Welcoming a new baby into the world is a joyful and exciting time, but it's also one that comes with great financial worry. Naturally, you want to do all that you can to protect your child and ensure that he or she has every advantage in life.
With a little planning and the right strategy, you can make the financial transition into parenthood as smooth as possible.
1. Boost Your Emergency Fund
Unexpected costs can pop up at any time. When you have a new baby to care for, the thought of being unprepared for these expenses can add undue stress.
Beefing up your emergency fund will give you peace of mind. This way, if the car breaks down or you have unexpected medical expenses, you can rest assured that you have everything covered.
Ideally, you should have three to six months of living expenses saved up in an emergency fund.
2. Reduce Your Debt as Much as Possible
In an ideal world, every parent would be debt-free before welcoming a new baby into their lives. Making this dream a reality is extremely rare, but that doesn't mean that you can't take steps to reduce your debt as much as possible before the baby is born.
Focus on the debts with the highest interest rates, such as credit cards and personal loans. Don't get rid of your credit cards entirely, but lower your balances as much as possible.
"Credit cards can be an asset to you when you use them to your advantage," says Scott Langdon from MoneyTaskForce.com. "Some cards even offer additional perks such as limited travel insurance, car rental coverage or other benefits that can save you money."
However, using credit cards irresponsibly will only add stress to the situation.
3. Revise Your Monthly Budget
Bringing a child into the world naturally means that your living expenses will increase. But many new parents underestimate how much they will spend once their little one arrives.
Be prepared to spend more than you thought. Experts recommend increasing your monthly budget by 10% for the first year to account for these expenses.
The first child is always the most expensive, particularly if friends and family don't pitch in to help purchase some of the more costly items. Outfitting a nursery can easily cost thousands of dollars.
Don't forget to consider the costs of hiring a nanny or putting your child in day care if you plan to both work full-time. The costs of daycare for a newborn can be as high as a second mortgage.
4. Open a College Savings Account
With the cost of college tuition continuing to soar, it's important to start saving for your child's education right away.
Consider opening a 529 college savings account. These accounts allow you to make investments and grow tax-free. Those funds are not taxed when they're withdrawn either. The funds in a 529 account can be used for qualified educational expenses, like tuition and books. Many states also offer a full or partial tax deduction or credit for contributing to a 529 account.
