What You Need to Know About Budgeting for Maternity Leave

Follow these four steps to financially prepare for your maternity leave.

Prepping for a new baby’s arrival might kick your nesting instinct into high gear, as you make sure everything is just right before the big day. One thing to add to your new-baby to-do list is figuring out how to financially prepare for maternity leave if you’ll be taking time away from work.

Lauren Mochizuki, a nurse and budgeting expert at personal finance blog Casa Mochi, took time off from work for the births of both her children. Because she had only partial paid leave each time, she says a budget was critical in making sure money wasn’t a source of stress.

“The purpose of budgeting for maternity leave is to have enough money saved to replace your income for your desired leave time,” Mochizuki says.

But the question “How do I budget for maternity leave?” is a big one. One thing’s for sure—the answer will be different for everyone, since not everyone’s leave or financial situation is the same. What matters most is taking action early to get a grip on your finances while there’s still time to plan.

Before you get caught up in the new-baby glow, here’s what you need to do to financially prepare for maternity leave:

1. Estimate how long you’ll need your maternity budget to last

To financially prepare for maternity leave, you need to know how long you plan to be away from work without pay.

The Family and Medical Leave Act (FMLA) allows eligible employees up to 12 weeks of job-protected, unpaid leave from work per year for certain family and medical reasons, including for the birth of a child. Some employers may also offer a period of paid leave for new parents.

The amount of unpaid maternity leave you take will determine the budget you’ll need while you’re away.

When estimating how long you’ll need your maternity budget to last, Mochizuki says to consider how much unpaid leave you plan to take based on your personal needs and budget. For example, you could find you’re not able to take the full period offered by FMLA after reviewing your expenses (more on that below) and how much you have in savings.

Even if your employer does offer paid maternity leave, you may decide to extend your time at home by supplementing your paid leave with unpaid time off, Mochizuki says.

Keep in mind that despite all of your budgeting for maternity leave, your health and the health of your baby may also influence how much unpaid time off you take and how long your maternity leave budget needs to stretch.

As you’re financially preparing for maternity leave, make sure your spouse or partner is also considering what benefits may be available to them through their employer. Together you should know what benefits are available for maternity or paternity leave, either paid or unpaid, and how to apply for them as you jointly navigate the budgeting for maternity leave process. You can then decide how to coordinate the amount of time each of you should take and when that leave should begin.

Contact your HR department to learn about your company’s maternity leave policy, how to apply for leave and whether there are any conditions you need to meet to qualify for leave. Ask if you’re able to leverage sick days, vacation days or short-term disability for paid maternity leave.

2. Babyproof your budget

When budgeting for maternity leave, make sure you review your current monthly budget to assess how budgeting for a new baby fits in.

In Mochizuki’s case, she and her husband added a category to save for maternity leave within their existing budget for household expenses (e.g., mortgage, utilities, groceries).

“We treated it as another emergency fund, meaning we had a goal of how much we wanted to save and we kept working and saving until we reached that goal,” Mochizuki says.

Figure out what new expenses might be added to your budget and which existing ones might reduce to financially prepare for maternity leave.

As you financially prepare for maternity leave, consider the following questions:

  • What new expenses need to be added to your budget? Diapers, for instance, can cost a family around $900 per year, according to the National Diaper Bank Network. You may also be spending money on formula, bottles, wipes, clothes and toys for your new one, all of which can increase your monthly budget. And don’t forget the cost of any new products or items that mom will need along the way. Running the numbers with a first-year baby costs calculator can help you accurately estimate your new expenses and help with financial planning for new parents.
  • Will any of your current spending be reduced while you’re on leave? As you think about the new expenses you’ll need to add when budgeting for maternity leave, don’t forget the ones you may be able to nix. For example, your budget may dip when it comes to commuting costs if you’re not driving or using public transit to get to work every day. If you have room in your budget for meals out or entertainment expenses, those may naturally be cut if you’re eating at home more often and taking it easy with the little one.

3. Tighten up the budget—then tighten some more

Once you’ve evaluated your budget, consider whether you can streamline it further as you financially prepare for maternity leave. This can help ease any loss of income associated with taking time off or counter the new expenses you’ve added to your maternity leave budget.

