How to Create a Budget When You're Expecting

Between researching the latest baby gear and planning for your new normal, expecting a baby can be an exciting yet sometimes overwhelming period for many soon-to-be parents. As you prepare for the new member of the family, one thing that's likely top of mind is finances. Baby-related expenses can add up, prompting you to try to work through your money-related issues and focus on a budget.

The good news is that devising a thorough plan and working through the financial changes before they occur can give you peace of mind both during pregnancy and once baby is here. "Having a baby is a life-changing experience, and the budgeting process will help you surface any trade-offs that may be required," says Dave Fortin, certified financial advisor and co-founder of FutureMoney. "Essentially, it’s a starting point for deeper thought and conversations about what matters to you."

As you venture into full-on baby preparation mode (and beyond!), here's a roadmap of important financial steps to consider.

Assess your current finances

As with any monumental life change, it's helpful to know your starting point. Having awareness of things like your average monthly income and spending, debt and savings levels allows you to make informed decisions for your growing family. Likewise, if your financial situation is messy, having a baby on the way may provide the motivation you need to get your finances under control, says Fortin. It's an important part of the kind of adulting task you may be doing as you plan for baby.

You may want to also assess your net worth, which provides a good snapshot into your financial state. "To determine your net worth, you need to know all of your assets—bank account balances, investment accounts, home, car and anything else you own—and liabilities: mortgage, credit card debt and anything else you're on the hook to pay," says Fortin. "Your net worth is determined by total assets minus total liabilities." This exercise can also open up your eyes to areas of improvement—for instance, if you’re only paying the monthly minimum on your credit card, you may realize you have some assets you could sell to pay down debt faster.

Plan for unexpected line items

There are several baby-related costs that you'll expect (like diapers, clothes and a car seat), but it's a good idea to have some wiggle room for the unexpected. "As a certified financial planner, I thought my husband and I were well-prepared from a financial aspect, but there were still several things that came up that we had not considered or budgeted for," says Amanda DeCesar of Tara Wealth. "For example, our son was tongue and lip tied and it was recommended that we move forward with a frenectomy (or tongue/lip tie revision), a non-covered procedure that became an unexpected out-of-pocket cost in the early months."

Make a list of first-year costs

Just as setting aside a budget for unexpected things is helpful, budgeting for the things you can count on provides a baseline for the first year. Some first-year costs of having a child may include diapers, wipes, clothing, bath essentials, the cost of the birth itself, and the larger, single-purchase items like a stroller and crib. Preparing a list of first-year essentials allows you to more clearly make decisions on what you truly need and what you think you need. "In some cases, you might choose to wait before making purchasing decisions, which allows you to avoid spending money on items you don't end up using," says Fortin. One silver lining in terms of the new expenses related to having a baby? You may see some upside with your taxes.

Pick your budgeting strategy

If you're going into budgeting as a newbie, it helps to have a method in place. There are a few popular budgeting strategies, and finding one that'll work well should factor in your family's financial goals and spending habits. Here are a few methods you may want to look into:

• Zero-based budgeting means assigning a purpose to every dollar of your income so that your income minus expenses equals zero. 

• The cash envelope system is ideal for over-spenders because it involves dividing your money into separate envelopes that have pre-determined uses (like for groceries, dining out or entertainment). 

• There's also the 50/30/20 rule, which would divvy up your money into 50% needs, 30% wants, and 20% savings. In any case, nailing down a budgeting strategy that works for you and your family is a great way of staying on track.

Utilize budgeting tools and resources

So you have your budgeting method figured out—great! Now what? These days, there are several budgeting apps, tools, and resources that can help make sense of the numbers. "I encourage everyone to have a system for tracking their spending and anticipated expenses," says DeCesar.

Remember that there is no one right way to do this—while some people are comfortable building spreadsheets, others may prefer something more structured, automated, or assisted, adds Fortin. Do your research and experiment with different resources to find what works for you. In the end, having a good system ensures you stay organized and on track to meet your specific financial goals.

Make plans for parental leave

"While the Family and Medical Leave Act (FMLA) protects parents going on parental leave for up to 12 weeks of unpaid leave, the US doesn't have a federal mandate for paid parental leave," explains DeCesar. "Not all families can afford to go without income for this long and thus, are forced to return to work earlier than 12 weeks—on the other hand, some states and companies offer six months paid leave."

Expecting parents should take the time to understand their coverage in their specific state and plan accordingly. If you're taking unpaid parental leave, you'll need to budget for a loss of income during that time, ideally by having the money saved before you go on leave, says Fortin.

Create an actual emergency fund

Think of an emergency fund as insurance for the unexpected, like job loss. "There are so many unexpected events that can occur, but having an emergency reserve protects you from having to dip into long-term savings or use credit," says DeCesar, who recommends that your emergency fund cover at least three to six months of spending, plus any anticipated cash needs in the next 12 months. "Since you don’t know exactly where your new monthly expenses will be, it’s hard to hit exactly, but having six to 12 months of your current expenses in savings gives you a very healthy buffer," adds DeCesar.

To reduce the temptation to spend the money in the emergency fund, consider creating a separate account—this will also help you keep track of the fund more easily.

Prepare for long-term costs

If you're able to, budgeting for future child-related costs puts you in a good position to pay for these expenses when the time comes. For instance, a 529 plan is a tax-advantaged account that helps save for education. "The money in these accounts grows tax-free and can be withdrawn tax-free and penalty-free as long as it is for eligible education expenses," says Fortin.

Also, consider future childcare options and their cost—do you want to explore daycare options or nannies, or will one partner stay home with the child (and future children)? Do you hope for your children to attend public or private schools? "Look at what these costs are today and understand that they’re expected to grow with inflation, then learn about your options for savings," says DeCesar.