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The Best Interest » 12 Financial Planning Topics for New Parents

12 Financial Planning Topics for New Parents

Highlights

  • Children can be incredibly expensive. It’s vital to plan for those new expenses in your household budget.
  • Once your children are born, there are important long-term safety nets you should implement (e.g. insurance, estate planning, etc)
  • Thankfully, there are numerous tax breaks available to parents to ease the financial burden of raising kids. Make sure you’re capturing those benefits.

My wife and I are at that stage of life where most of our close friends and family have multiple young children. And in the many conversations we have with those parents, I’ve realized a trend:

Most parents share similar financial questions and concerns.

So let’s provide the best financial tips for new parents.

Big Financial Changes for New Parents

Some financial best practices stay the same before or after children.

But there are many big changes. Let’s start with those.

Insurance Coverage

When you have kids, review your insurance policies to ensure you have adequate coverage. The two that stand out most to me are health insurance and life insurance.

Health insurance is important for your family’s well-being. Why?

It provides financial protection against the high costs of medical care, ensures access to necessary healthcare services, helps cover medical expenses and safeguards against unexpected illnesses or accidents that can otherwise result in significant financial burden.

If you can’t cover it with your bank account, you probably need insurance for it.

Life insurance matters because it protects your loved ones financially in case of your untimely death. Specifically, focus on term life insurance. Not whole insurance. Not indexed universal insurance. Term life insurance only! Because life insurance is not a substitute for proper investing (despite what TikTok grifters will tell you).

If you own a home or have a car, appropriate property and auto insurance coverage is also necessary.

Child-Raising and Childcare Costs

Children are expensive!

The Brookings Institute estimated that “the average middle-income family with two children will spend $310,605 to raise a child born in 2015 up to age 17.

[Part of their estimate included 4% inflation per year. If we crunch the numbers, that’s the equivalent of $16,400 in 2023 dollars every year for 17 straight years]

We can break that down a bit more.

If you need outside childcare, the early years of parenting are likely to be the most financially strenuous. According to Ilumine, the average cost of childcare in the US is just shy of $15,000 per year, or $1,250 per month. And according to Zippia, about 58% of parents rely on childcare so they can continue to work.

Granted, childcare expenses tend to decrease or disappear once your children enter school. But for those first five years, yikes!! $15,000 per year is a huge expense!

Most households cannot lightly absorb such a change in spending. The average American family earns $100,000 per household, taking home $6,000 per month after taxes. $1200 per month on daycare is 20% of that take-home pay!

Another option that is financially challenging in its own right: one parent stays home from work to care for the children. There are interesting pros and cons here. While it’s a hardship to go down to one salary, it’s hard to value the benefit of all that extra family time.

Then there are diapers, formula, strollers and carseats, clothes they outgrow in 3 months…the list goes on. Kids are extremely expensive, and those expenses require important planning.

Education

Start planning for your child’s future education early on.

We wrote a complete breakdown of 529 plans a few years ago. 529 accounts are the gold standard for education savings due to their flexibility and tax advantages. Regular contributions to such accounts can help alleviate the financial burden of higher education expenses later on.

While Coverdell accounts are also education-focused tax-efficient accounts, they are generally suboptimal compared to 529 plans, and should only be used if you are fully maximizing a 529’s potential (e.g. hitting the maximum annual gift tax exclusion of $17,000)

Estate Planning

Consider creating or updating your estate plan once you have kids. Estate planning helps avoid potential conflicts and ensures that the parents’ wishes are followed.

For example, you’ll want to designate legal guardians for your minor children, ensuring they are cared for by trusted individuals if something were to happen to you. This is a challenging conversation. Who do you want to watch over your children? Do they want to take on that responsibility?

You should also create or update your will to dictate how your assets (financial accounts, property, and personal belongings) should be distributed in case of your untimely death.

Additionally, you might look into setting up trusts to protect and manage assets for the benefit of the children until they reach a certain age or milestone.

You’ll also might want to update your beneficiaries on qualified accounts (IRA, 401k, etc) and insurance policies.

Long-Term Financial Goals

You had goals before kids. You still have those goals. But your timelines might have shifted a few years.

It’s essential to set and keep long-term financial goals. This could include saving for retirement, buying a home, or achieving other milestones.

Start contributing to retirement accounts early, take advantage of employer-matched retirement plans, and consider consulting a financial advisor for guidance on long-term investment and planning strategies.

Children & Taxes

Whether you file your own taxes or work with an accountant, make sure you understand and are benefitting from the tax code. Parents typically pay much less in taxes than those without dependent children.

Child Tax Credit: The Child Tax Credit is a tax benefit that reduces the amount of tax owed for eligible parents. As of 2023, the credit is up to $2,000 per qualifying child under the age of 17. The credit is partially refundable, meaning that even if the credit exceeds your tax liability, you may be eligible for a refund.

Earned Income Tax Credit (EITC): The EITC is a refundable tax credit that benefits lower-income working parents (earned income under $59,187). The credit amount increases with the number of qualifying children, and eligibility is based on income and filing status.

