The New Parent's Guide to Financial Health

You've just welcomed a baby, and you're prepared for diapers, drool, and delight. You should also be ready for financial changes. Babies come with expenses that can harm your budget unless you take action.

To maintain control of your post-baby finances, you'll need to:

• Sign up for life insurance protection.
• Create a savings account for the unexpected.
• Save for your child's college education.
• Prepare for additional health expenses.
• Create a baby-friendly budget.

We'll tell you how to take each step in this guide. With our help, you'll be able to take care of your baby and your finances at the same time. And you'll set a good example for your child while doing so.

Sign up for life insurance

Though it may be the last thing on your mind, one of the first steps you should take to protect the new life in your family is to address the financial problems your death would cause. By signing up for life insurance, you'll ensure that you continue to provide for your child even if something terrible happens to you.

There are two types of life insurance.

1. Term life insurance covers you for a specified time period, and as a new parent, you could set the policy to expire when your child comes of age. This is a good choice for parents with tight finances, as you can grab a large amount of coverage for a small fee. When the term is over, you can renew or let your coverage lapse.
   You build up no equity with this model. When the term of the policy is over, there is no residual value to the policy. A term policy only pays a death benefit.
   
2. Permanent life insurance covers your entire lifespan. Premiums are higher, but they don't tend to shift as you age. You build equity in a plan like this. This means you can apply this cash value for any purpose. You can borrow against the funds to cover unexpected issues.

If you have space in your budget, a permanent insurance plan can be a great option. Your child will get a payout when you die, no matter when that is. But if you can't afford this option, a term policy offers critical protection.

If you have children, you likely want a term life insurance policy that lasts at least 25 years. This will cover the time period when your child is growing up as well as their college tuition.

Once you've chosen a coverage type, you'll need to decide how much coverage you need. Think about your salary and other sources of income and determine how much of that your family might need after you've passed away. If your financial circumstances will change (for example, if your spouse will need to stop working to care for children), you'll need to account for that shift as well.

When you're buying your policy, your broker can help you make good choices about how much you'll need to set aside.

You can purchase life insurance through the company that covers your home or your car. You can also look for coverage through companies that specialize in life insurance.
Just be sure to get several quotes before you make your purchase so you’ll know you’re getting the best deal possible.

Open a savings account

Your checking account helps you cover day-to-day expenses. But what happens when you're hit with an unexpected bill? If you whip out your credit card, you're not alone. Unfortunately, interest charges can add up and strain your budget even more. It's best to have money set aside in a savings account for emergencies. Not only will the funds earn a small amount of interest, but they can enable you to cover a big expense without going into debt.

There are many different types of savings accounts that can appeal to new parents, including:

• Basic savings accounts. You can place funds directly into this account or have them transferred from your checking account. The bank uses this money to give loans to other customers, but you can withdraw your funds whenever you need them. Standard savings accounts tend to offer low interest rates, because they carry essentially no risk and the funds are easily accessible.
  
• Money market accounts (MMAs). In this case, you put money in the account, and then the bank can invest it. Typically, you'll need a good amount of money to open an account like this. MMAs are usually less liquid than standard savings accounts because they restrict the number of withdrawals. But you'll gain a bit more interest compared to a basic savings account, and you can still pull the money out when you need it.

Make saving painless by designating a set amount to stash in your savings with each paycheck. You won't notice the funds missing from your checking account, and your savings will grow every time you're paid.

Save for your child’s education

College is expensive, and an education can give your child much better odds of success. You can help cover that expense with a savings plan that starts early. The 529 plan allows you to grow your investment tax-free, provided the funds are used toward education.

The 529 program is administered at the state level, which means each region has a slightly different account structure and associated rules. But in general, plans like this come in two main varieties.

1. Prepaid tuition plans let you buy tuition credits at an institution located in your state at the current tuition rates. Let's think about that for a minute. Instead of waiting for college fees to grow over 18 years, you could buy credits at the current price. Potentially, that could save you a great deal of money.
   The downside involves choice. Your child may need to go to the college you've chosen, or in some cases, prepaid tuition plans cover multiple colleges. If your budding student wants to go to a different school, the funds can be applied toward tuition elsewhere, but you might not get the prepaid rate.
   
2. Investment plans allow you to choose an investment allocation and manage your account as it grows over time. The plans generally give an age-based option where the portfolio makeup will automatically adjust over the life of the plan. As your child gets closer to college, the investments move from riskier to more conservative. You also have the option to choose a static portfolio for a 529 plan. There are fees involved with programs like this, so you’ll need to shop around to make sure you’re not paying too much.

Visit with your bank to learn more about the 529 plans in your state, or ask your financial planner for help in finding the right program.

