Once you hold your new baby in your arms for the first time, the last thing on your mind is all of the money-related tasks and decisions you have to make.
Handling this while you’re bleary-eyed is guaranteed to lead to less than optimal choices. As a new mother myself, I did my best to prepare ahead of time. But nearly seven months later, even this personal finance reporter hasn’t managed to fully organize her financial and legal affairs.
What I have done is create a series of to-do lists, one for before and one for after the baby arrived, which has certainly helped my family maintain some sense of order. So sometime after you start considering baby names, but before you start to assemble a crib and decorate a nursery, try to check off as many of these as possible.
Before the baby
Automate savings for leave: Once you’ve figured out your company’s parental leave policy, start thinking about how much time you want to take off and how you’ll pay for it. A substantial chunk of my maternity leave was unpaid so while I was pregnant, I started automatically shuttling money into subaccounts that I called ‘‘baby leave’’ and ‘‘day care.” Even though I was only redirecting money from one account to another, this gave me some sense of control over the big expenses lurking around the corner.
Buy life insurance: Term insurance, which pays a specific sum if you die within a certain term, like the next 20 years, is usually the cheapest and most efficient avenue. Several financial planners suggested that women apply for coverage even before becoming pregnant, or at least early in pregnancy, to avoid potential issues later.
How much insurance you need is a personal calculation, but even a stay-at-home parent should have some. Parents also need to ask themselves a variety of questions, including how much income they will need to replace. Buy the insurance outside of your employer so you can take it with you wherever you may go, the experts said.
Disability insurance: This insurance, which pays a portion of your salary for a period of time if you become disabled, doesn’t tend to rank high on the priority list, but financial planners suggest considering it. Group policies offered through your employer typically pay about 60 percent of your current paycheck, some advisers said.
Choose a health plan: Ideally, you want to think about this before you’re expecting so you can choose the plan with the best maternity coverage. And be sure to inquire whether there are any out-of-pocket costs to avoid surprises later. You generally have about 30 days to add the baby to the plan after the birth — precisely the time you’ll be the most sleep-deprived. So think about how to best optimize family coverage ahead of time. How much more will it cost to cover a new child? Is it more cost-effective to put the baby on the mother’s or father’s plan?
Suspend flexible spending: New mothers going on leave may need to turn off contributions to flexible spending accounts if there is no longer a paycheck to deduct from. Speak with your human resources department about spending deadlines, particularly on flexible spending.
After the birth
Emergency savings, then 529s: You should have an emergency cash cushion in place (about six months of living expenses) before even thinking about a 529 college savings plan, several planners said. Still, you really can’t open one of these state-sponsored accounts soon enough. Its mere existence means you’ll be more likely to deposit found money like cash baby gifts or income tax refunds.
Tax decisions: Even babies born on the last day of the year provide their parents with a nice tax bonus: In 2013, a child will reduce your taxable income by $3,900.
But while that exemption is available to all taxpayers, you may need to choose one of two tax breaks if you plan on working and paying for child care. If your employer offers a flexible spending account for dependent care, you can set aside up to $5,000 to pay for day care or a nanny; it’s excluded from your income. The child care credit, meanwhile, is a credit (meaning if you owe taxes, you will be credited dollar for dollar) for up to 35 percent of child care costs up to $3,000 for one child, or $6,000 for two.
Think about guardians: Picking a guardian to care for your child should something happen to you or your partner is the last thing you want to think about when welcoming a new baby, and that’s why many parents procrastinate in writing a will.
One option is to create a temporary arrangement. ‘‘You might choose your parents now and then change it as your parents age,’’ said one Colorado financial planner.
And remember, there’s no rule that says the guardian must be the same person who oversees the child’s financial affairs. In fact, some parents prefer to name a couple of people with different strengths, which can serve as a system of checks and balances — the loving uncle may be guardian, while the finance-savvy aunt handles the money. Once you decide, be sure to speak with these people about their role.
Create or update an estate plan: Depending on whom you ask, you need to create either a will or a revocable trust to serve as the main document to execute both your and your spouse’s wishes in the event of your untimely deaths. Some specialists suggest the path of least resistance. Just write a basic will, which should contain what’s known as a testamentary trust, or a trust created for the benefit of the child and that usually goes into effect only if both parents die, one expert said.
Creating a will is certainly the simpler and less expensive route. But some lawyers still call a revocable trust the gold standard. One of its main advantages is avoiding probate, or the court-supervised process to settle a deceased person’s estate. But it also streamlines everything: All of your assets are put into the trust during your life. They remain in your control and can be changed at any time. After you die, a trustee that you name distributes the assets according to your instructions, all while avoiding probate.
Remember date night: When the baby arrives, changing just about everything, it can be difficult to remember what it was like when it was just the two of you. So do what you can to stay connected and keep your partnership strong, particularly at what is the happiest and most stressful time of your lives.