Your first baby is many things. It’s a milestone marking the point where a couple (or a single parent) becomes a family; it’s a source of surprising and bottomless joy; it’s a portal into an entirely new world of targeted ads for diapers, breastfeeding supplies, baby clothes, and toys.
Your first baby also transforms the way you think about the future. You’re no longer living only for yourself, or only for yourself and your partner. A baby creates its own set of obligations and responsibilities, and nowhere is that more true than when it comes to finances.
Some new parents will not have the financial means to do anything except keep their heads above water. But any new parent who has the ability to save—or has already been able to accumulate some savings—is immediately confronted by a host of options, possibilities, and fears. Even if you’re lucky enough to already have a lot of savings or a very high-paying job you may feel a certain amount of anxiety about your child’s future.
How much will you need for college? How do you predict what other expenses will come up? How can you give your child everything it needs or wants?
First, take a deep breath. Being a financially responsible parent is pretty similar to being a financially responsible non-parent. You should continue to save for retirement and maintain a budget so you know how much you’re spending on what, and you should continue to have a better investment strategy than “put it all in a checking account.” (You’re already doing all those things, right?) But you should also be reorienting how you think about the future, and how you think about money. Here are a few tips culled from experts, and a few tools from Betterment that can help…
Wrap Baby in a (Safety) Net
In addition to being lil bundles of joy, newborns are lil paradoxes—simultaneously the biggest blessing and biggest stressor all rolled up (snug as a bug) in one. Things are real now. Plan accordingly!
For that reason, it makes sense to start building out an emergency fund, “the bedrock of a good financial plan,” says Nick Holeman, Director of Financial Planning at Betterment, an investing and savings app whose mission is to help people turn everyday investments, no matter how small, into their dreams, no matter how big. This, explains Holeman, is your rainy day account, your safety net for anything that may go wrong in the future.
Ideally this means putting enough money aside to cover three to four months worth of essential expenses (we’re talking rent and food here, not vacation or incidentals). This, of course, varies individually, but Betterment can help calculate it using gross income, how much it costs to live in your area, and research from the American Economic Association and the National Bureau of Economic Research. From there, says Holeman, it’s a matter of asking yourself what your specific goals are and making automatic payments to your savings. “Opening a safety net goal ensures that your emergency fund is separate from your other goals, is low-risk, easily-accessible, and has competitive earnings/low fees,” he says.
Read more advice on Betterment’s website.
Decide on Your Savings Goals
You may have already talked with your partner about how much you should be saving for retirement or what your savings goals are. But having a child is a great time to revisit what you are saving for and why—and to visit indispensable 3 Low-Risk Ways To Earn Interest, from Corbin Blackwell, a financial planner at Betterment.
“Any time there is a big change in anybody's life, whether it's becoming a parent or starting a new job or taking care of your elderly parents, as they might need more assistance, more communication is better than less communication,” says Andy Hill, host of the Marriage Kids and Money podcast. “Do we care about our kids having a better life than we had? Do we care about allowing our family to give back to organizations and causes that call to our hearts? What do we value as a family?”
If one or both of you are on parental leave from work, you’ll need to decide who goes back to work when. In the course of these conversations, one parent may decide they want to look after the child part or most of the time, or one or both of you may want to shift to working from home if possible. If you and your partner both want to work full-time—and relatives or close friends can’t be used for regular childcare—you’ll need to factor in the cost of daycare to your budget, which can be a lot, especially in big cities. This is why you should sit to determine what you can afford to pay, and what you may need to economize on now that you are a family.
Prepare for the Worst
One reason to save is to have an emergency fund that could cover the cost of three to six months of living expenses in the event one or both parents loses their job. This money should be kept in a low-risk, interest-earning account that's accessible in a hurry. But parents should also think about how to care for their families if they suddenly die or become seriously injured.
For starters, you’ll need life insurance as well as (potentially) disability insurance. Many employers give workers these policies as part of a benefits package, but you may need to purchase additional insurance. The very rough rule for the “how much life insurance do I need?” question is “10 times your income” or “10 times your income plus $100,000 for college expenses.” But that doesn’t take into account the savings you may already have, or the cost of your funeral (the average funeral costs around $10,000). You should consult an online calculator that can give you a more detailed answer about how big of a policy you need.