Child and Dependent Care Credit: Are you paying for childcare? Parents who pay for childcare expenses in order to work or seek employment may qualify for the Child and Dependent Care Credit. This credit can help offset a portion of eligible childcare expenses, with a maximum credit of up to $3,000 for one child or $6,000 for two or more children.

Education-Related Tax Benefits: As children grow older, there are tax benefits available for education expenses, such as the American Opportunity Credit and the Lifetime Learning Credit. These credits can help offset the costs of higher education and certain qualifying educational expenses.

Long story short – if you’re a parent, you should be paying less tax. Make sure you’re taking advantage. Lord knows you’re paying for it in other places.

Financial Topics That Don’t Change (Much) After Kids

Certain financial priorities and habits shouldn’t change too much after having kids…

Budgeting

My budgeting rule is simple:

  • You can plan your expenses ahead of time.
  • You can track them after the fact.
  • You can do both.
  • But you can’t do neither.

Personally, I use the YNAB tool. I sit down ~twice per month to review, update, track, and plan ahead.

You can use this link to get 2 months of YNAB for free.

Budgeting is crucial, especially after adding massively expensive children to your family. It helps you track your income and expenses, ensuring you can meet your family’s needs and save for the future. Identify your essential expenses, such as housing, utilities, food, childcare, etc. Here are some ideas for how many budget categories you should have.

Kelly and I are currently moving to a bigger house and talking about having kids. You better believe planning our budget is a huge part of the conversation.

Emergency Fund

While the size of your emergency fund might change after kids, the need for an emergency fund is ever-present.

I’ve written here before…life throws you bitter curveballs. You need to be financially prepared to handle them.

How big should your emergency fund be? Typically in the range of 3-12 months worth of living expenses. The range is all a function of “how re-hireable are you if you lost your job?” If your expertise is in high demand, a 3-month emergency fund might be sufficient. But if you’d rather take your time with an exhaustive job search, you might need a 12-month emergency fund to make ends meet.

This emergency fund money should sit in a bank account, ideally something like a high-yield savings account. You should not invest your emergency fundhere’s why.

Debt Management

Debt can be a silent financial killer. No, Dave Ramsey, it’s not all bad. But you should certainly avoid it if you can…especially if you have little rugrats running around to distract you from paying it off.

Prioritize paying off high-interest debts such as credit card debt or personal loans. Don’t take on unnecessary debt. Establish a plan to become debt-free over time.

The best medicine is prevention. The second-best is decisive action.

Unique Financial Topics Related to Kids

And then there are some unique financial topics that some parents might face.

Special Needs Planning

Parents of children with special needs should consider financial planning specific to their circumstances.

This might include certain government benefits, setting up special needs trusts, and ensuring long-term care and support for their child’s unique needs.

Thankfully, there are fiduciary financial planners who specialize and focus on this very topic.

Digital Management and Identity Protection

In today’s digital age, parents should consider their children’s digital assets, including online accounts, social media profiles, and digital files. As part of estate planning, designating someone to manage or have access to these assets in case of incapacity or death is important to protect and preserve them.

That said, children can be targets of identity theft. Parents should take steps to safeguard their children’s personal information and be vigilant about potential fraud or misuse of their identities.

Other Investing Accounts

We already covered 529 plans. But there are other potential investment opportunities for children that you might want to consider.

Custodial Accounts (UGMA/UTMA): These accounts allow parents to invest directly on behalf of their children, typically with small tax advantages (they are taxed at the child’s tax rate).

Once the children reach their “age of majority” (which is 18 in most states), the children gain full custody of the accounts. For this reason, custodial accounts should be used with caution. It’s pretty easy for $40,000 of UGMA savings to turn into a new Jeep Wrangler.

Roth IRAs for Kids: If a child has earned income, they may be eligible to contribute to a Roth IRA.

Roth IRAs are awesome. Contributions are made with after-tax money but grow tax-free, and qualified withdrawals in retirement are tax-free. Roths are a powerful tool for long-term savings and investing for a child’s future.

But let’s go back: to qualify for a Roth IRA, your children need earned income, and need to be filing taxes on that income. Odd jobs like mowing lawns and babysitting do qualify (as long as the income is reported). And for teens, official W2 summer jobs also qualify.

But kids don’t want to invest! How boring! That’s why generous, forward-thinking parents should consider the following “loop hole”:

  • Jonny earns $4000 as a lifeguard over the summer.
  • Let Jonny keep his $4000 for his own spending needs (fun, college savings, whatever…)
  • The generous parents contribute $4000 to Jonny’s Roth IRA. As long as Jonny reported his income, there’s nothing wrong with this solution.
  • By the time Jonny is done with college at 22, he might already have $20,000+ of contributions in his Roth IRA. It’s not inconceivable that that amount alone could grow to $300,000+ of tax-free money by the time Jonny retires (7% growth for 40 years).

What a gift!

Time To Graduate

Kids are great.

They’re also expensive.

Hopefully, these financial planning ideas for new parents will help you navigate your parental future!

Thank you for reading! If you enjoyed this article, join 7500+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week.

-Jesse

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