Financial Guide for New Parents

An essential financial guide for new parents

Parenthood is one of life’s most exciting and rewarding endeavors.

But it’s also a difficult – perhaps even overwhelming – undertaking. Caring for and raising a newborn human being into a healthy adult is a physically, mentally, emotionally, and financially daunting task. While you may be prepared for the physical, mental, and emotional responsibilities of parenthood, many new parents struggle to prepare their finances. The U.S. Department of Agriculture found that raising a child from infant to age 17 costs over $200,000 on average — and that doesn’t include their college education!

Parenthood is beautiful, but parenthood is tough enough without having to worry about the money involved. To make it a bit easier, here’s a comprehensive financial guide to help you prepare.

Before the Baby Arrives

Weathering the financial challenges involved in parenthood starts well before your baby arrives. You need to create as much budgetary breathing room as possible — you’ll be spending a lot of money. Financially preparing for your child involves three key steps: solidifying your emergency fund, clearing any debt, and monitoring your spending.

Formalize your Emergency Fund.

As you know, emergency funds keep you afloat when disaster strikes. Whether you or your spouse get in a car accident, lose a job, or receive a large medical bill, having no emergency fund will drain your bank account at best — and puts you hundreds or thousands in debt at worst.

For parents, a rule of thumb is to ensure you have at least six months of living expenses in an emergency fund. Living expenses include only the bare essentials — housing, utilities, food, gas, and similar expenses. Since you’ll be a parent soon, you need to factor your new child’s living expenses into your emergency fund, too.

Eliminate Debt (Prioritize High-Interest Debt).

As you prepare for baby, try to eliminate any remaining debt to free up money for you to spend on or save for your baby. Focus on your high-interest debt first — generally, personal loans and credit card debt should be your top priority. Once you have those cleared, tackle lower-interest debt, such as car loans. Don’t fret too much about attacking your mortgage. Each mortgage payment gains you equity in your house, whereas credit card debt interest is money down the drain.

Budgeting for Baby.

As a parent, you’ll have to monitor your spending more closely. Planning for a baby’s arrival is an exciting time, but it also means that you’ll need to adjust your financial habits. Finding the balance between saving and spending is crucial. Here's a quick summary of the key points to consider when budgeting for a baby:

  1. Food: Baby food, whether it's formula or jars, can significantly increase your monthly grocery bill. Before settling on any product, it’s smart to compare prices across different brands to find the most cost-effective options.

  2. Clothing: Babies grow fast! Therefore, it’s important to budget wisely for clothes. While it's tempting to get cute outfits, remember your baby will outgrow them sooner than you think.

  3. Housing: Preparing a nursery can be a fun but expensive process. This space should have all the necessary items for baby's comfort, including clothes, blankets, and baby wipes. Keep in mind the costs of items like furniture, paint, and decorations as you prepare this room.

  4. Entertainment: A budget for toys and books is beneficial not just for baby’s enjoyment, but for their learning development too. They can be a great source of happiness for your child and a relief for you.

  5. Transportation: Don't forget to account for key items such as a car seat and a reliable stroller. These are safety necessities that might take a sizable chunk out of your budget, so do your research and compare prices before buying.

Remember, having a baby doesn’t mean cutting out all non-essential spending. The goal is to find a happy medium that allows for responsible savings while still enjoying life. Happy parenting!

Insurance and Your Baby

Part of your budget needs to include insurance for both you and your baby. The main types of insurance you’ll have to worry about are health insurance, life insurance, and disability insurance.

Health Insurance: Health insurance is a must for protecting your child's wellbeing and covering medical expenses. Adding your baby to your existing plan or starting a new one will be an additional expense, but it’s crucial for avoiding out-of-pocket healthcare costs.

Life Insurance: Life insurance can provide financial security for your baby if something tragic happens to you. It's recommended for both parents, but especially for the primary earner. It's best to get this coverage as early as possible, as younger policyholders usually have lower premiums. Importantly, your baby doesn't need their own policy; it’s often better to put that money toward other financial priorities, like your retirement savings. Be sure to explore different types of life insurance to find the best fit and consider the amount of coverage necessary to support your family and meet any financial obligations.

Disability Insurance: Disability insurance is equally important as it covers a substantial portion of your salary if you're unable to work. This can provide essential support for your family in such situations.

As with life insurance, explore offerings from your employer or compare quotes from different providers to find the best coverage. In a nutshell, insurance is a vital part of planning for your baby's arrival. It’s not just about immediate needs but also about securing your family's financial future.

Preparing for the Future

Now that you’ve created a baby budget and your insurance is in place, you’ll want to start preparing for the future.