How much should you invest? In general, experts recommend multiplying your child’s age by $2,000. You should have that much invested in the account at that time. If you’re using a 529 plan, your return on investment could help you hit that goal much more easily. But you’ll need to keep track of your progress to ensure you have enough in the account.

Cover your health expenses

Being a parent means looking toward the future, but you can't ignore the present. Children need medical care, and a health crisis in a child can eat away at your finances. Protect your family with health insurance and use health savings accounts (HSAs) to save up for other costs.

When your child is born, it's time to talk to your health insurance company. If you're covered at work, visit your human resources department. If you're self-insured or covered through the insurance marketplace, call the number on the back of your identification card to get the process started.

Be ready to provide your baby's birth certificate and Social Security number so the company can verify your baby's relationship to your family.

Typically, your coverage will start on the day your baby is born. But if you wait too long, your insurer could exclude your baby from coverage. Be sure you've started the conversation within 30 days of the birth.

Some health insurance plans cover all your expenses. Others come with a deductible (a set amount you must pay each year before your insurance coverage kicks in). If your deductible is high enough that your policy is considered a "high deductible health plan," then you're eligible to sign up for an HSA.

Typically, if you have a high-deductible plan, you'll know it. Policies sold through the marketplace are tagged as either "HSA eligible" or not, and employers that offer HDHPs tend to hand out HSA enrollment forms for their employees. If you're not sure, you can ask your HR rep or insurance company.

An HSA is a bit like a savings account. You put money in, and you can take money out when you need it. But all of your withdrawals must be for healthcare expenses, and you'll get in trouble if you break the rules.

HSAs offer various tax advantages. You can contribute funds on a pre-tax basis, you can accumulate interest on the account, and your qualified withdrawals are tax-free.

You can withdraw money from an HSA for non-healthcare expenses, but if you are under age 65, you’ll have to pay income tax on these distributions as well as a penalty. If you are over age 65 and withdraw the money for non-healthcare reasons, there won’t be a penalty, but you’ll have to pay the income tax.

Some health insurance companies sell HSAs along with their plans, and many banks and brokerages offer them, too. If you're not sure where to sign up, get estimates from several companies and compare their fees and investment options.

Create a baby-friendly budget

Up to this point we've discussed many ways you can set aside money for baby. You'll need to add all those expenses into your budget so you don't forget about them. And if you don't have a budget, this is the section for you.

To create a budget, you'll need to make a list of all your income. That may come from:

• Full time employment.
• Side-hustle work, such as driving for Uber or selling Mary Kay.
• Alimony or palimony payments.
• Investment payouts.
• Rent paid to you.

Next, you'll need to make a list of all expenses. One quick way to do this is to download your bank statements for the last two months and highlight everything you've spent. If you've incurred that cost in the past, you're likely to see it again.

Total all your expenses and compare that amount to your income.

Part of budgeting involves planning. If you notice you're spending a bit too much on one category, such as entertainment, look for a way to whittle that down to help you cover the necessities.

Budgets are living documents, and they adjust with time. Managing your finances can also take practice, and it's not uncommon for early attempts to veer far from reality.
The key is to persist. The more you understand the money coming in and the funds going out, the more control you'll have.

Keep working on your budget, and as your child grows, include them in your talks. You'll help your child learn how to do the same in adulthood, and that's a priceless gift.

Frequently asked questions

What's the difference between permanent and term life insurance?

Term insurance lasts for a specific time period, while permanent insurance covers the entire lifespan. Term plans can be inexpensive, but they expire at the end of the covered period, and policyholders don't build equity.

Which is better: a savings account or a money market account?

It depends. If you don't have a lot of money to invest right now, a savings account is a better option, as you don't typically need a down payment. A money market account requires a minimum investment but can accrue more interest over time.

What's a 529 plan?

This is an investment tool you can use to save for a child's college education. Some plans allow you to prepay for a school of your choosing, while others enable you to control your investment and fund the cost of attending almost any school your child may choose.

How do I know if I'm eligible for an HSA?

Call and ask your insurance company if you're not sure. In general, you'll need to be enrolled in a plan with a high deductible to open up an account like this.

Why is it important to keep a budget?

When you know more about the money coming into and flowing out of your household, you can spot trends that help you become a wiser consumer. For example, a budget could help you realize you're spending the bulk of your income on rent, and that could prompt you to find a more affordable housing choice.

References

• How to Choose the Right Type of Life Insurance. (April 2019). Insurance Information Institute.
• Personal Insurance. (April 2019). USAGov.
• An Elementary School Parent’s Guide to Saving for College. (April 2019). GreatSchools.
• Children’s Savings Accounts. (April 2015). The Pew Charitable Trusts.