Becky Beach, founder of Mom Beach, a personal finance blog for moms, says that to make her maternity leave budget work—which included three months of unpaid leave—she and her husband got serious about reducing unnecessary expenses.

Find ways to reduce costs on bills like insurance and groceries to help save for maternity leave.

Cut existing costs

As you budget for maternity leave, go through your existing budget by each spending category.

“The best tip is to cut costs on things you don’t need, like subscriptions, movie streaming services, new clothes, eating out, date nights, etc.,” Beach says. “That money should be earmarked for your new baby’s food, clothes and diapers.”

Cutting out those discretionary “wants” is an obvious choice, but look more closely at other ways you could save. For example, could you negotiate a better deal on your car insurance or homeowner’s insurance? Can you better plan and prep for meals to save money on food costs? How about reducing your internet service package or refinancing your debt?

Find ways to earn

Something else to consider as you budget for maternity leave is how you could add income back into your budget if all or part of your leave is unpaid and you want to try and close some of the income gap. For example, before your maternity leave starts, you could turn selling unwanted household items into a side hustle you can do while working full time to bring in some extra cash and declutter before baby arrives.

Reduce new costs

As you save for maternity leave, also think about how you could reduce expenses associated with welcoming a new baby. Rather than buying brand-new furniture or clothing, for example, you could buy those things gently used from consignment shops, friends or relatives and online marketplaces. If someone is planning to throw a baby shower on your behalf, you could create a specific wish list of items you’d prefer to receive as gifts in order to offset costs.

4. Set a savings goal and give every dollar a purpose

When Beach and her husband saved for maternity leave, they set out to save $20,000 prior to their baby’s birth. They cut their spending, used coupons and lived frugally to make it happen.

In Beach’s case, they chose $20,000 since that’s what she would have earned over her three-month maternity leave, had she been working. You might use a similar guideline to choose a savings goal. If you’re receiving paid leave, you may strive to save enough to cover your new expenses.

Setting a savings goal and tracking expenses before the new baby arrives is an easy way to save for maternity leave.

As you make your plan to save for maternity leave, make sure to account for your loss of income and the new expenses in your maternity leave budget. Don’t forget to factor in any savings you already have set aside and plan to use to help you financially prepare for maternity leave.

Once you’ve come up with your savings target, consider dividing your maternity savings into different buckets, or categories, to help ensure the funds last as long as you need them to. This could also make it harder to overspend in any one category.

For instance, when saving for maternity leave, you may leverage buckets like:

  • Planned baby expenses
  • Unexpected baby costs or emergencies
  • Mother and baby healthcare

“The purpose of budgeting for maternity leave is to have enough money saved to replace your income for your desired leave time.”

– Lauren Mochizuki, budgeting expert at Casa Mochi

Budgeting for maternity leave—and beyond

Once maternity leave ends, your budget will evolve again as your income changes and new baby-related expenses are introduced. As you prepare to go back to work, review your budget again and factor in any new costs. For example, in-home childcare or daycare may be something you have to account for, along with ongoing healthcare costs for new-baby checkups.

Then, schedule a regular date going forward to review your budget and expenses as your baby grows. You can do this once at the beginning or end of the month or every payday. Take a look at your income and expenses to see what has increased or decreased and what adjustments, if any, you need to make to keep your budget running smoothly.

Budgeting for maternity leave takes a little time and planning, but it’s well worth the effort. Knowing that your finances are in order lets you relax and enjoy making memories—instead of stressing over money.

Discover Bank, Member FDIC

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Is Now a Good Time to Buy a House?

So you’re at the point in your life where buying a home is not a question of if, but when. You’re scrimping. You’re saving. You’re dreaming of walking through the front door of your very own home.

But as the decision draws near, you start questioning everything. Is now a good time to buy a house? Or is this the worst time? Is it more financially responsible to buy a house right now or wait? And what if you mistime the market, buying too soon or too late, and miss out on lower home prices?

Ultimately, the experts say the answer is less about economies, markets and pandemics and more about you.

So, how do you think through this decision? You’ll want to take time to thoroughly review your personal financial situation and life goals. At the same time, you’ll need to gain some understanding of the market dynamics that impact home costs.

