Preparing for a new baby can be overwhelming, especially if it’s your first. Between setting up the nursery, reading every pregnancy book under the sun, and creating a birth plan, your mind is a constant whirl of to-do’s. With so many fun mommy-to-be chores like registering and decorating to distract you, there is one much less fun, yet absolutely crucial, task that is often missed: organizing your finances.
To get started, find the answers to these questions:
How much time off can you get? Under FMLA, federal law requires employers to provide eligible employees up to 12 weeks of unpaid time off for the birth of a child (with certain restrictions and eligibility requirements). Your state may also have applicable laws that you should familiarize yourself with. Your Human Resources (HR) department should be able to provide you with information about your eligibility, but it’s important to do your own homework and know your rights!
Are you eligible for paid maternity leave? Not many employers offer this benefit, but there are some that do. If your employer does, ask about your eligibility and what percentage of your pay they will provide during your leave. There are also a handful of States with universal family leave.
Do you have disability insurance? If you have health benefits through your employer, you may be included in a group plan for short-term disability. In this case, your employer will assist you with filing a claim. These plans generally cover a percentage of your lost wages for six weeks for a vaginal birth or eight weeks for a c-section (this is how long your doctor will require for your recovery). You will likely receive a single check for the full amount of the claim. It does take time for your claim to be filed and approved, so don’t count on having these funds in hand right away. Also, keep in mind that this money is considered taxable income and you will want to have taxes withheld.
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How much paid time off should you use? If you receive these benefits at work, how much do you have banked? If you have been saving up, you may be able to cover a portion of your leave. If you don’t have a lot of hours to spend, then focus on using enough to cover deductions for your other benefits such as health, dental, and vision. If you suddenly stop receiving any pay, your benefits will stop and you could end up with a lapse in coverage.
Your HR or payroll department should be able to calculate how many hours it will take to cover your deductions. They should also be able to give you a rough estimate of what your paychecks will look like if you decide to use hours beyond what it takes to cover your deductions.
Another consideration is how much of that time off do you really want to give up? Remember, having a baby is exhausting, plus you are going to want bonding time with your little one beyond your maternity leave.
Should you reduce withholdings for your 401k? While this may result in a slightly larger paycheck, you may be worse off in the long run. If you reduce your contributions to less than you’re your employer’s matches, you are essentially giving up free money. Remember also that your contribution is a percentage of your pay, so if you are receiving a reduced paycheck, your 401k contribution is going to be reduced proportionately.
Should you reduce withholdings for your Health Savings Account (HSA)? If you have an HSA, your answer should depend on how much you already have in the account, your insurance deductible, and out-of-pocket (OOP). Your hospital stay alone will come with a hefty price tag, not to mention pre and postpartum appointments. If you already have the funds in your HSA to cover your OOP, then yes, you can afford to pause contributions. If you don’t, and you think you can’t afford to make contributions during your leave, just carefully consider that you will still have to spend that same money later to pay your medical bills.
How much do you have in savings? If you are a saver, you may have funds set aside that will cover some or all of your lost income. If your only savings is your emergency fund, you can certainly consider dipping into that to cover your time off. Just remember that life happens! Another emergency could still pop up any time! If you don’t have a savings and are living paycheck to paycheck, you may find this article helpful.
CRUNCH THE NUMBERS
Now that you know what benefits and time off you are eligible for, it’s time to determine how much income you will be missing out on during your maternity leave. Don’t be afraid to ask your HR representative to provide you with any of the following information.
- Calculate your net income for the time period. Once you know how much time off you are eligible to take, multiply that amount of time by your net pay (your average paycheck after taxes and deductions).
Example: Let’s say your average biweekly paycheck is approximately $1,000.00. You are also eligible for FMLA and want to take the full 12 weeks off.
$1,000.00 average paycheck x 6 missed paychecks = $6,000.00 net income for the time period.
- Calculate and add up all supplemental income. This will include paid maternity leave, an approximate estimation of short-term disability claims, and any paid time off (PTO) benefits you plan to use.
Example Continued: You want to use 120 PTO hours and your HR department estimates that over 12 weeks, that will total approximately $1,500.00 net pay (after deductions). You are also filing a short-term disability claim for 60% of your lost income for a period of 6 weeks.
