Atlanta Financial Newsroom

Billfolds and Babies

Billfolds and Babies
Charles Crowley, CFP®, AIF®
November 13, 2019

A baby changes the game in so many ways. I think back to the first time I heard my little boy say “peeeez, Daddy.” I would have handed that little guy nearly anything he wanted with little remorse just because of how cute it was. It makes me think about how as parents, we naturally want to not just meet, but exceed the wants and needs of our children; however, accomplishing that can be quite a challenge. With so much time focused on getting ready mentally, spiritually, and physically for a new baby, it is also fact that soon-to-be parents can especially end up feeling a bit unprepared financially because it is so tough to judge how expensive life as a growing family will be.

Knowing personally and professionally that the fiscal changes associated with parenthood are a gracious plenty, I’ve laid out a few things below that will hopefully make the experience of welcoming a new baby less of a learn-on-the-fly education.

Big-Picture Communication

The single most significant piece of advice that I can provide to couples considering starting a family is to equally communicate sooner rather than later. It is imperative to discuss and fully understand each other’s respective fears and expectations so that you can prepare financially for what is to come. Far too often I come across couples who haven’t realistically defined how life will change after a child is born. Obviously, a certain focus tends to be on the impact to the wallet, but not all the necessary questions to be asking are purely monetary in nature. Asking tough questions, like the ones below, and having very real conversations with your spouse early can make a world of difference.

  • Will both parents return to the work force or will one stay home to care for the child/children?
    • If only one parent will be working, how will this impact health insurance coverage for the family? How will one income versus two impact the monthly cashflow plan, and what might have to be sacrificed in order to make the budget work month to month?
    • If both parents will be working, what does the childcare structure look like and cost? How can work and home schedules best be coordinated for doctor’s appointments or an illness – will PTO have to be taken or will it be unpaid leave?
  • What values and/or skills should the children learn growing up when it comes to money? Should they receive an allowance? To employ the envelope system or not to employ the envelope system? What examples should be set within the family finances to purposefully show the children how to handle money?
  • What happens if both parents pass away? Who takes care of the children and how will they be provided for financially?
  • If one spouse is to be a homemaker, how might that individual be or feel fulfilled daily if they are used to a 9 to 5 job? What will it feel like when there is no “office” to head into?

Trust me, what is above merely starts to scratch the surface on these conversations.

Insurance

Insurance may be the most confusing aspect to dive into because there is so much information (good and bad) and much of it is hard to understand because you are dealing with events you have no prior experience with. So, let’s break this into three parts: health insurance, disability insurance/employee benefits, and life insurance.

Starting with health insurance, there are several things to consider:

  • If both parents are going to be working AND there are two different group health policies involved (it happens more than you think), you must decide which group policy the baby will be covered under. The numbers and coverage limitations make this decision for you. Babies go to the doctor, a lot! So, look at premiums, deductibles, out of pockets, co-pays, etc., and make the decision that works best for your family budget while not sacrificing the adequate levels of coverage.
  • Meeting with the billing department at the hospital you plan to have your baby at can shed a great deal of light on costs you are likely to incur. Further consulting the insurance company will provide insight into how those costs will be covered, and you can therefore begin planning for the appropriate levels of cash reserves.
    • Ask for details on typical charges (prenatal and postpartum monitoring, c-sections versus natural births, epidurals and other common medications used during labor, and prolonged neonatal care for example).
    • Some hospitals will bill the baby as their own person for insurance purposes immediately upon birth, and that is regardless of whether their stay involves the NICU. Ask specifically how your hospital and insurance company will handle the billing of neonatal care.
    • Ask about “minimum protocols”- many hospitals implement a minimum number of days for observation depending on the type and complexity of the birth. Every second that you’re there will be billed, so understand the policies. Similarly, ask about protocols for the baby as well as certain conditions might require longer stays under neonatal/pediatric care.
  • Flexible Savings Accounts (FSA) are generally funded up front by the sponsoring employer and the employee “pays the contribution back” throughout the year via payroll deductions. The full benefit is typically available for use with the birth. However, if you have not paid the entire contribution back and you subsequently decide NOT to go back to work, the company could technically come back to you for a lump sum payment of the remaining FSA contributions that would have otherwise been covered under future paychecks. Just keep that in mind if an FSA is part of your plan.

As it relates to child birth, the disability insurance component can be summarized simply by saying that you should review in detail the benefits package your company offers versus what you have elected. Two of the most important aspects are PTO and short-term disability.

