There is nothing more special than a new baby! In addition to decorating the nursery, selecting a pediatrician, and buying those first wardrobe pieces, you also need to be financially prepared. And, if either parent will be taking off work, it’s important to understand the parental leave policy.
When contemplating a pregnancy or an adoption, be sure to understand your employment benefits. Parental leave policies and insurance benefits can cover associated costs as well as provide income while you are away from work.
Maternity And Paternity Leave Policy
At this time, the United States does not mandate paid maternity/paternity leave. While time off is generally available for childbirth and adoptions, it may be unpaid. However, the trend of offering paid leave benefits is positive. More companies are seeing this benefit as a means of retaining employees. Research shows an employee is more likely to return to work after a paid leave versus an unpaid leave.
If you have access to maternity or paternity leave through your employer, it may be paid, unpaid or a combination of the two. A combined policy, for example, may offer three months leave with two of the three months being paid. If your employer offers either a combination or an unpaid policy, you may need to do some advance planning to ensure you’re financially prepared.
If all or a portion of your time off from work is unpaid, calculate the amount of income that you will not receive during the non-working months before and after your child’s birth. That amount is your minimum savings goal. What’s the easiest way to get there? Set up recurring weekly or monthly automatic transfers to a dedicated savings account earmarked for expenses. Building up your savings in advance of your leave will help reduce your stress during the first crucial months with your new child.
Vacation And Sick Days
Another way to replace lost income during your leave is to save up vacation and/or sick time to use during your time away from work. This method can be especially useful if you can’t save enough cash in advance. Of course, you should discuss the scheduling of your paid time off with your manager or human resource department to ensure there are no unnecessary surprises.
Disability Insurance to The Rescue
Besides building up your savings account and accumulating vacation days, another option worth considering is short-term disability insurance. This benefit is sometimes provided by employers and would only benefit expectant mothers, not fathers or those adopting children.
Most short-term disability policies consider childbirth as a qualifying disability and will replace all or a portion (usually 50 to100 percent) of your salary. Be sure to read the fine print to determine if the policy covers childbirth. Also, make sure you understand the elimination period (number of days an individual must be disabled before benefits will be paid) and benefit period (length of time a policy will pay benefits during a qualifying disability).
No short-term disability offered through your employer? If you’re planning ahead (prior to getting pregnant) consider purchasing an individual short-term disability policy. Individual policies can also be purchased to supplement an employer-sponsored policy if its benefits don’t quite fit your needs.
Other Employee Benefits
If you’re enrolled in a high-deductible health insurance plan (HDHP) through your employer, you can set up a health savings account (HSA). Maximizing contributions ($3,450 in 2018 for an individual; $6,900 for a family) to an HSA prior to childbirth can be especially beneficial. Not only are contributions to this account pre-tax, but withdrawals for qualifying medical expenses are tax-free. At the very minimum, make sure you have your HDHP deductible covered by your HSA, so you can pay the health costs associated with childbirth.
A flexible spending account (FSA) can also be used as a savings vehicle for childbirth expenses. If your employer offers an FSA, contributions made (maximum contribution of $2,650 in 2018) are pre-tax and withdrawals for qualifying medical expenses are tax-free. Unlike an HSA, FSAs have a “use it or lose it” provision. Make sure the amount you contribute to your FSA will be spent on childbirth or other medical expenses by year-end to avoid losing any of your contribution.
Common qualifying expenses associated with childbirth covered by HSAs and FSAs include: childbirth classes for mothers, breast pumps, doulas, hospital expenses, and adoption counseling.
Childbirth and getting acquainted with your new baby are memorable moments you’ll cherish for a lifetime. Don’t let worrying about finances spoil that precious experience. Planning ahead and being financially prepared will reduce your stress and allow you to focus on the newest member of the family.
Abby VanDerHeyden, CFP, is a Financial Planner with Bedel Financial Consulting Inc., a wealth management firm located in Indianapolis. For more information, visit their website at bedelfinancial.com or email Abby.