External factors can make buying a house right now intimidating, but your personal finances are an important factor.

This process will take some time, but it’s well worth the effort. With a firm grasp on your personal situation and some context on the housing market, you’ll be able to confidently go forth knowing you’re making a fiscally informed decision about whether to buy a house right now.

Honestly assess these aspects of your finances

Financial security is always important if you’re trying to determine when you’re ready to buy a home. To decide if now is a good time to buy a house, ask yourself the following questions about your finances:

How secure is your income?

Job or income stability is an important factor if you are buying a home in a rocky economy, such as the one triggered by the coronavirus pandemic, says real estate economist Gay Cororaton. Even in a robust economy, your income security should be top of mind when you’re thinking of buying a house right now.

If you have any inkling that your position may be eliminated or that you’ll be making a career change, you may want to delay buying a home. Even a recent break in employment that caused you to draw down some of your savings may raise a red flag with lenders, says Kate Ziegler, a real estate agent with Arborview Realty in the Boston area.

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If you’re considering buying a house right now, you should avoid opening any new lines of credit right before purchasing a home.

– Jeff Tucker, senior economist at Zillow

Do you have enough money saved?

After income stability, savings is the next-most-important financial factor you’ll want to consider to determine if now is a good time to buy a house, Ziegler says. The old rule of thumb was to save 20% of the price of the home for your down payment. While that is ideal, it’s not necessary—far from it, Ziegler says. In fact, it has become more common for first-time buyers to put down much less than 20%.

How much house can you afford?

The down payment is one side of the affordability coin. Your monthly mortgage payment is the other side. You need to know how much you can spend on both to determine if you can afford to buy a house right now, says Jeff Tucker, a senior economist at Zillow. Aim for a monthly mortgage payment that doesn’t stretch you too thin—experts typically put this at around 28% of your monthly gross income, according to Bankrate.

With those guidelines, you can determine what you can afford. For example, if you make $4,000 a month, you should typically spend no more than $1,120 on your monthly mortgage payment in total.

How much house that buys you depends on multiple factors: mortgage rates, property tax rates, homeowners insurance and—if you don’t have the savings to put down 20%—primary mortgage insurance, or PMI. To get a rough estimate, plug your income details into an online calculator. For a more specific figure, talk to a local lender and get pre-approved for a mortgage, Ziegler says.

If you're buying a house right now, aim for mortgage payments around 28% of your monthly gross income.

Once you know your price range, you can determine how much savings you need in the bank to buy a house right now. You’ll also need to have money saved for closing costs, which vary but typically run 2% to 5% of the loan amount, according to Bankrate.

Again, Ziegler recommends talking to a lender to really understand what your individual down payment and closing costs would be. Finally, be sure to add a line item in your budget for home maintenance that will inevitably pop up after you move in. Whether it’s a dishwasher on the fritz or a leaky roof, you don’t want to be caught off guard, so be sure to save money for emergency home repairs.

How is your credit?

Your credit profile is also important to lenders, and it will likely be a factor in what interest rate you’re offered. Given that, you should be checking your credit report and know your credit score before investing in a home. If you’re considering buying a house right now, you should avoid opening any new lines of credit right before purchasing a home, Tucker says.

What is your debt-to-income ratio?

Another factor lenders check is your debt-to-income ratio, or DTI, Tucker says. This is the percentage of your gross monthly income that goes to paying monthly debt payments, plus your new mortgage. Lenders typically require this ratio to be 45% or less but prefer it even lower—in the 33% to 36% range.

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Have you considered the opportunity cost?

Another financial consideration when deciding if now is a good time to buy a house is the opportunity cost of delaying a home purchase, Ziegler says. If you’re renting in a market where the rent is higher than your would-be monthly mortgage payment, you may be spending a lot more money each month than if you were to purchase a home. And of course, with a mortgage, your monthly payment increases your equity.

After taking a clear-eyed look at your income, savings and these other financial factors, you will have a better sense of when you’re ready to buy a home and whether now’s the time for you to dip into the market.

Consider key market factors

Next, take a look at factors that are outside of your control, but still influence your purchase: prices, interest rates and national employment trends.

Where are housing prices?

