay off the debt in 21 months and save over $7,000 in interest, which could go to your child’s education fund or your retirement accounts. The sooner you pay credit card debt off, the sooner you’ll be able to start saving real money.

Protect your child’s future with estate planning and life insurance.

There is absolutely no reason for any parent to ever go without life insurance. If you’re a young, non-smoking adult with few or no medical problems, you might be able to obtain a $250,000 20-year policy for as little as $200 per year.

Certified Financial Planner Cathy Pareto recommends a term policy for most people because it’s affordable and offers coverage for a set period of time.

At minimum, secure life insurance for the primary breadwinner, but preferably for both parents, before the baby is born.

Pareto says young people typically don’t want to think about life insurance but it’s a necessity that ensures the financial well being of your child should something happen to you.

“If you’re having a child, one of your responsibilities as a parent is to make sure that if something happens to you, you can financially provide for them upon your death,” she says.

A common rule of thumb says you should carry life insurance equal to ten times your income. Adams says while it can be expensive, you may also want to consider long-term disability insurance.

While the risk of you dying may be relatively small, you have a greater chance of being injured and not being able to provide a living.

Finally, consider your estate plans and draft a will to lay out a division of assets.

Create a budget

You’ll often hear people talk about how expensive diapers and formula are, but they are relatively cheap when compared to things like daycare and school tuitions later down the line. If you’re going to handle these expenses, you’re going to have to get a clearer picture of how much money you have coming in and going out every month.

According to a new report called “Parents and the High Cost of Child Care,” the annual cost of day care for preschoolers runs from $4,600 in Mississippi to a whopping $15,000 in Massachusetts.

By creating a realistic budget, you might be able to find areas where you can make cutbacks or trim some fat to help deal with the added costs. Adam says creating a budget is a good way to get your finances in order before the baby arrives.

This is especially true if the mother is going to stay home with the child or draw a limited short-term disability. It’s also important to factor in the cost of taking time off for maternity (or paternity) leave.

“You have to start thinking about how it’s going to impact your income and how these expenses are going to add up. Childcare could run $800 a month so you’ve got to find that money,” says Adam.

Save and don’t overspend on baby stuff.

The good thing is that Mother Nature can give you up to nine months to start saving before the big expenses kick in. By analyzing your budget, you should be able to start making cuts and setting aside some money for delivery costs and initial expenses.

Adam says there can be a tendency for new parents to overspend on all the “fun” things that parents want. Having a premium crib, car seat, swing or toys shouldn’t come at the expense of the parents paying down debt, funding their own retirement or starting an education fund.

If you’re having a baby shower, try to ask for the necessary items so that you won’t have to spend money on them yourself. Also research which items are truly “must-haves,” and which baby items are a waste of money.

“If you’re going to get gifts, ask for the essentials so you can open a college savings account right away for the baby and not need to go out and spend that money,” says Adam.

Opening and funding a 529 Plan or ESA (Education Savings Account) when the child is born is a smart move. Through compounding, small regular investments can add up big over time. If you start with just $100 per month and can earn a 6% return, you could have $36,000 by the time the child is a senior in high school. $16,000 of that would have come from growth alone.

“You should be setting up a 529 plan immediately because you can get 18 years of growth. The sooner you do it, the more you’ll have down the line,” says Pareto.

Craig Guillot is a business and personal finance writer from New Orleans. He covers insurance, investing, real estate, retirement and debt. His work has appeared in such publications and web sites as Entrepreneur, CNNMoney.com, CNBC.com, Bankrate.com and Investor’s Business Daily. He is the author of “Stuff About Money: No BS Financial Advice for Regular People.“