Here’s How to Give Your New Baby an Unbeatable Financial Edge

Having a baby changes your life—and your finances. That’s why it’s smart to build a solid financial plan before your baby arrives. Your plan should include a budget, emergency fund, paying off debt, a review of your retirement savings, and an estate plan to protect your family’s future.

Revise Your Budget

Budgeting is a critical financial tool that can help you manage your finances. It’s especially important whenever your financial situation changes, such as when you’re expecting a baby, because your expenses can change significantly. During the first year, the costs of having a child can range from $16,905 to $28,166, according to Boeing Employees Credit Union. Some of these costs can include:

• Medical expenses, such as prenatal care, delivery, hospital stays, insurance, and other related costs
• Baby supplies
• Childcare
• Health care costs and insurance
• Food and clothing
• Daily supplies, such as diapers, strollers, furniture, and toys

Don’t forget to budget for other expenses, including time lost from work if you or your partner must take time off for the baby.

Build an Emergency Fund

An emergency fund is a financial safety net that helps you deal with financial shocks that may arise due to a job loss, if your income drops, or when unexpected expenses come up, such as medical bills or home repairs. Experts recommend setting aside at least six months of expenses in your emergency fund.

Your emergency fund should be easily accessible and safe, so consider putting it in a savings account with a competitive interest rate. Many financial institutions provide high-yield savings and money market accounts with better rates than traditional savings accounts.

A few things to keep in mind about your emergency fund:

• Avoid using it for nonessential or impulse spending.
• Be careful locking your funds up in vehicles like certificates of deposit (CDs), which typically pay a higher interest rate, but the bank may charge a fee if you need to access the funds early.
• Don’t keep cash at home. You could be tempted to use it for other reasons. It is also prone to loss or theft if you keep it at home.

If you use your emergency fund for any purpose, replenish it so you can use it for the next emergency.

Get Life and Disability Insurance

Life and disability insurance can provide crucial financial protection for you and your little one in the event of death, illness, or injury.

Life insurance gives your beneficiary(s) a death benefit when you die in exchange for premiums you pay to the insurance company. If you’re having a baby, consider permanent life insurance, which provides coverage for your entire life and features a cash value component that grows on a tax-deferred basis. Two types of permanent life insurance include:

• Whole life insurance covers you throughout your life while paying your beneficiary(s) a tax-free death benefit. The interest on the savings component accrues on a tax-deferred basis.
• Universal life insurance offers a death benefit and a savings option, but it is more flexible. You can borrow against the savings portion and adjust your premiums if your financial situation changes. You can even change the death benefit amount at any time within certain limits.

Disability insurance can provide income replacement if you can’t work due to an injury or illness on a short-term or long-term basis. Coverage is available from public or private sources, such as Social Security, insurance companies, and workplace programs.

Getting coverage is critical if you can’t work and must cover expenses, such as your mortgage or rent, bills, and groceries. The cost of disability insurance depends on several factors, including age, the amount of income the policy will cover, your medical history, and the total benefit period.

Plan to Pay Off Debt

Having a baby can be expensive, and paying off as much of your debt as possible can provide you with financial flexibility when you need it. Consider using a debt payoff strategy that works best for you. Some of the most popular include:

• Debt avalanche: Make the minimum payments on all of your debts. Use any extra money to pay off the debt with the highest interest rate. Once you have paid off that debt, move on to the next highest-interest debt, and keep moving through the list until you pay off all of your debt.
• Debt snowball: Make the minimum payments on all of your debts. Use any extra money to pay the debt with the smallest balance. Once you have paid off that debt, continue moving up the list from lowest to highest balance until you have paid off all of your debt.
• Debt consolidation: Apply for a debt consolidation loan. Once approved, you can use the funds to pay off your existing debt. This gives you one, easy-to-manage monthly payment to a single creditor, typically at a lower interest rate.

You can always keep your debt in check by using a debt payoff app. Budgeting apps can also help you track your spending and expenses.

Revise Your Retirement Plan

It’s always a good idea to review your retirement plan whenever significant changes occur in your life, such as having a baby. You may need to adjust how much you save, your goals, and the outcome of your retirement savings.

• Consider maximizing your contribution limits, such as for your 401(k) and individual retirement accounts (IRAs).
• Take advantage of employer matches, which give you access to free money in your retirement fund.
• Consider working with a financial professional who can help guide and identify any missed opportunities, including ways for your money to grow on a tax-deferred basis.

Start your Estate Plan

Contrary to popular belief, estate planning isn’t just for the ultra-rich. Everyone should have a plan, regardless of their net worth. Planning can help you decide what happens to your money after you die. You can also make decisions about who takes care of your underage children, your pets, and how your other assets are divided.

Estate planning can be as simple as having a will or a power of attorney. You can also set up trusts for your children or other beneficiaries. If you don’t have an estate plan, the state where you live decides how your assets are divided and who is responsible for your children.

Financial Accounts to Secure Your Child’s Future

There are different financial accounts that you can set up for your child to help kick-start their financial future. Here are some of the most common ones:

• Traditional savings account: You can open this at a bank, credit union, or an online institution. A savings account earns you interest on the balance held each month. You have various options, including traditional savings, tiered options, and high-yield accounts. Each offers different rate options.
• Coverdell Education Savings Accounts (ESAs): This trust account lets you save money for your child’s education. The account must be established when the child is under 18 and can be used for K-12 and college education. The money grows tax-free, and withdrawals are tax-free as long as they are used for qualified education expenses.
• UTMA/UGMA custodial accounts: These are investment accounts, which stand for Uniform Transfer to Minors Act and Uniform Gifts to Minors Act, respectively, are established for minors and managed by adults. UTMA accounts can hold a wide range of assets, including real estate, whereas UGMA accounts hold assets such as cash, stocks, and bonds.
• Educational trusts: These trusts manage and distribute funds solely for educational purposes. This includes funding for tuition, books, and other related expenses. Types of trusts include tuition trusts and scholarship trusts.
• Life insurance for your child: Buying a life insurance policy can provide financial protection for your child. You may want to consider purchasing a rider on your adult policy or a standalone whole life policy to insure them.

The Bottom Line

Having a baby can be exciting. Along with shopping for new clothes and toys, you must also consider how you will fund your child’s financial future. Take the time to develop a solid financial plan, which can help you cover the costs of having a child, but also establish a secure foundation for your new baby’s financial future.