As you’re looking at the market, one of the biggest considerations when you are ready to buy a home will be housing prices and availability. Research your local market by talking to real estate agents who work specifically in the area where you want to buy and asking them about market trends, Ziegler says.

Track current listings and recently sold prices to get a sense of how prices look today. Generally, the tighter the inventory—meaning the fewer houses available—the higher prices will be, Tucker says.

If you're trying to determine when you are ready to buy a home, track current listings to get a sense of how prices look today.

What’s going on with interest rates?

When you’re ready to buy a home could also depend on another major economic factor: interest rates. When interest rates are low, your housing budget is effectively supercharged, Tucker says, and you can afford a more expensive house because you’re spending less on interest. When they are high, the opposite is true.

This is what compels people to buy when interest rates are low—you get more for your money. If you get a 30- or 15-year fixed-rate mortgage, you lock in that rate for the entire life of the loan, which could save you money now and into the future, Tucker says.

How does employment look nationally?

Finally, if you want to get a general idea of where the housing market may be headed—if prices will drop or rise soon—check out the national employment trends, Cororaton says. Low unemployment means prices will generally trend upward because more people can afford houses, boosting competition and prices, she says.

But if unemployment is inching up, then people are losing jobs and will be more likely to remain in their current homes. As a result, there tends to be less competition for them, lowering prices.

You don’t need to be an expert in the market to determine if now is a good time to buy a house, but a baseline understanding of these big-picture forces can give you the confidence you need to embark on your home-buying journey.

So when are you ready to buy a home? Paying attention to big-picture economic forces can help you decide.

Think about your future plans

After reviewing your savings and income and assessing the market conditions, take a step back and think about your life plans over the next few years. Your lifestyle and goals will help determine whether now is a good time to buy a house.

“For buyers who are not certain whether they will still be living in the same place in three or five years, I would caution against locking themselves into a certain location,” Ziegler says. “If they’re just not sure what the future holds, it may be better to have that flexibility.”

It’s unlikely in many markets that you will see substantial financial gain from homeownership if you move within five years, Ziegler says. Your equity gains will likely be offset by the transaction costs of buying and selling your home.

That goes for remote workers, too. Are you working from a home office these days? While widespread remote work may allow buyers to consider homes farther from their offices, ask yourself: Is my company going to permanently allow employees to work from home? Do I think there will be other remote opportunities in the future?

Is now a good time to buy a house? That depends on your lifestyle and long-term goals.

While you’re thinking about the next three to five years of your career, also consider the next three to five years of your personal life. Will you have a family? Will that family grow?

These can be weighty topics, so be sure to think them through on your own schedule. Buying a house is a big decision, and it’s not one to be rushed. By taking the time to assess your life, from your job security to your financial health to your lifestyle, and considering the impact of market factors, you’ll have a clearer sense of when you are ready to buy a home.

If you’ve decided that buying a house right now is the best decision for you, it’s time to learn more about how it will impact your budget. Get started by reading up on these eight unexpected expenses when buying a home.

Articles may contain information from third-parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third-party or information.

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Affording a Second Child: How to Make Your Budget Work

Having kids is anything but cheap. According to the USDA, families can expect to spend an average of $233,610 raising a child born in 2015 through age 17—and that’s not including the cost of college. The cost of raising a child has also increased since your parents were budgeting for kids. Between 2000 and 2010, for example, the cost of having children increased by 40 percent.

If you’ve had your first child, you understand—from diapers to day care to future extracurricular activities, you know how it all adds up. You’ve already learned how to adjust your budget for baby number one. How hard can it be repeating the process a second time?

While you may feel like a parenting pro, overlooking tips to prepare financially for a second child could be bad news for your bank account. Fortunately, affording a second child is more than doable with the right planning.

If your family is about to expand, consider these budgeting tips for a second child:

1. Think twice about upsizing

When asking yourself, “Can I afford to have a second child?”, consider whether your current home and car can accommodate your growing family.

Think twice about upsizing your car or house if you're concerned about affording a second child.

