6 Ways to Prepare Your Finances for Parental Leave

Preparing to add a child to your family is an exciting time, with its share of stress along the way. Many expectant parents need to figure out a plan to meet their household expenses while also taking time off to recover and bond with a new baby.

A financial plan to cover leave can take many different forms. These options can help you get started considering how you’ll cover your essentials while you’re on parental leave.

1. Review Your Existing Savings

A new baby is a major life change! At the same time, taking care of your new family includes balancing short-term needs (e.g., adjusting to newborn life) with long-term needs (e.g., planning for retirement).

You might consider pulling from your savings to help fund your parental leave. Ideally, you already have a robust family emergency fund that you can tap to help pay your expenses while you step back from receiving a paycheck or accept partial pay.

If you’re considering cracking into your retirement savings, there are special considerations to bear in mind. There are often taxes and penalties associated with taking money out from a 401(k) or IRA early. Under the SECURE Act of 2022, a new rule allows people to take up to $5,000 from an eligible retirement plan after a birth or adoption of a child (as long as it meets the requirements of a qualified birth or adoption distribution and falls within the timeline requirements) without the 10 percent early withdrawal penalty. Not every plan necessarily allows this, so you’d only be able to do such a withdrawal if your 401(k) or IRA allows it. You would still have to pay taxes on the withdrawal amount. The penalty-free exception begins after the child is born or adoption is finalized (so you can’t do this during pregnancy), and you have one year to take the distribution. You may generally also re-contribute the money as a rollover contribution to an IRA or other eligible plan.

Once you’ve assessed the current landscape of your savings, you’ll have a better sense of whether (and how much) you’ll need to save to make your parental leave a reality, and to what extent you can lean on existing savings.

2. Set a Goal for Your Parental Leave

First, you’ll need a target figure to aim for. This is an amount that would comfortably cover your leave.

Let’s say you plan to take three months off and cover one month’s worth of expenses from your savings. That would leave you with two months to save up for. If you start saving by the end of first trimester, you’d have six months to hit that goal. Of course, if you get paid for part of the time, or if you receive a partial paycheck, that will ease the burden of how much you need to sock away before the baby comes. Either way, break down your goal into manageable chunks, like a monthly or even weekly saving target to help keep you on track.

3. Check Your Leave Options at Work

In 2023, only 27 percent of private sector workers had access to paid family leave. Taking advantage of any paid parental leave your company offers is good for your own finances and helps normalize using this benefit for your colleagues.

There may be other options to help cover at least a portion of your parental leave. You might have access to short-term disability plans through your employer, for example. Some short-term disability plans cover pregnancy, childbirth or recovery. Check what your plan offers if you have one and take note of any requirements, such as a statement from your physician or obstetrician.

If you are able to accrue paid time off such as vacation time, that can also be a way to maintain your income for a portion of your planned time home with your baby. Ask at your workplace whether it’s possible to get an advance on your PTO or if there is an option for people with extra PTO to donate hours to their colleagues (and then remember to pay it forward when someone else is the one in need).

Even if the available options don’t match your full income, they can chip away at the amount you need to save. If, for example, you are able to negotiate with your company and use available options to cover 40 percent of your leave, your savings target could drop substantially.

4. Cut Spending Where You Can

Most expenses fall into one of three primary categories:

• Fixed expenses: Necessary bills that stay the same, such as your mortgage, rent or car payment.

• Variable expenses: Necessary bills that fluctuate, such as utilities, groceries, gas or clothing.

• Discretionary expenses: Nice-to-have but not essential to maintain a healthy household. These can be fixed (e.g., gym membership, streaming subscriptions) or variable (e.g., dining out, shopping, entertainment, travel).

The higher the percentage that goes to discretionary spending, the more room you may have to adjust your budget. Cutting back on discretionary spending may help on two fronts. First, it means you can dedicate more funds to your parental leave savings. And second, constraining your lifestyle will reduce the target amount you need. You might review your spending and see if it’s possible to cut back on expenses like restaurant dining or delivery, travel, clothing (beyond necessary purchases) and luxury personal care items.

Think about how you might bring down your variable expenses, too. For example, you might do your grocery shopping at a less expensive store or look for used items instead of new. Friends, family or community groups on social media may be a source of free or inexpensive maternity clothing.

5. Get Help From Family and Community Resources

Popular wisdom says it takes a village to raise a child. Your friends, family and neighbors may be a resource to help you plan for your parental leave and beyond. Ways they can help may include:

• Gifts or donations of baby supplies and maternity clothing

• Financial gifts toward postpartum recovery, parental leave or long-term goals like a child’s college fund

• Childcare, like babysitting—in fact, a National Household Education Survey found that

  nearly half of working parents turn to relatives for childcare

Depending on your income and other eligibility requirements, you may qualify for government assistance programs to meet your family’s needs. One example is the Supplemental Nutrition Program for Women, Infants and Children (WIC). You can provide your information and learn what programs might be available for you through the Benefits Finder.

6. Prepare for a Worst-Case Scenario

A mix of savings, workplace benefits, family gifts and careful budgeting may help you create a plan to take parental leave with a new baby, even if your employer doesn’t offer generous benefits. It’s a good idea to have a backup plan in mind to protect your family in a worst-case scenario.

One way some families may help protect against the unexpected is to consider a life insurance policy. Of course, life insurance isn’t a solution to simply help you pay for a baby, as your loved ones would only receive a death benefit if you (or the insured person) were to pass away. That said, life insurance can be a key way to help make sure that your family would be OK even if you were no longer here. Practicing consistent, long-term savings habits can be another way to build a secure financial future. A qualified financial professional can help discuss options for your financial future.

Growing your family may mean your finances need to change (along with sleep and other routines!). Planning early can help you put together a realistic plan for your budget and savings.

Fabric exists to help young families master their money. Our articles abide by strict editorial standards.

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