6 Ways to Plan for Unpaid Parental Leave

Quick Answer

You can fund your unpaid parental leave from work by adjusting your budget, saving up, using employer and state benefits, signing up for short-term disability insurance, arranging part-time or work-from-home job opportunities or borrowing money.

A parent has their hand under their child's hand that is holding a red heart.

Parenthood comes with a lot of costs, especially if it starts off with unpaid leave from work. To help financially prepare for a new baby and unpaid parental leave, expectant parents can adjust their budget, shore up their savings, utilize all possible employer and state benefits, and more. Here are six ways to help pay for unpaid parental leave.

1. Adjust Your Budget

As your family grows, you may need to adjust your budget generally and as you prepare for unpaid parental leave. Try planning to live on just the salary of the parent who will continue working while the other is on leave, and adjust spending accordingly. Some areas where you may be able to reduce your spending include:

  • Groceries: Food spending is one of the best categories to cut back on. That's because there are many options to help reduce costs, such as shopping sales or in bulk, cooking more at home, buying generic or store-brand items, using coupons or shopping at a discount grocery store.
  • Entertainment: Entertainment including streaming services, concerts, purchased books and more is considered discretionary spending—as much as you might enjoy it, it's not an essential expense. To reduce entertainment costs, consider free, ad-based streaming services like YouTube, Peacock and Xumo or library-based options like Hoopla, which hosts movies, TV shows, e-books, audiobooks, comic books and music. Attend free concerts in the park, patronize your local library or hike nearby trails to help save money.
  • Insurance: When looking to slash costs from your budget, examine your insurance policies. You may be able to cancel an umbrella policy or reduce your auto insurance costs by shopping for new policies with Experian's auto insurance comparison tool.

2. Save Up Ahead of Time

If you can't count on paid parental leave from your employer, try setting aside savings ahead of your new bundle's arrival. If you've already started adjusting your budget, use the extra money you're saving to pad a savings account or budgeting "envelope" specifically for your leave.

Some tips and tricks to making saving money easier include:

  • Remove your credit card as an online payment method. Disabling one-click ordering slows down online spending, making it slightly less convenient. This may give you time to think twice about making those costly splurge purchases.
  • Spend with cash. You may save more when you see your physical cash dwindling in your wallet.
  • Open a special savings account. Saving in a secondary account can make it easier to grow savings separately from the money in your checking account. Consider opening a high-yield savings account to get rewarded for your savings efforts even more.
  • Automate savings. Set up automatic deposits to your savings account to remove the temptation to spend what's in your checking account.

3. Use Employer and State Benefits First

Exhaust any employer and state benefits before using savings to finance your leave. Can you get disability insurance through your employer to cover maternity leave? Does your state offer paid leave?

More locations are offering paid leave for medical or family needs. You may be able to receive paid parental leave if you live in one of these states:

  • California
  • Connecticut
  • Massachusetts
  • New Jersey
  • New York
  • Rhode Island
  • Washington
  • Washington, D.C.
  • Oregon (beginning in 2023)
  • Colorado (beginning in 2023)

4. Get Short-Term Disability Insurance

Short-term disability insurance can be used as income replacement during pregnancy and the recovery phase after childbirth. You typically need to enroll in short-term disability prior to becoming pregnant, as pregnancy is considered a pre-existing condition for these types of policies. Short-term disability insurance may be a benefit provided by your employer.

Even if you are not provided short-term disability insurance through your job, you can purchase a plan yourself. For a cost of 1% to 4% of your annual income, you can purchase a plan through a broker or directly from an insurer and get between 50% and 100% of your salary replaced while you're on leave.

5. Investigate a Part-Time Return to Work

You may be able to maximize your time at home with your new baby without forsaking your entire paycheck if you negotiate a part-time return to work.

If your supervisor is willing to offer you a flexible schedule or even let you work from home to start off, you may be able to enjoy those early weeks with your child while still getting paid.

6. Borrow Funds

If you're unable to secure an income replacement using other means, borrowing money may help with the short-term costs of an unpaid leave. Options may include:

  • Retirement funds: In 2019, the SECURE Act made it possible for new parents to pull up to $5,000 each from their 401(k) or IRA without incurring penalties. These are not loans and do not have to be repaid, though it's a good idea to do so. That's because every day the withdrawn funds are out of your retirement account you lose possible interest earnings.
  • Personal loans: When you absolutely must borrow money for your leave, personal loans may offer the best rates when compared with typical credit card rates. The average 24-month personal loan rate in 2022 is 9.41%, compared with the average credit card interest rate of 16.17%.
  • Credit cards: Credit cards can ease some of the tension on immediate expenses like groceries or new baby items. If you have good credit, consider applying for a credit card with an introductory 0% APR offer right before your leave. These cards allow you to avoid paying interest for a period of six to 21 months before the standard interest rate kicks in. Once you're back at work and earning your regular income, you can work to pay off the balance before the intro period ends.
  • Friends and family: The arrival of a new member often prompts family to get involved and offer assistance. Consider asking to borrow some funds or even adding a donation option to your baby registry to replace some of your income during your unpaid leave.

More Ways to Prepare Financially for Children

Having money in the bank isn't the only financial preparation to do before welcoming a new child. As an expectant parent, you should also consider:

  • Making a will: It's important to have your affairs in order, particularly when you have children who depend on you financially. Making sure that your surviving spouse or a designated guardian can access assets is a good reason to draw up a will with an estate attorney. Also consider creating a living trust, which can offer more detailed instruction on the distribution of assets, once your child is born.
  • Increasing your life insurance: How much life insurance you need increases drastically after having children because you likely need to factor in the cost of child care that will replace the deceased parent's care, among other costs like income replacement and college tuition savings.
  • Assessing your living space: Babies are tiny—for a time. If your current living space is smaller than you'll need once they start to grow, now is the time to start saving for a down payment on a house or stashing cash away for home renovations or additions.
  • Monitoring your credit: Kids can come with big expenses, from hospital bills associated with the birth to unexpected school costs. Make sure you're ready to access credit when you need it by keeping an eye on your credit score and report.

Whatever your financial situation, there are ways to financially prepare for children. By making some strategic money moves now, you'll feel more ready than ever for parenthood.