Beyond life insurance, you should also prepare a will and designate a guardian for your children in case the worst happens and they are left without either parent. Having a child means that you are bringing a life into the world that will continue after you are gone, and this imbues you with the responsibility to think about what will happen to your kid when you die.
It’s More Than Just College
We’ll get to the college thing in a second. But in between thinking about the worst-case scenarios and fretting over the looming cost of higher education, there are a lot of anticipated and unexpected costs of having a child. What if they need medical treatment your insurance likely doesn’t fully cover, like braces? What if you want to buy them a musical instrument, or they become interested in a hobby that requires some investment on your part, like a travel sports team? A “rainy day” fund of a couple thousand dollars (which is different from your emergency fund) can help defray the costs of these expenses. More broadly, it’s important to have some flexibility in your budget.
A dependent care flexible-spending account (FSA) can help with some of this. These employer-sponsored accounts allow you to put pre-tax money from your paycheck aside to pay for qualifying expenses. Mostly this means daycare fees, but some baby-related items, like breast pumps, qualify. (Other expenses, like diapers, unfortunately do not.) If your employer offers this sort of benefit, be sure to take advantage of it.
For babies especially, you can save a lot of money by getting used clothing and accessories from consignment shops or local Facebook groups for parents, a practice that not only saves you money, but is more sustainable than buying new equipment that you’ll only use for a short amount of time. “A lot of the time, the gear only lasts for three months or a year until you're on to the next thing. So a lot of parents only use it for a certain period of time until they transition into the next piece of gear. But if you're able to be a part of a community that provides you with good baby gear, you can find some good discounts,” Hill said. “We ended up using Facebook marketplace to resell that stuff, sometimes for the same amount of money that we bought it for.”
…But It’s Also a Lot of College
If any parents of newborns want to freak themselves out, they should look up what college will cost for their child in 18 years. According to one calculator, the average cost of a four-year in-state public school in 2040 will come out to be $135,000, and the average cost of a private school will be… wait, the calculator is just laughing at me? That can’t be right.
“Don’t be freaked out,” is the advice from Martha Kortiak Mert, the COO of SavingForCollege.com. The sticker price of a college education is higher than what most families will pay, for one thing—there will likely be scholarships and financial aid that your child can take advantage of. Secondly, many experts go by a “one-third rule,” which says you’ll use savings to pay for one-third of your child’s tuition, pay for one-third of it with your income, and pay the final third using loans. This allows you to set a savings goal that isn’t so high you’ll despair of ever reaching it. (A lot of families aren’t able to save even a third of the cost of their child’s education, however.)
You also have a tool that helps save for college: 529 savings accounts, which provide tax advantages when you use the money in them for education (they’re generally used for college but can be spent on private primary and secondary school as well). Some 529 plans let you essentially purchase tuition in advance by paying for “units” of tuition corresponding to the current cost of tuition at an in-state public university. The value of these units then rises as tuition does, and these units can be redeemed at any school. Other 529 plans function more like 401(k) plans, growing in value over time until you need to cash them in to pay for tuition, room and board. If you use a 529 plan to pay for qualified expenses, it’s tax free.
For many parents, opening a 529 account is one of the most important changes to their finances. You need to continue to save for retirement, but you can’t neglect the cost of college either. “We definitely recommend, if you can do it every month, that’s great, and just set it up as an automatic withdrawal,” says Kortiak Mert. “It’s a set-it-and-forget-it strategy… you're not thinking about what else you can be doing with that money.”
Remember Why This Matters
So you’ve got a will now, an emergency fund, life insurance, a guardianship plan; you’re making sure you have your FSA and 529 plan all set up. You’re still worried, but maybe you’re a little calmer. What now? Keep talking to your partner, if you have one, and remember what all this stuff represents: it’s a new stage of your life, one in which you have more responsibility, where your life is no longer just your own. Money is different for new parents, and money management is not just about making sure you are comfortable and secure.
“It came in, and we used it, and we were having fun,” Hill says of how he and his wife treated money before children. “But after [our first child], there were more plans. It wasn't just living for today. It wasn't just us.”
This article was created in partnership with Betterment. Investing involves risk and performance is not guaranteed. Any links provided to other websites are offered as a matter of convenience and do not imply endorsement or affiliation with Betterment unless otherwise stated.