How to Financially Prepare for a Baby

Mother, daughter and grandmother holding new baby
Congratulations! You're becoming parents, and your excitement is building as you come ever-closer to the day you'll welcome your new baby into your home. It's a huge commitment, but the rewards are infinite. You can't wait to tackle the joys and challenges of your new life.

One of those challenges? How to prepare for a baby financially. According to the US Department of Agriculture, it costs roughly $233,610 to raise a child to age 17. That's a big chunk of change, but with careful planning to be a parent and some financial savvy, you'll be fine. Here's some advice for new parents to help you maintain financial stability while raising your child.

Think about health insurance

Once your baby is born, ensure they're included on your family's health insurance – it doesn't happen automatically. One of the best tips for new parents is to remind them to call their insurer and make sure the baby is on the plan. It's also worth seeing if your health insurance plan allows you to use a health savings account (HSA) — a savings account that allows you to set aside money, pre-tax, to pay for medical expenses.

Plan for emergencies

When it was just the two of you, you managed just fine with a minimal budget. But now that your little one is joining the family, a financial checklist for new parents is in order. One of the first items on that list is a savings fund — preferably six months or more of funding to cover you if you lose your job, face a severe family illness, or some other disaster strikes. Keep that money in a reasonably liquid investment, such as a CD or short-term treasury bond, so you can access it quickly if something goes wrong.

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Start saving for college

Say what? Your baby has just arrived, and college is already something to plan for? Yes, it's true. By the time your child is ready for higher education, the cost of a four-year degree will be well into the six figures — an online college calculator can help you figure out exact numbers. 

While it may seem like something you don't need to think about yet, financial planning for a newborn baby includes considering college costs. Fortunately, tax-advantaged 529 plans are increasingly popular. Stashing away a few bucks each month may mean your child's entry into a good school is that much closer.

Utilize flexible spending accounts

If you can use an employer-sponsored flexible spending account (FSA) for some costs, it's worth doing so when planning for a baby financially. An FSA allows you to save a certain amount of money each year, tax-free, for your child. Current limits are $2,850 for each partner, for a total of $5,700, which can be used to pay out-of-pocket costs such as prescriptions and over-the-counter medications, co-payments, dental and medical expenses, and more. This will reduce your taxes, but note the money needs to be used within the year, or it's forfeited.

Update your estate planning

The thought of a will often evokes grandparents planning for their legacy, but financial planning for new parents includes estate planning, too. Once you have a partner and you're preparing for a first child, you should be thinking about your estate. If you die intestate (without a will), the court in your state of residence will determine where and how your assets will be distributed. Your loved ones will face a lengthy probate process and may struggle financially until your estate is settled. 

On the other hand, if you have a will, you can explicitly state what you want to happen to your estate — a far better outcome for all. 

Take advantage of tax breaks

Tax codes change from year to year, but generally, there are credits to help you save money when you file your taxes. One piece of financial help for new parents: if your child is your dependent, the child tax credit reduces the amount of tax you owe — a considerable benefit. In 2021, for example, there was a $3,000 tax credit for children under age 18. There are some restrictions, so make sure you understand these when doing your taxes or have a tax professional do them. There are also tax credits for earned income, adoption, and dependent care credits. 

Invest in insurance

You're young and healthy — why do you need a life insurance policy? The answer is, sometimes life throws you a curveball. You don't want your family to suffer if the worst should happen to you. The best life insurance for new parents is a term policy that offers financial protection at a reasonable cost while your children are young. 

Consult the Ethos website to help you determine how much life insurance you need, how that insurance policy will protect your loved ones, and the best way to choose a guardian for your child in the event you're not there to protect them.

The information and content provided herein is for informational purposes only, and it is not to be considered legal, tax, investment, or financial advice, recommendation, or endorsement. You should consult with an attorney or other professional to determine what may be best for your individual needs.