Becoming a new parent for the first time represents one of the biggest changes in life. The first time that you hold your newborn baby, you will realize that your life has changed forever. You’ll be facing a new set of responsibilities, concerns and costs. It is both a responsibility and a joy to raise a child and one of the biggest responsibilities is to ensure your child’s financial future.
Having a child can be almost as expensive as it is exciting and it can be particularly daunting for new parents who have no idea how to create a baby fund. So, here we’ll delve into this topic to help you make informed decisions for your family.
Why Do You Need a Baby Fund?
If you already have some savings or have a comfortable income, you may wonder why you need a baby fund. It is important to appreciate that even if you have an emergency fund that can cover a few months of your regular expenses, as parents you will need a bigger safety net. You need to not only plan for your finances during maternity leave, but you’ll have medical bills and other big expenses relating to your new baby.
For example, federal law only requires that you have 12 weeks of unpaid maternity leave and only 40% of employers offer paid leave. So, if your employer does not offer paid leave or you want longer than 12 weeks, you’ll need to be prepared for a loss of income.
Having a baby fund can not only cover some of these additional expenses, but provide reassurance that you will have a buffer as you get adjusted to being a parent.
How Much Do You Need in a Baby Fund?
The first step you’ll need to do to create your baby fund is to work out how much you need. Your specific needs will depend on your circumstances. But, there are some common baby-related expenses that will help you in your calculations.
You may already have coverage for your visits to the obstetricians and your delivery costs. Your employer will be able to explain what is and will not be covered. If you have a large insurance plan, you can expect your out-of-pocket costs to be an average of $2,800.
If you don’t have any coverage, the average cost of childbirth can be almost $20,000 depending on where you live. You can get an approximate idea of the costs by talking to friends or family members who have recently had babies for a ballpark figure.
Whether you prefer disposable or cloth diapers, this item can have a significant impact on your monthly expenses. Cloth diapers typically cost more initially and are more environmentally friendly, but you may need to pay a premium for a cleaning service. You may also be able to get some good deals at big box stores if you buy diapers in bulk.
It is a good idea to check around for typical costs in your local area to get an approximate idea of how much you’ll need to spend. For reference, newborns can require 10 to 12 diaper changes per day. This decreases as your baby grows, but you can still expect to use approximately 7 diapers for a 9 to 12-month-old.
Whether you breastfeed or use formula, your food bills are likely to increase when you have a little girl or boy. However, if you typically eat out frequently now, cutting down on this is likely to offset any increase in your grocery bills.
As with diapers, if you use formula, it is often possible to get bulk deals when you shop at big box stores, or warehouse clubs like Costco.
Even if you choose to breastfeed, your food bills are likely to increase, since you need to eat more and snack more regularly to maintain your milk supply and keep your energy levels up.
So, you will need to assess the potential impact of your new baby on your food bills.
This is a more exciting area of a baby fund, as you’ll need to think about all the purchases you’ll need to make for your little one. This varies from small items such as clothing to furniture, strollers and car seats. Bear in mind that you don’t need to buy everything at once, and every little one is different. So, while it is a good idea to have the basics ready, you can fill in any gaps once your baby has arrived.
You may be pleasantly surprised at how little a baby needs. If you’re on a tight budget, you don’t need multiple super cute outfits, as your newborn is likely to be lying in a bassinet most of the time.
However, it is a good idea to overestimate the costs of baby stuff and any remaining money can be used for other baby expenses or diverted into a college fund.
Keep in mind that if you have a network of family and friends, you can do a baby registry to cover many of these items. You can also ask for gift cards for additional flexibility.
For most families, this is the biggest expense and will take up a large part of your baby fund. If both parents work, you will need to think carefully about your childcare options before your baby arrives. The cost of daycare can vary greatly depending on your local area, so you’ll need to compare estimates near your home or work.
Ideally, the monthly cost of your childcare will be integrated into your monthly budget, but you may need a buffer within your baby fund, particularly if your hours will change when you return to work.
Once you’ve determined how much you need in your baby fund, we need to get to the trickier part, creating your baby fund. This will involve saving money on a regular basis to build up your fund before your new baby arrives. There are a few tips that can help you to achieve this.
Even if you’re not yet pregnant, if you’re thinking about starting a family, it is a good idea to start your baby fund as soon as possible. The longer that you have to make your savings plan, the greater the potential accumulation of funds. Even if you can only save a modest amount, if you have longer to save, you’ll still be able to create a decent fund.
Set a Budget:
The first and most obvious tip is to set a budget. Even if you currently have a budget in place, you will need to adjust it to accommodate your new savings plans. Remember to consider the new expenses relating to the pregnancy including doctor’s visits and unpaid leave to attend appointments.
If you’re new to budgeting, you’ll need to assess your current monthly income and all of your expenses. It is also a good idea to divide your expenses into essential and non-essential. Essentials include things like mortgage or rent payments, utilities and loan repayments. Non-essentials are things such as streaming subscriptions, eating out and impulse purchases.
While you don’t need to eliminate non-essentials, as this would make life a little dull, these are areas where you may be able to save. For example, if you typically eat out once a week, cutting this down to twice a month would create a significant amount in your baby fund after six months.
Consider Additional Funding Sources:
There are a number of ways where you can add money to your baby fund that can provide it with a real boost. These include things like birthday money, tax refunds, bonuses, an increase in your income and cash gifts you receive at your baby shower.
Every dollar will count when you’re creating a baby fund and if you put whatever free cash that you have into the fund, it will quickly start to add up.
For example, if you receive a $50 birthday gift, $200 from your baby shower and a $1,500 tax refund, you’ll be adding $1,750 to your baby fund.
Pay Down Your Existing Debts:
This may seem counterintuitive when you’re trying to raise money, but even the best savings and investment products will be unable to match the rate you’re paying on credit card debt. This means that for every dollar that you save, you’ll be paying out more than a dollar to service your debt.
So, while you have a little time before your baby arrives, try to pay down your costly existing debt or consider restructuring it. For example, if you have good credit, you may be able to transfer your credit card balance to a new 0% introductory APR card. This will give you a set time to clear or pay down the balance with no interest charges. This means that all the money you pay into your credit card account will go towards the debt rather than interest payments.
Choose the Right Account:
Most financial institutions offer a variety of account options that may be suitable for your baby fund. In many cases, you may simply choose a basic savings account, but you may be able to get a better rate if you opt for a high yield account or a CD. These types of accounts do have withdrawal limitations, but if you don’t plan on making purchases for a good few months, they could be beneficial.
Remember that there is no one size fits all account solution. So, think carefully about what you need from a bank account. For example, if you want to continue using the account for your child as they grow, you’ll need a custodial account. On the other hand, if the account will be changed into a vacation fund account once the baby is born, you’ll have completely different requirements.
Ask any parent and they will let you know that having a baby can be very expensive. Before you even consider saving for college tuition and paying for big trips, you’ll have a lot of expenses and costs to cover. From equipping the nursery to paying medical bills and covering the loss of income during maternity leave, a baby fund can provide a reassuring buffer.
Fortunately, if you have a baby savings plan, it can help you to prepare for these new expenses and ensure that you can meet them head-on. Just bear in mind that once you’re over the hump of having a newborn, you will need to start thinking about the longer term.
There are a number of tax-efficient investment vehicles that can help you to save for your child’s college education or provide them with a financial helping hand as they approach adulthood. By getting into the habit of regularly saving for your baby fund, you can adopt a proactive approach to managing your money that will benefit your family in the short and long term.