Oh Baby! Financial Dos and Don'ts for New Parents

As a new parent, you’ll receive no shortage of advice about how to prepare and care for your little one. While you ultimately know what’s best for your family, you may find comfort in learning the best practices that have helped other parents on their journey.

This can be especially true when it comes to the financial aspects of welcoming and raising a child. Let’s go over some common dos and don’ts to help you navigate this important time.

Do Keep Sufficient Emergency Savings

It’s often suggested that you keep at least three to six months’ worth of essential living expenses saved in an emergency fund.¹ When surprise expenses inevitably arise, this money is a cushion to help you continue meeting your needs and potentially avoid taking on debt.

A new baby at home usually means increased monthly expenses, so the target for your emergency savings may need to increase as well—and you might even consider building in some padding above and beyond the six-month amount. If you’re able, aim to sock away a little extra each month to gradually work towards your goal.

Don’t Underestimate Expenses

We all know that raising kids is expensive, but many of us would be hard-pressed to put a dollar amount on the experience.  Consider that raising a child born in 2025 to age 17 could cost up to $310,605 when factoring in a 4% inflation rate.²

Of course, every family is different—lifestyle, geography, how you formed your family, and plenty of other factors influence your costs. Not to mention, certain phases may entail more expenses than others. For instance, cribs, car seats, and seemingly endless packages of diapers may inflate the early costs for a first child. At each stage, review your budget and make adjustments as necessary to ensure you can comfortably cover new and upcoming expenses while staying on track towards your own financial goals. 

Do Make Childcare Decisions Early

For many households, childcare represents one of the most significant considerations—and expenses—involved in welcoming a new baby. Will one parent stay at home? Will you hire a nanny? Will your child go to daycare?

The national average rate for a nanny approximately $827 per week, and $343 per week for a childcare center³ – and there can be opportunity costs for those who choose to exit the workforce to become a full-time parent. The sooner you decide on a plan for your child’s care, the sooner you can budget for your chosen option.

Don’t Get Caught Up In All the New “Stuff”

For every baby essential on the market, there are many more items that end up collecting dust. Ultimately, what you do and don’t decide to buy is personal—but considering how fast kids grow and how quickly their interests change, you could end up with piles of clothes and toys that never make it into the regular rotation. Not to mention, certain items are often given as gifts or available in great condition second-hand, so not everything you get needs to be new-with-tags. Money saved on these non-essential items can go a long way towards meaningful experiences and longer-term goals, like saving for education.

Do Make a Plan for College Expenses

As the cost of college has ballooned, many parents have realized the value of starting to save for higher education even before their child has learned their ABCs. The sooner you start putting money aside, the longer it has to potentially grow. If you utilize an education savings account, the compounding interest and investment returns on your money have the potential to really add up over time. Here are three popular options:

529 Qualified Tuition Program: A tax-advantaged account that lets you invest for future education expenses on a tax-deferred basis. Distributions of earnings are not subject to federal income taxes as long as the funds are used for qualifying education expenses. Distributions of earnings that are not used for qualifying education expenses are subject to ordinary income tax and are generally subject to a 10% penalty tax.⁴

Coverdell Education Savings Account (ESA): A tax-advantaged account in which invested funds potentially grow tax-free. Distributions of earnings are not subject to federal income taxes as long as the funds are used for qualifying education expenses, which generally include tuition at eligible education institutions, room and board, books and other costs, such as computers, calculators and even Wi-Fi. Distributions of earnings that are not used for qualifying education expenses are subject to ordinary income tax and are generally subject to a 10% penalty tax.⁴

Custodial Accounts held under the UGMA/UTMA (Uniform Gift to Minors Act/Uniform Transfer to Minors Act): Custodial accounts hold investable assets or cash that have been gifted to your child. The money in the Custodial Account belongs to the child, but is controlled by the custodian until the child reaches the age set under the applicable UGMA/UTMA law for the termination of the Custodial Account. The use of the assets held in the Custodial Account are not limited to qualified educational expenses and so the assets held in a Custodial Account can be used to pay any expense that is for the benefit of the child.⁵

Planning for the cost of college is a major undertaking, so you may wish to speak with a financial professional about the various strategies available. Keep in mind, some options have limitations and might even impact financial aid eligibility. 

The Bottom Line

Welcoming a child is an exciting—and expensive—milestone. Every parent, child, and family is unique and should make the decisions that work for them and their finances. Knowing some of these major money considerations early on can help you formulate the plan that’s best for you.