financial literacy

Financial Planning for New Parents

May 4, 2022

Welcoming a new baby into the world is an exciting time. But it’s nearly impossible to be excited about the new addition to your family without also feeling anxiety about the financial responsibility of raising a child.

The good news is that with the right financial planning, you can significantly reduce the financial stress of parenthood and better position your family for the future.

Financial planning involves taking a look at your current financial situation and planning for your financial future. The guide below will discuss the fundamentals of financial planning, with a focus on what parents need to know.

Are you a new parent wondering where to start? Keep reading to learn about the importance of financial planning for new parents, when to start, and eight financial planning tips for new parents.

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The Importance of Financial Planning for New Parents

With a new kiddo on the way (or recently arrived), your life is surely about to change in more ways than you can imagine.

Having a solid foundation in your household — including solid finances — is vital.

Having a financial plan can reduce stress, allowing you to focus on what matters most: Your child!

Proper financial planning can help you prepare for both short-term and long-term financial goals. Not only that, but it can help you be prepared for unexpected expenses and emergencies.

Financial planning is important for everyone, but it’s particularly important for new parents. Raising a child is expensive — $233,610, on average. And that doesn’t include the cost of college.

The cost of raising a child
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If that number seems intimidating, don’t worry — those costs are spread out over two decades. Nonetheless, it’s important to have a plan.

When New Parents Should Start Financial Planning

Everyone can benefit from financial planning, whether they have children or not.

But for new parents, planning is vital — and it’s never too early to start.

In fact, finances should ideally be discussed before you even start planning to have a child.

Starting early has several benefits:

  • It gives you more time to save and make adjustments to your budget
  • It takes stress off your plate
  • It gives you more confidence and control
  • It encourages a stable, supportive environment for your child
  • It allows you to take advantage of investing and compounding interest

This last point is particularly important to take note of. Investing for kids allows parents to magnify the benefits of their money because the money has time to grow.

For example, say you want to help your child with a down payment or college tuition once they turn 18. You decide that you want to give them $60,000 at 18.

If you wait until they’re 18, you’ll have to come up with $60,000 in cash — not an easy feat!

But if you start saving and investing when they are a newborn, things become much more manageable.

In fact, you only need to invest $105 per month to reach a nest egg of around $60,000 after 18 years. You’ll only have saved around $23,000 in total — but your investments will have more than doubled, thanks to stock market growth and the magic of compound interest.

Which seems more manageable: $105 per month or $60,000 all at once?


Note: This calculation assumes you invest in diversified stock market index funds and earn 10% per year on average (this is the long-term average stock market return).

And because of compound interest, the earlier you start, the better. Compounding creates a “snowball” effect, where investments grow faster and faster over time.

Compound interest graph
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If you’re behind schedule, don’t be discouraged! Financial planning is beneficial at any stage, whether your child is in high school or has yet to be born.

Want to get started with investing for your child? Sign up for EarlyBird.

EarlyBird makes it simple for parents to set up a custodial investment account for children. The parent serves as the custodian until the child becomes a legal adult and gains control of the account.

EarlyBird lets parents invest efficiently in diversified portfolios of stocks, bonds, ETFs, and more on behalf of their children — no investing experience required.

Plus, family members and friends can easily send gifts to the child’s account, and they will automatically be invested.

Download the EarlyBird app today to get started.

9 Financial Planning Steps for New Parents

Ready to make a financial plan? Here are nine key steps to take.

1. Set realistic expectations

First off, it’s wise to consider what having a child will mean for your financial situation.

Will you need to move to a larger home? How will that affect your housing costs?

Do you plan to have multiple children or just one? How will that affect your budget?

Do you plan to send your child to public school or private school?

These are the kinds of questions you should be asking yourself as soon as possible before starting your detailed financial plan.

It’s also wise to research the estimated costs of raising a child. You can start with nationwide averages, then dig into specific costs in your area.

USDA data suggests that it costs around $233,610 to raise a child in the United States. That works out to just under $13,000 per year (although the costs won’t be distributed evenly).

Keep in mind that this number is from 2015 data (the latest available). Adjusted for inflation, that figure would likely be closer to $280,000 (as of 2022). That’s around $15,550 per year, on average.

2. Understand your health insurance coverage

You should contact your health insurance provider to add the child to your plan. And while you’re at it, be sure to investigate your health insurance coverage and benefits.

Understanding what your insurance will or will not cover can help you make a financial plan for out-of-pocket medical expenses.