Commit to Your Retirement Savings

Saving for your retirement is quite possibly the most important financial decision you can make for the future. Unfortunately, too many new parents let their retirement savings strategies fall by the wayside in favor of putting that money towards various expenses for the baby. Continue contributing to your retirement accounts to ensure your long-term financial security.

Save For Your Child’s College Education:

However, the moment you’re on track to your retirement goals and you have enough resources to put towards college education costs, start building your child’s tuition fund immediately. The earlier you start to save for your child’s college, the better.

Luckily, you have many savings options to explore, most of which offer very advantageous tax-free savings opportunities.

A 529 account is the most popular of these options. Your contributions grow tax-free, and your withdrawals are tax-free if you apply them to qualified educational expenses.

Coverdell accounts are another option if you fall below a specific income limit. These plans let you put away $2,000 per child per year.

Estate Planning and Creating a Will

Planning your estate and will are absolutely vital to ensure the safety and financial future of your children

A will doesn’t just define what should happen to your assets, it’s also a way to designate who should be the legal guardian of your child in the event you and your spouse both pass away. Without it, the state will decide these matters — and that may not fall in line with your wishes.

In your will, you also name your estate’s executor, the person in charge of managing the distribution of your assets.

While estate planning involves many important nuances, there are a few essential elements that you should know:

  1. Instituting Beneficiaries:

    A beneficiary is a person you elect to receive control of funds and assets accumulated in certain accounts after you pass. If you haven\’t updated your beneficiaries in several years, now is a great time to do so. Perhaps you would like to make your new child or your spouse a beneficiary.

    Should your first beneficiary be unable to assume responsibility, you can often name a secondary beneficiary. That way, your assets will still end up where you want, even if something tragic happens to the first beneficiary.

    Your beneficiary will possess the legal right to your accounts. Courts often hold up the beneficiary as being more formal and official than a name listed in a will. For example, if you name your spouse as your beneficiary on your life insurance policy, but you name your child as its recipient in your will, the court would recognize the spouse, since they were the beneficiary.

  2. Naming a Guardian:

    Should something happen to you, who would take care of your children? A guardian is responsible for the wellbeing and livelihood of your child. When choosing this person, think of someone who shares your views and wishes for parenting.

  3. Establishing a Trustee:

    If the guardian is responsible for the social upbringing of the child, a trustee is the financial counterpart. This person is tasked with managing your child’s money and bills. A trustee files income tax returns, invests leftover funds, and distributes money to your child.

    While it is possible to appoint the same person as the guardian and the trustee, many experts say that these appointments should be given to different people who do not share a dependent relationship.

Estate planning requires a two-fold professional process and can significantly benefit from the counsel of a financial planner and an estate planning attorney.

Take Advantage of Tax Breaks for Parents

As a new parent, tax breaks might be the last thing you’re thinking about. However, the IRS provides many credits, deductions, and other breaks to offset the high cost of parenthood.

Tax credits are different from deductions. While deductions lower the income that can be taxed, tax credits lower the amount you owe in taxes. And the good news is, some of these credits can even get you a refund if they lower your tax owed to less than zero.

The Child Tax Credit

To get the Child Tax Credit, you and your child have to meet certain rules. Some of these rules are:

  • Your child must be younger than 16 at the end of the tax year.

  • You must claim your child as your dependent.

  • Your child must have lived with you for more than six months of the year.

  • Your child must be a U.S. citizen.

    To see all the rules, you should check the IRS's website.

The Dependent Care Tax Credit:

Don’t confuse this one with the previous credit — you can claim this tax break on the money you spend hiring childcare providers.

Expenses that qualify range from babysitters to nannies to daycare, all of which can represent a credit on tax liability. If you plan to claim this credit, you will need to have thorough documentation of all your care providers — including the Tax ID or Social Security Number of anyone you hire to look after your child during the filing year.

Summer camp expenses can also be eligible if the child is under 13, provided that the parent(s) is either employed, seeking employment, or enrolled in school. Just like with other care providers, be sure you have all the supporting documentation for the camp — otherwise, the IRS may deny the credit


Managing your finances as new a new parent starts before the baby arrives and continues until they’re an adult. Careful planning and discipline can minimize stress and help you succeed.

Position yourself for success before the baby arrives by building an emergency fund, paying down debt, and monitoring your spending. Make a budget to avoid spending too much on your baby. Leave room in the budget for life insurance and create a will should you pass early. Save for your child’s education using tax-advantaged accounts, but keep up your retirement savings as well. Lastly, don’t forget about tax breaks; they can save you thousands.

As you juggle all of these tasks, keep in mind that you aren’t alone. In addition to this guide, you have the support of family and friends who have gone through parenthood before you.