How to Plan Financially for Parental Leave

Welcoming a child, whether through birth or adoption, is one of life’s most exciting milestones. But time off work can mean a smaller paycheck at the same moment your expenses increase. Planning ahead can make parental leave less stressful and let you focus on bonding with your new child rather than worrying about money.

Know your rights under federal law

The federal Family and Medical Leave Act, or FMLA, provides eligible employees up to 12 weeks of unpaid, job-protected leave in a 12-month period for the birth of a child and to care for the newborn, or for the placement of a child for adoption or foster care. During FMLA leave, your employer must maintain your group health insurance coverage on the same terms as if you were working.

Eligibility depends on your employer and your work history. Generally, FMLA applies to private employers with 50 or more employees, as well as public agencies and schools. To be eligible, you typically must have worked for your employer for at least 12 months, worked at least 1,250 hours during the 12 months before your leave and work at a location where the employer has at least 50 employees within 75 miles.

Keep in mind that FMLA leave is unpaid, though you may be able to use paid leave, such as vacation or sick time, during that period, depending on your employer’s policies.

Check state paid family leave programs

Some states, including California, New York, New Jersey and several others, offer paid family leave programs funded through payroll taxes. These programs replace part of your wages while you take time off to bond with a new child. Benefit amounts, the length of leave and eligibility rules vary by state.

Some states also have their own family leave laws that offer job protection beyond the FMLA, covering smaller employers or providing additional time. Check your state’s labor department website for details on programs where you work.

Explore employer benefits

Many employers offer benefits that go beyond legal requirements. Paid parental leave policies may provide full or partial pay for a set number of weeks for birth, adoptive and foster parents. Short-term disability insurance may cover a portion of your income during recovery after childbirth, typically for a set number of weeks depending on the type of delivery and the policy. Accrued vacation or sick time may also be used during leave.

Ask HR for details in writing well before your due date or expected placement date. Find out how much paid leave you’ll receive, how benefits coordinate with state programs and short-term disability, what paperwork is required and when, and how your health insurance and other benefits will continue.

Estimate your income during leave

Once you understand your benefits, estimate how much income you’ll receive during leave. Combine any paid leave from your employer, state paid family leave benefits, short-term disability payments and accrued vacation or sick time. Then compare that with your normal income to see the gap you’ll need to cover.

If one partner will continue working, factor in that income. Planning together as a couple helps you understand your household’s full financial picture.

Prepare your budget

Start preparing months in advance. Cut nonessential spending ahead of time, practicing living on your expected leave income. Saving the difference between your normal income and your leave income in a dedicated account builds a cushion for when your paychecks shrink.

Plan for new baby costs too. Diapers, formula if needed, clothing, a car seat, a crib and other gear can add up. Buying secondhand where safe, accepting hand-me-downs and creating a baby registry can help. Note that car seats and cribs should meet current safety standards, so be cautious with used versions.

Think ahead to childcare costs after leave ends, which can be one of the largest expenses for families with young children. Research options and costs early, since many childcare providers have waitlists.

Don’t forget insurance and benefits

Make sure your health insurance continues during leave and understand what you’ll pay for premiums if you’re on unpaid leave. Add your baby to your health insurance plan within the required window, often 30 days after birth or adoption. Missing this deadline could leave your child uninsured until the next open enrollment period.

A new child is also a good time to review other financial protections. Consider whether you need life insurance or more coverage to protect your family, update beneficiaries on retirement accounts and insurance policies, and create or update a will that names a guardian for your child.

Consider tax benefits

A new child may affect your taxes. You may be eligible for the Child Tax Credit and, if you pay for childcare, the Child and Dependent Care Credit. Adoptive parents may qualify for the adoption tax credit. Dependent care flexible spending accounts through your employer can also help pay for childcare with pre-tax dollars. Check irs.gov for current rules.

Plan your return

Think about how you’ll transition back to work, whether you’d like a gradual return or flexible schedule, and discuss options with your employer. With careful planning, you can enjoy precious time with your new child while keeping your finances steady.