The cost of childbirth in the United States is more than $10,000. But this can vary wildly depending on your insurance benefits.

To budget for hospital expenses, it’s important to read through your benefits and contact your health insurer for details.

Ongoing costs can add up, too. According to the USDA, the average cost of raising a child requires more than $21,000 in healthcare spending (over the course of 18 years). This figure can vary greatly, depending on insurance coverage and the health of your child.

3. Build your emergency fund

An emergency fund is a chunk of money set aside for financial emergencies, job losses, or unexpected expenses. This money should usually be kept in a checking or savings account that is easily accessible (it shouldn’t be invested).

Emergency fund explained
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An emergency fund should be a top priority for everyone, and it’s particularly important for new parents.

Experts typically recommend having three to six months of expenses in your emergency fund. If your household spends $4,000 per month, that’s $12,000 to $24,000.

If you can’t save that much, don’t worry — any amount is better than nothing! Even having a few thousand dollars tucked away can help provide a significant financial cushion for unexpected expenses.

4. Handle legal matters ahead of time

Parents should take steps to tackle basic estate planning tasks. This could include:

  • Adding your child as the beneficiary on your financial accounts
  • Making plans for your assets and estate in the case of your death
  • Assigning powers of attorney for healthcare decisions (both for you and your child)
  • Making a plan for who will care for your child should you pass away unexpectedly

These are difficult things to even think about, but planning for them ahead of time can help set your mind at ease.

5. Update your household budget

With a new child in the picture, your monthly expenses are almost certain to change. By adapting your budget ahead of time, you can be more prepared.

Personal budget
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Start with the largest expenses first. According to USDA data, these are the biggest contributors to the cost of raising a child:

Housing: 29% of total cost. Many families need to buy or rent larger homes in order to accommodate their children.

Food: 18% of total cost. Children eat a lot! This cost will generally increase as the child gets older.

Child care & education: 16% of total cost. This cost will vary depending on if you family that can take care of your children for free, and if you choose public school or private school. This can be a very significant cost for many — more than half of families spend more than $10,000 per year on childcare

See this USDA data for a full breakdown of expected costs, then use this data to adjust your budget as needed.

6. Update life insurance coverage

If you don’t have life insurance, you may wish to look into it now that you have a young child. And even if you do, it’s worth taking a second look to see if you have enough coverage.

Be sure to read the fine print of any plan for exclusions, maximum limits, etc., so you fully understand your coverage.

7. Take advantage of tax benefits

Parents can take advantage of certain federal tax perks. It’s wise to research these benefits now and adjust your future tax returns accordingly.

Child tax credit: The child tax credit provides $3,000 for families for each child over six, and $3,600 for each child under six. This is a tax credit, which means it directly reduces your tax owed. This credit can also be taken as a monthly automatic transfer to your bank account.

Child care credit: The child care credit helps reimburse you for certain child care expenses. You may qualify for it if:

  • You had child care expenses for dependents who were under 13.
  • The child care you paid for allowed you either to work or to look for a job.
  • You (and your spouse, if applicable) earned income during the tax year.

Earned income tax credit: For parents with low to moderate incomes, the earned income tax credit (EITC) may apply. The EITC amount depends on the number of children you have and your income level. Not everyone will qualify.

Note: It’s recommended to speak to a tax advisor or CPA to ensure you are claiming all the appropriate deductions and credits.

8. Start planning for your child’s future

As previously discussed, compound interest means that if you save and invest early, your money can grow faster. So, now is the time to start planning for major expenses in your child’s future.

Parent carrying child

This starts with identifying the major expenses/goals, then figuring out how much they might cost. Then, it’s time to make a plan and start saving. The earlier you start, the better.

For more on this, read these useful resources:

9. Don’t neglect your own financial priorities

Having a child will change your financial picture — but it shouldn’t completely derail your other financial priorities.

It’s still important to save for your long-term goals, like retirement or a down payment on your dream house, and even optional things like vacations.

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The Bottom Line

Having a financial plan as a new parent doesn’t just financially prepare you to raise a child. It also creates peace of mind and gives you more confidence in your family and your child’s future. The importance of financial planning as a parent truly can’t be overstated, and there’s no better time to start than now.

Small steps like reviewing your insurance coverage, updating your household budget, and building your emergency fund can make a world of difference, not only in helping you to meet your family’s short-term and long-term goals but also in preparing you to tackle any financial emergency and weather any financial storm.

Want to start investing in your child’s future? Download the EarlyBird app today to open an investment account and start saving.

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