Financial planning for new parents

When you welcome a child into your home, you’ve probably already considered the short-term and long-term essentials, like baby gear and childcare arrangements. But financial planning for new parents is just as important. It means updating your budget to reflect a larger household, preparing for future expenses and putting safeguards in place to protect your child if the unexpected happens.

A LendingTree analysis estimates the 18-year cost of raising a child is over $300,000 for a middle-income, two-parent household.¹ Housing, food, and childcare costs are typically the largest expenses early on, with higher education becoming a major expense later. 

How to financially prepare for a baby before they arrive

Planning ahead can make the first few months feel less stressful. Here are a few ways to financially prepare before your baby is born.

Build or grow your emergency fund.

Money set aside in a savings or money market account gives your family breathing room if you experience a job loss or a large, unexpected expense, such as a home repair or medical bill. Many people aim to save three to six months of total household income in an emergency fund. With a child on the way, you might consider building a larger cushion if you can.

Understand your parental leave benefits.

Time to bond matters, and you’ll want a clear view of your income. Ask your HR team how your leave works, including any mix of company leave, short-term disability, FMLA-protected leave, sick time, and vacation time.

Check whether you have FSA, HSA, and dependent care account options.

If your employer offers a dependent care flexible spending account (DCFSA), you may be able to set aside pre-tax dollars for eligible childcare costs. A flexible spending account (FSA) or health savings account (HSA) can also offer tax advantages for eligible health expenses.

Top financial planning tasks for new parents

Once your baby is born and you’re settling in as a family, these steps can help you build financial stability. 

1. Review health, life, and disability insurance

• Health insurance: Getting health insurance for your child is one of the first tasks you should tackle as a new parent. You can add them to your existing health insurance plan or, if you don’t have insurance, you can enroll in a Marketplace plan through a Special Enrollment Period. Requirements vary by plan and state, but you typically need to add your new child or apply for coverage within 30 to 60 days.²
• Life insurance: Life insurance for new parents is another way to protect your child’s wellbeing. It acts as a safety net if a parent, especially the primary earner, passes away unexpectedly. There are two main types of life insurance:
  • Permanent life insurance (whole life) provides death benefit protection for your family and allows you to access the potential cash value that may accumulate inside the policy. The cash value can go toward additional financial needs, like college funding.
  • Term life insurance is a more affordable option and provides coverage for a set number of years, usually no more than 30, with a fixed premium each year.
• Disability insurance: You may also want to consider disability insurance. If you or your partner became unable to work due to an accident, illness or injury, it would significantly affect your family’s income. Disability insurance covers a portion of the income loss. 

2. Create or update estate planning documents

Start by reviewing your beneficiary designations on retirement accounts, such as a 401(k) or an IRA. The beneficiaries listed on these accounts supersede any designations in your will or trust, so update them as your life changes.

Next, review your estate planning documents to confirm your beneficiaries are current. Your new child should be included, as should your current partner or spouse and any children from previous marriages.

Here are the key estate planning documents to create or update when you become a parent:

• A will: If you don’t have a will yet, create one as soon as you can. It establishes guardianship for your children, ensuring they’re cared for in the way you determine is in their best interest. When choosing a guardian, name both a first choice and a backup.
• Healthcare power of attorney: This lets you specify who makes decisions about your healthcare if you become incapacitated. It also specifies who can receive information about your healthcare needs.
• Financial power of attorney: This document lets you designate your spouse, partner, or another individual to act on your behalf in financial matters if you became incapacitated. A financial power of attorney establishes a safeguard for your children if you can’t care for them for an extended period.
• A trust: A trust is a legal contract, drafted by an attorney, with a named trustee who manages your assets according to your wishes both during your lifetime and after your death. Talk with an estate planning attorney to see if a trust fits your situation.

These documents will have a major effect on your family if you die or become incapacitated, so consult with an experienced estate planning attorney to help build a plan that establishes the legacy you want. If that isn’t an option right now, estate planning software can help you create and maintain these documents.

3. Plan for childcare

Childcare costs are highly dependent on where you live, but one report found that nearly 8 in 10 U.S. parents spend 10% or more of their household income on childcare.³

Childcare can become a significant expense in the early years if both parents work outside the home. Costs may include daycare, preschool, summer camps, and before- and after-school care. Check whether your employer offers a DCFSA, which lets you deduct a set amount each year from your pre-tax salary for eligible childcare expenses.

4. Plan for future education

Get a head start on college savings by opening a 529 Education Savings Plan for your child and setting up regular deposits. If you’re considering private school, a 529 plan can also cover K-12 private school tuition.

Beyond a 529 plan, you can establish a Coverdell education saving account, a Uniform Gifts to Minor Account (UGMA) or even a Roth IRA for educational purposes.

5. Consider claiming your baby's 530A IRA account

Eligible children are automatically enrolled in a 530A IRA, or Trump account, which is a tax-advantaged investment account established for children. Check eligibility rules, contribution limits, and tax treatment before claiming and managing one. A financial professional can help you decide which savings vehicles fit your goals.

Frequently asked questions

When should I start financial planning for a new baby?

Start before your baby arrives, if possible. Building your emergency fund, understanding your parental leave benefits and checking your employer's FSA or HSA options are all easier to tackle before a newborn adds new demands on your time and budget.

How much life insurance do new parents need?

There's no single answer, since the right amount depends on your income, debts and long-term goals, such as future education costs. Many parents work with a financial professional to estimate coverage that could replace income and cover major expenses.

What's the difference between a will and a trust for new parents?

A will names a guardian for your child and directs how your assets are distributed after your death. A trust is a legal contract that lets a named trustee manage your assets according to your wishes, both during your lifetime and after your death, and can offer more control over how and when your children receive assets.

Benefits of financial planning for new parents

Taking steps early can help you feel more in control of your finances as your family grows. When your plan covers both everyday expenses and “what if” scenarios, you can spend less time guessing and more time focused on your new routine.

Thoughtful planning can make a real difference in how you manage your money. Learn how our approach to financial planning can help put you in control of your finances.