How to financially prepare for parenthood

Congratulations! Parenthood, as you've likely realized, is a major milestone, and as with most life milestones, it's going to shift things financially. While it might be easy for financial considerations to get pushed to the back of your mind amid thoughts about birthing plans, baby registries, and all the nuances of raising a tiny human, your financial situation is too big of a foundation to overlook.

But just like with that stack of baby books piling up on your nightstand, it can feel hard to know where to start when trying to financially prepare for the arrival of your child. So before all things baby take over your days (and nights), here are some steps experts recommend soon-to-be parents take:

Conduct a financial self-assessment

Before you start worrying about what's next, it's helpful to get an idea of where your finances stand right now. Tally up the amount of debt you currently have, and check to see how much is stashed in your emergency fund. This is a smart time to cut down on the former and bolster the latter.

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In fact, one of the biggest mistakes soon-to-be parents make is ramping up their costs pre-baby, rather than whittling them down, Investopedia says. For instance, while it might seem natural to splurge for a new home given you'll soon have an additional member of the family, "upgrading your home could be a mistake if it means taking on a larger mortgage payment that ends up being burdensome for your budget," Investopedia points out.

Make a post-baby budget

You might also review your current budget and then figure out how that will shift going forward, taking into consideration all of the childcare costs you're anticipating (and leaving room for some surprises as well). "We looked for ways we could save on our current expenses, while adding these new categories to accommodate our growing family," wealth advisor Ignatius D'Anna told Kiplinger.

It's also critical to accurately estimate your added costs post-baby. According to Investopedia, at the most basic level, a baby budget should take into consideration co-pays and doctor visits, birth and delivery costs, baby gear, essentials like diapers and wipes, feeding-related supplies, and childcare. Also don't forget to account for any shifts in income due to the baby's arrival, such as a period of unpaid parental leave.

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Plan ahead for insurance

Beyond health insurance, new parents should also take into consideration both life and disability insurance. "Most expectant parents should insure themselves for at least six to eight times the amount of their gross annual salary to cover the anticipated dependent," James H. Hunt, a retired life insurance actuary for the CFA, told Parents.

And even if you have disability insurance through your provider, "make sure that it will be enough to cover essential expenses like your mortgage, debt, childcare, and household expenses for a reasonable length of time," Charles Scwhab suggests. Consider supplementing your existing plan if needed, and make sure to note the specific policies of different plans.

Also don't forget about adding your newborn to your health insurance plan. "Most insurance plans typically have a 30- to 60-day window to add your newborn to your plan after birth, so it's beneficial to contact your insurance provider ahead of time to find out what information they'll need," D'Anna tells Kiplinger.

Don't overlook available tax breaks

Because of how costly raising a child is, there are a number of tax breaks available — and new parents should make sure they're not leaving that money on the table. For instance, the child tax credit, offered to parents who have an eligible dependent child and meet income limits, "reduces your taxes on a dollar-for-dollar basis," Investopedia says. Other credits to look into include the earned income tax credit, intended for families with lower and moderate incomes, and the child and dependent care credit, which is for parents who pay for childcare in order to work.

Relatedly, explore the option of a flexible spending account (FSA), which is "an employer-sponsored program that allows you to set aside up to $5,000 per year tax-free for qualified childcare expenses for couples filing jointly with one or more dependents," Charles Schwab explains. Having a new baby counts as a qualifying event, so you might be able to sign up through your employer outside of the typical open enrollment period.

Update your estate planning documents

While it might be the last thing you're thinking about while waiting to welcome new life, it's especially important to have your estate planning affairs in order now that you're soon to have a dependent. "It's easier to write a will and choose a guardian before the baby is born," Parents says.

Charles Schwab also suggests speaking to an attorney to ensure other areas are in good shape, "including powers of attorney for financial and health care decisions and up-to-date beneficiary designations."

Start saving for college (yes, seriously)

It might seem wild to start saving for college when your child is still in the womb, but it's better to start saving sooner than later given the reality of sky-high college tuition costs. You could even just start by sifting through all of the 529 plans there are to choose from and opening an account now, as "most plans will give you up to six months to add a Social Security number when the baby is born" Parents points out.

Plus, you could always ask for contributions to that 529 plan from family members, friends, and co-workers in lieu of less-needed gifts.

Becca Stanek has worked as an editor and writer in the personal finance space since 2017. She has previously served as the managing editor for investing and savings content at LendingTree, an editor at SmartAsset and a staff writer for The Week. This article is in part based on information first published on The Week's sister site, Kiplinger.com

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