Kimberly Palmer, personal finance expert at NerdWallet, says sharing bedrooms can be a major money-saver if you’re considering tips to prepare financially for a second child. Sharing might not be an option, however, if a second child would make an already small space feel even more cramped. Running the numbers through a mortgage affordability calculator can give you an idea of how much a bigger home might cost.

Swapping your current car out for something larger may also be on your mind if traveling with kids means doubling up on car seats and stowing a stroller and diaper bag onboard. But upgrading could mean adding an expensive car payment into your budget.

“Parents should first decide how much they can afford to spend on a car,” Palmer says.

Buying used can help stretch your budget when you’re trying to afford a second child—but don’t cut corners on cost if it means sacrificing the safety features you want.

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Families can expect to spend an average of $233,610 raising a child born in 2015 through age 17—and that’s not including the cost of college.

– USDA

2. Be frugal about baby gear

It’s tempting to go out and buy all-new items for a second baby, but you may want to resist the urge. Palmer’s tips to prepare financially for a second child include reusing as much as you can from your first child. That might include clothes, furniture, blankets and toys.

Being frugal with family expenses can even extend past your own closet.

“If you live in a neighborhood with many children, you’ll often find other families giving away gently used items for free,” Palmer says. You may also want to scope out consignment shops and thrift stores for baby items, as well as online marketplaces and community forums. But similar to buying a used car, keep safety first when you’re using this budgeting tip for a second child.

“It’s important to check for recalls on items like strollers and cribs,” Palmer says. “You also want to make sure you have an up-to-date car seat that hasn’t been in any vehicle crashes.”

3. Weigh your childcare options

You may already realize how expensive day care can be for just one child, but that doesn’t mean affording a second child will be impossible.

A tip to prepare financially for a second child is to weigh your childcare options.

Michael Gerstman, chartered financial consultant and CEO of Gerstman Financial Group, LLC in Fort Lauderdale, Florida, says parents should think about the trade-off between both parents working if it means paying more for daycare. If one parent’s income is going solely toward childcare, for example, it could make more sense for that parent to stay at home.

Even if this budgeting tip for a second child is appealing, you’ll also want to think about whether taking time away from work to care for kids could make it difficult to get ahead later in your career, Palmer adds.

“If you stay home with your child, then you’re also potentially sacrificing future earnings,” she says.

4. Watch out for sneaky expenses

There are two major budgeting tips for a second child that can sometimes be overlooked: review grocery and utility costs.

If you’re buying formula or other grocery items for a newborn, that can quickly add to your grocery budget. That grocery budget may continue to grow as your second child does and transitions to solid food. Having a new baby could also mean bigger utility bills if you’re doing laundry more often or running more air conditioning or heat to accommodate your family spending more time indoors with the little one.

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Gerstman recommends using a budgeting app as a tip to prepare financially for a second child because it can help you plan and track your spending. If possible, start tracking expenses before the baby arrives. You can anticipate how these may change once you welcome home baby number two, especially since you’ve already seen how your expenses increased with your first child. Then, compare that estimate to what you’re actually spending after the baby is born to see what may be costing you more (or less) than you thought each month. You can then start reworking your budget to reflect your new reality and help you afford a second child.

5. Prioritize financial goals in your new budget

Most tips to prepare financially for a second child focus on spending, but don’t neglect creating line items for saving in your budget.

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“An emergency fund is essential for a family,” Palmer says. “You want to make sure you can cover your bills even in the event of a job loss or unexpected expense.”

Paying off debt and saving for retirement should also be on your radar. You might even be thinking about starting to save for your children’s college.

Try your best to keep your own future in mind alongside your children’s. While it feels natural to put your children’s needs first, remember that your needs are also your family’s—and taking care of your future means taking care of theirs, too.

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“Putting money aside when you’re expecting can help offset the sticker shock that comes with a new member of the family.”

– Kimberly Palmer, personal finance expert at NerdWallet

The key to affording a second child

Remember, the earlier you begin planning, the easier affording a second child can be.

“Putting money aside when you’re expecting can help offset the sticker shock that comes with a new member of the family,” Palmer says. Plus, the more you plan ahead, the more time you’ll have to create priceless memories with your growing family.

The post Affording a Second Child: How to Make Your Budget Work appeared first on Discover Bank – Banking Topics Blog.

Source: discover.com