Avoid a Major Money Mistake: Learn How to Prepare for a Baby Financially in 11 Steps You Can Finish Before Your Due Date
We moved a few months after my first was born. All was well when we were pre-approved for our loan, but when they ran the final credit check TWO DAYS before closing our credit scores had dropped. Turns out we’d forgotten to pay a tiny credit card bill while we were in a new parent daze. That forgotten $5 led to a massively stressful few days. It was a completely innocent mistake that affected our credit for years.
Even if you’re not planning to move right after you have a baby, a late credit card payment can drop your credit score significantly. And late payments can stay on your credit report for up to seven years. So learn from our mistakes, and take steps before baby to make sure your finances are on autopilot. You’ll want everything organized before a major life change like becoming a parent!
Learn how to prepare for a baby financially in 11 steps. You’ll avoid making a big financial mistake when you’re in that new parent sleepless haze.
Make a List of All Recurring Payments
Work with your partner to list all recurring bills in your household. I like to do a spreadsheet that shows the payee, frequency of payment, approximate date due and amount due. If it’s a fixed expense, like the mortgage or daycare, I’ll put in the exact amount owed. For variable expenses, like electricity and water, I’ll put an average or the minimum and maximum just to give me a rough idea.
When you’re making this list, it’s important to remember annual or bi-annual bills. Things like car insurance, homeowner’s insurance, property taxes and homeowner’s association fees come due just once or twice a year. It can be really easy to lose sight of these payments since they don’t happen every month! To be extra sure you’ve got everything listed, comb through your checking account and credit card statements from the prior year. That way, you’ll make sure that every bill is on the list.
Automate as Much as Possible
Armed with your list of bills, automate as many bills as you possibly can. Most companies now offer some form of automatic bill pay. If a company doesn’t offer automated bill pay, but the bill is fixed every month, you can set up automatic bill pay through your bank. For a while, our daycare didn’t have an automated option, so we sent them a check every month via our bank’s automatic bill pay. Make sure to go back to your spreadsheet and mark the bills that you’ve set up on auto-pay.
As an aside, we didn’t want to automate our credit card payments in full. We like to look at the balance and go through the charges before paying. If, like us, you don’t want to auto-pay your entire credit card balance, just auto-pay the minimum payment. That will be your backup in case you accidentally pay late one month.
Schedule Manual Banking
For all bills that aren’t automated, you’ll need to set aside time to pay those bills. I find that it works well to have two banking sessions per month. Put a recurring meeting invitation on your calendar (work, home, partner’s work, partner’s home) so you don’t forget. Then, distribute all of the remaining bills to one of the two banking sessions. For example, banking session one might be:
- Credit Card #1
- Lawn Service
- Electricity
Banking session two might consist of:
- Credit Card #2
- Credit Card #3
Also gather up any physical, non-recurring bills you receive and address them during the next scheduled monthly banking. Since this should never be more than 2 weeks away, you’ll still be paying all of your bills in a timely manner.
Assign Responsibility
Moms, you may not realize this if you’re pregnant with your first child, but you are going to be all sorts of out of it in the first few weeks (months) after your baby arrives. You’ll be sleep-deprived. Your hormones will be all over the place. You’ll be figuring out how to be a parent and worrying about your baby’s sleep habits while wondering how you will ever be a good employee/spouse/daughter/sister again. It’s a lot to take in.
Therefore, you do not need to be worrying about paying the bills during this time. If you usually are the family banker, talk with your partner before the baby arrives to make sure you’re on the same page. Your partner should be in charge of the bills during the post-partum period, end of story.
Track your Credit Scores
If you’re not already doing so, sign up for Credit Karma or another credit monitoring service. (I like Credit Karma because it’s free!) A credit-monitoring service will alert you to identify theft. It will also notify you if there’s a change to your credit score, like a late payment showing up. Make sure you’ve turned on notifications so you’ll be aware of any changes right away.
Track your Budget
Perhaps you’re not already a budgeter. I certainly am not. That being said, maternity leave can be a challenging time since your income will likely change. To make sure that you’re sticking to a budget, I highly recommend signing up for Personal Capital. This is a completely free tool that monitors your net worth, income and spending. Personal Capital automatically categorizes your expenses, so you can easily see when the bulk of your expenses are eating out or Amazon (ahem).
Although we don’t adhere to a strict budget in our house, having visibility into our expenses and income is really helpful for us. We can also easily see if we’ve got a bunch of cash sitting in our investment account that needs to be invested, or some other financial housekeeping chore that needs to be taken care of.
Discuss Kid-Related Financial Items
Kids are expensive. It costs about $250K (and counting) to raise a kid, so you’d better start talking about that now. Discuss your budget for everyday baby expenses, like diapers and formula. Talk about how much you can afford to pay for childcare, if you haven’t already. Think about how you might want to save for your child’s college education. There are many options, like a 529 plan, a custodial account or a trust. When the baby arrives, relatives will want to start contributing to the college fund, so it’s good to be prepared to tell them how they can do that! You’ll also be able to research and make the decision with a clear head. Be sure to consider not only the tax implications but how flexible you want your child’s savings to be. Some options, like the 529, limit the way the money can be spent.
Automate Saving
If you haven’t already, automate your saving. This means automatically transferring money every month from your checking account to other accounts. You might send the money to a savings account, investment account and/or college fund. You can usually automate this with your bank. It’s a great way to enforce saving. Obviously, you can turn off the transfer if you need to but it’s better to have it occur by default when possible.
Set Up Balance Alerts
When you automate your bills, you want to keep close track of your checking account balance. To do so, set up balance alerts with your bank if they’re available. My bank allows you to set an alert at any balance, so choose at least two balances to alert yourself. I like to set one “yellow” alert, which means that the account is a bit lower than I’d like it to be. This lets me know to keep an eye on it, but I don’t need to take any action. I then set a “red” alert which means that the account is too low to pay upcoming bills. In that case, I would need to make some adjustments like turning off the automatic savings transfers or transferring funds in from another account. You don’t want to end up in red status, but if you do you’ll want to know immediately.
Fund your 401(k)
If your employer has a 401(k) plan, contribute the maximum amount if at all possible. Employers often have contribution plans that match the employee’s contribution, so you can make the most of your benefits by putting as much as your budget allows into your retirement plan. Make sure to check the IRS guidelines for maximum 401(k) contributions so you don’t get taxed on your contribution.
Prepare a Will
It’s painful to think about, but something could happen to you. You and your partner need to make sure that you’ve made your last wishes known. That includes deciding who should get guardianship of your child and who has the power to make medical decisions on your behalf. Many lawyers offer reasonably priced packages for wills, medical powers of attorney and other important documents. Ask your friends or colleagues for a recommendation.
Be Prepared!
Having a baby is not all about cute onesies and adorable crib sheets (unfortunately). Unless you’re a super-organized person by nature, it’s pretty easy to end up making a big financial mistake like I did. Instead of paying the price, put in a little time up front to prepare for baby, so all you have to worry about is cuddling your squish and figuring out the whole parenting thing (no biggie)!
Note: I am not a lawyer or a Certified Financial Planner. For legal or financial advice, please see a professional who can advise you on your specific situation.