$3,000.00 approximate net income for 3 paychecks x 0.6 (60%) = $1,800.00 estimated claim payout
$1,800.00 estimated claim payout + $1,500.00 from PTO = $3,300.00 supplemental Income
- Calculate your lost income. Subtracting your supplemental income from your average income for the time period will tell you how much income you will be missing during your maternity leave.
Example Continued: $6,000.00average income for the time period – $3,300.00 supplemental income = $2,700.00 lost income
Once you have calculated your approximate lost income, you will be able to determine if you have the funds in your savings to cover your lost wages. If you don’t have these funds set aside, this isn’t the time to fret. Instead of wandering into the unknown, you have the knowledge to plan ahead. You have time to set money aside, cut unnecessary spending, or even adjust your plans for your leave. You may do all the math and realize that you just can’t afford to take a full 12 weeks off.
Set aside funds on schedule. If you don’t have the money set aside to cover your lost income, it’s time to start saving. If you are on a tight budget, decide if you can manage to set aside a small amount from every paycheck from now until your due date. If you can only afford to set aside $25 a week and you are still five months from your due date, that means you can set aside $500 before the baby comes. Here are some creative ways to save money on a tight budget.
Cut unnecessary expenses. Most of us regularly spend money on things that we can live without. I know it’s hard to imagine going months without binge-watching Netflix or getting through traffic without your morning cup of Starbucks. Even those small expenses can add up quite a bit. Just think about your time off, you snuggled on the couch with your new little bundle, and you will remember what your priorities are!
Back to that HSA. What a wonderful tool for saving and paying for medical expenses. If you don’t have the funds in your HSA to cover most or all of your OOP, you may want to consider increasing your contributions. Any money you contribute to your HSA is tax-free! Plus, it’s an easy way to automatically set aside a savings fund that you can’t dip into for those impulse purchases!
More to consider. Keep in mind that your financial situation will be affected beyond your maternity leave. There are large one-time expenses for items like cribs, car seats, and maternity clothes. There will also be new ongoing expenses like daycare, baby clothes, diapers, and possibly formula. Research the going rates for these expenses in your area and be prepared to work them into your monthly budget. The cost of daycare alone may take up enough of your income to make you consider being a stay-at-home mom or making a career change.
In addition to saving beforehand, you can save on an ongoing basis by making wise choices in how you spend.
Create a baby registry whether or not this is your first baby. Keep it simple and only register at one or two places and only register for the necessities. Some of the items on your list aren’t as important as you may have built them up to be. That adorable quilt set and the “baby-proofing” items can wait. It will still be quite a while before the baby can even sleep with said quilt or stick a fork in said light socket! Be selective so you are sure to get the items you really need and won’t have to take on those expenses yourself. Be sure to return unwanted and duplicate gifts and dedicate the money to essential baby items.
Daycare alternatives. If you have family members who are willing to care for the baby, it could save you a bundle! You may be able to get family members to agree to take on different days of the week. You may have a friend who is a stay-at-home mom who would be happy to watch your little one for a very low rate. Daycare licenses are only required for watching a certain number of other people’s children. Check for specific guidelines in your state.
Cloth diapers are better for the planet and your pocketbook. The average cost of diapers per child per year is about $900. You can buy adjustable cloth diapers for your child that will last them from newborn to two years old. Prices vary depending on the brand, but on average you can get a pack of six adjustable cloth diapers for around $30. About $200 in cloth diapers could comfortably last you all the way to potty training.
Breastfeeding saves money on formula. The average cost of formula is about $1,200 to $1,500 per child, per year. If you’re considering switching to formula when you return to work, consider both the health and financial benefits of continuing to breastfeed. Your employer is required to make accommodations for you at work and you may even be able to get a breast pump for free through your health insurance. However, there are circumstances that can prevent a mother from breastfeeding and it’s important that you do what works best for you and your family.
Most of us have a good seven or eight months to get everything ready for baby and somehow that still doesn’t feel like enough time. But you’ve got this mama! Now that you have set your priorities and know what to plan for, you are empowered. When the baby comes, you won’t have to worry about finances, you can relax and enjoy that new baby smell! Congratulations super mom!
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