Investing for Life: Money moves to make when welcoming a newborn

Once you have a child, you quickly realize there are many more financial considerations to deal with than just budgeting for diapers and babysitting. Even when you are just starting to plan for welcoming a baby into your home, there are key money moves you should make. Here, roughly in order, is a list of action items:

Review medical insurance

Checking out what your medical plan covers is one of the most important things you should do before the baby arrives. You’ll want to know exactly what procedures and costs are covered both before and after the delivery. Many people are surprised to find that certain services, such as anesthesia, can be only partially covered under some insurance plans. Private hospital rooms are rarely covered in full.

After the baby arrives, notify your health plan. Many employer health plans won’t cover a child automatically at birth. You may need to notify your health insurance provider to add a dependent to the health policy within 30 days for coverage to begin.

Enroll in flexible spending accounts

If your employer offers the option to pay for out-of-pocket medical expenses with pre-tax dollars, use it. Typically you’re allowed to enroll in these plans once per year (a time called open enrollment) or following a “qualifying life event,” such as the birth of a child. 

 Estimate the annual expenses your medical plan will not cover and calculate the amount to deduct each pay period over the year (or the remaining pay periods if enrolling mid-year). Parents with young children will have more expenses for doctor visits and prescriptions. The taxes saved by using these accounts will help reduce these costs.

Maternity leave and pay

Many employers will allow moms to combine unused sick days and vacation days with short-term disability benefits for extended time off with pay after the delivery. Many companies require employees to use up all sick and vacation days before commencing disability benefits. Paternity benefits at some companies are generous. Dads should find out what is offered well ahead of the due date.

If you’re given a choice, using vacation days after sick days and short-term disability benefits could maximize your paid time off. You’ll need to plan your cash flow carefully as short term disability benefits usually don't provide for 100 percent of pay. Ask your Human Resources Department how you can combine available benefits to maximize paid time off.

Life insurance

Once the baby arrives, most families should increase life insurance. With the many expenses popping up, buying the lowest cost form of life insurance is the most practical way to go. Buy annual renewable term insurance. Avoid the extra cost of a guarantee for level premiums for five or ten years. 

Calculate what your family will need financially should one of the parents pass away. Buy a large enough policy to pay off the mortgage, replace earnings and handle child-care expenses. Employer-provided insurance may be a good option. 

Get a will

 If you and your spouse do not already have wills -- and two thirds of all Americans don’t -- the law of your state will specify, not only how to dispose of your property, but also who will be the guardian of your minor children. These state laws vary and most new parents find them to be impersonal and unacceptable. If you want to designate your child’s guardian and the trustee of property left them, then you must do so with a properly executed will.

Check beneficiary designations

After the baby arrives, check your designations for contingent (secondary) beneficiaries on all life insurance, retirement plans and IRAs. You probably have named your spouse as primary beneficiary and parents or siblings as secondary beneficiaries. You may want to change this to your child (or children). If your will includes a provision for a trust for your minor children (I highly recommend this), then the second beneficiary should be your estate or the named trust in your will.

Start saving and investing for college

You can never start too soon. Set up an automatic, regular savings plan in a state sponsored 529 education savings plan. Save every month, no matter how modest -- even as little as $25 a month over 18 years can really add up. Many states offer an age-based fund that is designed to manage the investment allocation of these savings and become more conservative as the time to use the money for college expenses nears.  

Make childcare less taxing

Your company may offer a dependent-care reimbursement account. These accounts allow you to direct part of your pre-tax salary (up to $5,000) into an account which can be used to pay out-of-pocket childcare costs, whether you use a day care, preschool, nanny or au pair. 

The catch is that you must have receipts for the expense and the tax ID number of the caregiver to claim the reimbursement. You cannot claim the tax credit and use the pre-tax reimbursement. Depending on your situation, one will save more than the other. Lower income individuals should take the tax credit; individuals with higher incomes (thus higher tax bracket) should use the reimbursement account.

In summary:

Before the baby arrives:

  • Review your health coverage
  • Review employers' parental leave policies
  • Prepare a new budget including additional childcare costs
  • Get a new will

After the baby arrives:

  • Change beneficiary designations for life insurance, retirement plan account and investment accounts
  • Apply for a Social Security number for the child
  • Enroll in and contribute to flexible spending accounts
  • Start saving for the child’s college education
  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.