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PF: 3 To-Do's when you see 2 Pink Lines

The 3 most important things you need to do when a baby is on the way

Finding out a baby is on the way is a moment of true joy (hopefully) immediately followed by pure terror.


All that time that you thought you had left before you had to start adulting has been reduced to about 9 months (or less if you are even remotely proactive).


Aside from the "fun" part of new baby planning (baby showers, setting up a nursery, etc), there are some crucial financial items that need to be addressed immediately as the cost of not doing so can be catastrophic.


Lucky for you, it's as simple as 1-2-3.


To note, I realize upon drafting this that it may appear that I work in the insurance industry or have some sort of affinity for insurance. To answer bluntly, I detest insurance salesmen and only ever recommend obtaining any form of insurance if the risk reduction offered makes sense in relation to the cost. In this case, it very much does.



1. Health Insurance


Very boring topic but a very crucial component of your pregnancy & brand new baby stage.


This breaks down into 2 baby steps:


Review your current health insurance plan to see what your deductibles are.


The game to play here is attempting, if even somewhat possible, to keep all of your pregnancy & child delivery expenses in one year to avoid being hit with the "double deductible".


"Bronze plans" deductibles can run as high as $6,000 (for those a bit confused - this is the amount you have to pay out-of-pocket until your insurance kicks in). This means if your pregnancy occurs during 2 calendar years, you will have to pay up to $12,000 out-of-pocket.


Costs can get crazy quickly so the importance of this cannot be understated. As reported by Nerdwallet, child delivery can cost between $3,296 to $37,227 based on your hospital selection (which could by itself eat up your entire deductible).


Have a look here for other expected costs.


This obviously sucks and if you can attempt to front-load/back-load expenses/appointments/treatments into the more expensive year, you could save thousands.


Once the baby arrives, add your baby to your health insurance coverage.


This may be obvious but having a child is considered a "life event" and thus qualifies you to make adjustments to your health insurance.


Your personal health insurance policy will cover expenses for the first 30 days post childbirth but terminates on day 31.


You have up to 60 days to obtain coverage specifically for your newborn and it applies retroactively (so it covers expenses that occurred right after birth and up until you sign up).


Check out this article for additional advice.


BONUS:


Additionally, you can obtain the applicable tax deductions now that you have a "dependent".


And YES, you can claim a full year dependency even if your child was born on December 31st.


2. Life Insurance


Obtain a term life insurance policy on the income-producing spouse(s).


"Income-producing" is the keyword here.


If something should happen to the individual(s) charged with financially supporting your household, you need to make sure that an adequate safety net is established to protect the surviving spouse & child.


The general "rule of thumb" here is to at least obtain 10 times the income-producing spouse's salary. So if they make $50,000/year, your policy should at least be $500,000.


If you wanted to add more safety, you can add in any outstanding debt and buffer funds to cover the new childcare costs associated with a single working parent household.


"Term" is the second keyword.


Term life insurance is 6 to 10 times cheaper the whole life and will provide coverage only when you really need it (until your child goes off to college or reach a point of financial stability where a loss of a spouse would not seriously impact the remaining dependents).


In short, this could be obtaining an 18-year policy.


You should absolutely shop around for the best rates/prices for this policy. Different providers can price the monthly payments in drastically different ways (from less than $10/month to over $100).


3. Savings


Increase emergency fund savings.


You need to increase your savings to cover 6-12 months of living for 3 now (rather than 2 people before).


So if your monthly emergency fund now is based on $2,000 in monthly expenses, add an extra $1,000 (at least), bringing your 6-month fund to $18,000 from the prior $12,000.


Create a 529 account for your child.


Your child is almost certainly going to pursue some form of higher education.


As this is inevitable, a 529 account is your best strategy.


This account can be opened at most banks/brokerages for free and carry very low fees.


With a 529, "contributions are not deductible, [but] earnings in a 529 plan grow federal tax-free and will not be taxed when the money is taken out to pay for college. Reference.


So compared with a traditional savings or investment account, you avoid paying taxes on all earnings (interest, dividends, capital gains).


With ordinary-income & capital gains tax rates ranging from 10% to 37%, this can be a drastic amount of avoided cost/increased value.


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