Financial Planning for Baby: Paying Down Debt vs. Building Savings
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Meredith Rines is a wife and mom to an always moving toddler. When she's not chasing after her little boy, she can be found helping families with their money issues. Meredith holds her Master of Business Administration degree and is currently studying for the Certified Financial Planner exam. She helps young families start learning to budget, paying down debt, and saving for the future. Meredith's goals are to help families learn how to manage their money effectively while living the life they've always wanted. If you want to learn more about Meredith check out her blog Merelynne.com or on Facebook.
You see the positive blue lines on the pregnancy test and your head starts spinning. There is so much to do before your newborn arrives and you start to feel like you won’t have enough time. There are many doctor appointments, you have to get the nursery ready, start finishing up any projects at work, and you have an urge to get your money in order. No matter if you’re expecting your first child, your second child, or even your fifth child there is always so much that needs to be done in just those short nine months. Financial stress can always take a front seat to all of the worries you’re facing. One question expectant parents are faced with is whether or not to build your savings or pay down debt before the baby comes.
Actually the best advice is to do both, but let’s be honest, building a savings while paying down debt can be pretty impossible.
If you have to pick one area to focus on then you should be building a savings cushion.
To start, it’s recommended for families to have an emergency fund of at least $1,000 because having a savings can be a big relief during a financial setback. That cash reserve can be there if something breaks without warning such as needing your car repaired or your fridge goes out in the middle of summer. After you have the $1,000 saved it’s time to build a bit more of a cushion, especially if you are pregnant or planning to become pregnant.
When you are trying to financially prepare for a baby you not only need an emergency fund, but you also need to build a savings for your insurance deductibles. Already having the amount of your insurance deductibles in the bank will make the day those hospital bills start arrive a lot easier. When your sweet baby is around four weeks old you will start receiving bills from the hospitals and doctors. One look at those bills and it could be enough to send you into panic mode.
On average it costs around $13,000 to have a complication-free hospital birth in the United States.
That doesn’t even include if your little one needs to spend any time in the Neonatal Intensive Care Unit. The average NICU costs around $3,000 a day in the United States. Luckily insurance will help cover the majority of the cost; however, you will still be liable for the deductible or out-of-pocket maximum. Most states put the birth of a baby under the mother, but if your baby has any other medical needs and needs to go to the NICU then the child becomes listed as their own patient. At that point not only do you have the mother’s deductible, but now you also have the child’s deductible. Most insurance deductibles can be anywhere from $500 to $1,000 per person. So a great tip when you’re expecting is to have two times your deductible in a savings account–one for you and one for the baby.
Once you have your emergency fund and your deductible amounts saved then you take care of any last minute items. You may need to buy a few of the bigger items for your baby like a crib, changing table or car seat. Once you have your savings built now is the time to finish getting any last pieces you may not have received at the baby shower. After you have everything for your little one purchased and ready to go then you can switch your focus to paying down debt.
The first place to look when paying down debt is your credit cards or store cards.
Those typically have a higher interest rate than any bank loans or mortgages. When you are ready to start paying down your debt then you have to pick which method you want to follow. The first way is to pick the card with the lowest balance and work your way up from there. You start with paying off the smallest balance debt first while paying the minimum payment to all your other bills. Once your smallest is tackled you take that amount and apply it to the next lowest debt amount. This is called the debt snowball, which is great because you build up momentum when paying off the smaller debts and keep it going all the way through.
The next way to pay down debt is to pick the card with the highest interest rate. By picking the card with the highest interest rate and paying it down first then you will be saving more money in the future. For instance, let’s say your credit card charges 15% interest rate annually and it has a $3,000 balance with a $60 minimum monthly payment. If you pay just the minimum payment without any extra then within a year you could be paying over $400 in interest. This method works really well if you have one or two debts that have significantly larger interest rates than your other debts.
Whichever way you choose to start paying down debt is fine. You need to pick a method that will work for you and your family then stick with it. Once you have your emergency fund and the amounts of your insurance deductibles saved you will breathe a huge sigh of relief. Then you can spend the remaining time of your pregnancy preparing the nursery while making a dent in your debt.
It may seem scary, but getting on top of your finances during your pregnancy will put your mind at ease and help you to enjoy your sweet newborn!