  • Understand your employer’s PTO policy and coordination with FMLA standards, and then plan appropriately for your paid leave. Same for your spouse or partner – maximizing paid time off between the two of you may help make the transition into parenthood a little easier if nothing else but financially.
  • Short term disability coverage for the mother can be unbelievably crucial during this time. At the very least, it could allow for some additional paid time off after PTO is exhausted. It could also serve as a source of payment for deductibles and out of pocket costs as well. Just note, if you are not currently signed up for short term disability, you would need to before

Having a baby can also be a game changer when it comes to life insurance. My colleagues, Chris Blackmon and Michelle Thompson, have both touched on this aspect in prior articles1 but I’ll add a few highlights below:

  • The amount of life insurance you need can be somewhat difficult to address because there is a subjective component. It depends on what you are looking to replace if something were to tragically happen. Whether you use sophisticated analysis or simply apply a rule of thumb you should contemplate several things when determining how much life insurance you need:
    • How much income do you need to replace if something happened to you or your spouse? Remember, even if your spouse is now going to be working in the home versus the marketplace, there may not be a salary per se to replace but there are still costs that would have to be covered if something happened to him/her (i.e. the child would then presumably need to be in daycare while you are at work).
    • Is there a mortgage that should be paid off? You might not want your spouse to have to go back to work (immediately or at all) simply to make the mortgage payment.
    • College education – where are you with saving for eventual education costs? If you could fund that goal with a lump sum in the event of a premature passing, what does that number look like?
    • Final expenses – what are those going to potentially be for your family based on your final wishes?
  • How to cover the life insurance need is a second consideration. For most people, level term insurance will suffice; it is the cheapest and most simple way to check this box. That said, check what is available through your employee benefits.
    • Typically, the open market is going to be cheaper per thousand of death benefit, but that isn’t always the case. Look into what your employer provides free of charge (generally the maximum is going to be around $50,000, at least before it starts costing you something!)
    • There may also be supplemental coverage you can purchase via payroll deductions but compare that cost per thousand to a private policy available on the open market. Go with the cheaper of the two.

Pre-Baby Cashflow

If you have talked through all the possible outcomes together and you understand how your benefits and insurance will work, then the only thing left to do is consider what changes need to be implemented within your budget in preparation for the baby.

  • If it is very likely that one spouse is not returning to the work force, at least for a period of time, budgeting on one income is a necessity. I’d recommend starting to do this well before pregnancy (and thus well before you are a one-income family) if possible so that you build much needed habits and you begin to get used to less discretionary income.
  • Through targeted savings within your budget you can “practice” paying for daycare and other baby related expenses. This will help you adjust your budget comfortably and help build up your necessary cash reserves.
  • If both parents will be working and childcare will inevitably be a line item in the budget, go ahead and do your due diligence on facilities as early in the pregnancy as possible. Get on the daycare waiting lists; a good daycare center in a popular area will potentially be hard to get in to. Inquire about the costs and deposits required and compare in-home, nanny, or daycare center options accordingly.
  • If one spouse doesn’t have paid leave to take for the birth, consider building a savings component into your budget to account for some unpaid time off for that parent.
  • You have your contingency funds for deductibles, you have your emergency funds for longer term cashflow issues… a “sinking fund” for baby supplies might not be a bad idea – diapers and wipes go very quickly, and formula is super expensive. Those costs can add up rapidly, so build in some room and a coffer for that uncertainty.
  • When it comes to spending on baby accessories and a nursery, parents get a great deal of control over those costs and there are a lot of ways to be frugal when providing for a baby.
  • Take advantage of baby showers if you are so fortunate to have them. Request essentials like diapers and wipes versus niceties that you may or may not ever use.
  • Don’t be afraid to take back things you realistically will not use. This can provide a source of funding for things you do need.
  • Some moms make their own baby food, use cloth diapers over disposables, or buy used gear and accessories from consignment stores. Truth of the matter is that babies grow out of things very quickly, and I can attest to the benefits having watched my wife do some of these things very successfully over the last two years.

In conclusion, learning that you are going to be a parent can be a mixture of excitement, nervousness, fear, and anxiety all at once, but the journey is what makes it so great in the end. I can’t count the times I heard my father say to me growing up, “you’ll have your own kids one day, and then you’ll understand.” And Pop was right. Everett just turned 2 in July and my little girl, Connolly, just crossed the 4-month mark. Second only to surrendering my life to Christ, the most rewarding thing in this life to me is being a father. But it didn’t come without stressful moments and some tough conversations, as there are a lot of personal lessons learned embedded in the tips above. My hope is that the concepts presented help someone out there gracefully shift their focus from how to have a baby to just enjoying your new blessing!

 

1 See the article “Financial Planning for Myself” by Chris Blackmon https://atlantafinancial.com/financial-planning-for-myself/ and also “4 Estate Planning Tips When You Have Young Children” by Michelle Thompson https://atlantafinancial.com/4-estate-planning-tips-when-you-have-young-children/

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