Financial Planning for New Parents: 12 Best Tips

10.9 MIN READ

Becoming a new parent is a life-changing event. But, along with the bliss and excitement of becoming parents comes a whole new level of responsibility for financial planning. You may not even know how to prepare for a baby financially.

There are so many things to consider when it comes to finances – from saving for college to creating a will – that it can be overwhelming for first-time parents.

But don't worry, we're here to help! Below you'll find the 12 best tips for financial planning when you become a new parent.

Follow these tips for new parents who are financial planning, and you'll be on your way to ensuring a secure financial future for your family. Good luck!

Financial Planning for New Parents: 12 Best Tips

Here are our top 12 financial planning tips and advice for new parents wanting to learn how to financially prepare for a baby.

Plan For Maternity Leave

If you're lucky, your employer will offer some paid leave, but you should still plan for at least a few weeks without income. Then, build up a nest egg in savings so you have a cushion to fall back on and ensure you clearly understand your benefits and entitlements.

Also, think about how long you'll be out of work. Parenthood is a big commitment, and you may be unable to return to work full-time immediately. Talk to your employer about your options, and consider whether you'll need to make any adjustments to your career plans.

Consider applying for short time disability benefits. Many women experience various physical and emotional changes during pregnancy, making it difficult to continue working. Recognizing these challenges, the government has established a program allowing women to collect short-term disability benefits while pregnant.

You must have worked for at least six months to qualify for the program before becoming pregnant. In addition, you must be able to provide medical documentation confirming your pregnancy. Once approved, you can collect benefits for up to 17 weeks.

Finetune Your Budget

As a new parent, you may be wondering how to budget for a baby. One way to do this is to determine your baby's expenses for the first year. After that, you must account for feeding, diapers, clothing, health care, and child care.

You will also need to factor in the necessary furniture or equipment cost. Once you have determined your budget for babies, you can begin to create a budget.

Start by evaluating your income and expenses. Then, identify how much you can reasonably set aside each month for your baby's needs.

Finally, create a spending plan that allocates your money to meet your baby's needs while staying within your budget.

Invest in Life and Disability Insurance

A baby brings a new meaning to the phrase "breadwinner." As your family's primary caregiver and provider, making sure you have financial protection in the event of an accident or illness is paramount.

One way to do this is to invest in life and disability insurance. Life insurance will provide financial security for your family in the event of your passing.

Disability insurance will replace a portion of your income if you're unable to work due to an injury or illness.

New parents need both a disability and life insurance policy, so shop around for financial advisors to discuss what policy is right for you.

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Increase Emergency Fund

No one likes to think about emergencies, but the truth is, they happen. And when they happen, they often occur when you least expect it. Having a financial cushion can help you cover unexpected costs.

The first step is ensuring you have an emergency fund in place. Next, aim to save up at least three months of living expenses so that you're covered if you lose your job or face a significant unexpected expense.

If you don't have an emergency fund, start by setting aside $50 from each paycheck into a savings account. Then, once you have $1,000 saved, you can start using that money to cover unexpected costs as they come up. And if you ever find yourself needing more than $1,000, you can always dip into your primary savings account to cover the rest.

By setting aside money each month, you can put yourself in a better position to handle whatever life throws your way.

Save for Retirement

There's no denying that babies are costly. Between diapers, formula, and medical bills, it's easy to see how expenses can quickly add up.

However, remember that while your little one may only be a few months old now, they'll eventually grow up and head off to college. And if you don't start saving for retirement now, you could end up struggling to make ends meet later in life.

So how much should you save? A good rule of thumb is to aim for 10-15% of your income. But if you can't swing that right now, don't worry - any amount you can put away is better than nothing.

There are a few different ways to save for retirement. One option is to open a dedicated retirement account, such as a 401(k) or IRA. Another approach is simply creating a savings account that you earmark for retirement. Whichever method you choose, the important thing is to get started.

Update Your Will

A Will not only outlines how you would like your assets divided in the event of your death, but it also names a guardian for your minor children.

Without a Will and estate planning documents, the court will decide who cares for your children, and your asset will be distributed according to state law. So while it may be tempting to put off this task, it's crucial to have a plan in case the worst happens.

Having your will notarized is also good to ensure it's legally binding. You can typically find a notary at your local bank or courthouse.

Take Advantage of Tax Breaks

Tax breaks can help offset the cost of raising a child. As a new parent, you may be eligible for the Dependent Care Credit or Child Tax Credit, which can save you up to $2,000 per child.

You may also be able to deduct childcare expenses from your taxes. To take advantage of these deductions, keep detailed records of your childcare expenses throughout the year.

Talk to your financial advisor or tax preparer to see if you qualify for any of the following:

Update Tax Withholdings

Your tax withholdings will likely change once you have a baby. This is because the government considers children dependent, which means you may be eligible for additional tax deductions.

Ensure that your employer withholds the correct amount of taxes from your paycheck by completing a new W-4 form.

You can also use the IRS Withholding Calculator to help determine the right amount of tax to withhold from your paychecks.

Save for College From the Start

College costs are skyrocketing, and it's wise to start saving as early as possible. There are several ways to do this, including setting up a 529 plan or opening a custodial account.

A 529 plan is a tax-advantaged savings account that you can use to cover qualified higher education expenses, such as tuition, fees, and room and board. You can contribute to a 529 plan monthly or annually, and the money will grow tax-free. Plus, if you use the money for eligible expenses, you won't have to pay any federal taxes on the withdrawals.

A custodial account is another option for saving for college. With this type of account, you can make investment decisions on behalf of your child. Additionally, the money in the account will be taxed at the child's tax rate, which is typically lower than the parent's.

Whichever route you choose, the important thing is to start saving now. College is an essential investment in your child's future, and the sooner you start saving, the more prepared you'll be when it comes time to pay the tuition bills.

Update Health Insurance Coverage

One of the first things new parents should do is update their medical insurance. This is especially important if one or both parents are currently working.

Most employer-sponsored health plans will allow new parents to add their child to the plan within 30 days of birth. First, however, you should check with your human resources department to find out exactly what you need to do to add your child to your health insurance plan.

If you're not currently employed or your employer doesn't offer health insurance, you'll need to purchase a policy on your own. Various options are available, and you should compare different plans before deciding.

With so many things to consider when you become a parent, updating your health insurance may not be at the top of your list. However, it's a crucial step in protecting your family's health and well-being.

Think About Childcare

One of the most significant financial decisions you'll make as a new parent is how to arrange for childcare.

There are a few things to keep in mind as you start to plan for childcare.

First, consider the cost of childcare. It can be expensive, so you'll need to factor it into your household budget.

Second, think about the quality of care your child will receive. You want to ensure they're in good hands, so research and talk to other parents to get recommendations.

Finally, think about your childcare needs in the long term. For example, if you plan to return to work after maternity leave, you'll need to make arrangements for long-term childcare.

Planning for a baby financially can seem daunting, so take the time to do it right.

Meet With a Financial Planner

Meeting with a financial planner can be a helpful first step if you're unsure where to start with financial planning.

A financial planner can help you understand your options and make smart money moves that will benefit your family now and in the future.

Some of the key areas a financial planner can help you with include:

Setting up a realistic budget
Prioritizing your spending
Saving for your child's education
Investing in retirement accounts
Planning for the baby financially

Making sound financial decisions now will lay the groundwork for a bright future for you and your family. Don't hesitate to reach out to a qualified financial planner to get started.

FAQs

Here are some frequently asked questions about financial planning for new parents:

What Is the Best Investment for a Newborn Baby?

There is no one-size-fits-all answer to this question. The best investment strategy for a newborn baby will depend on your unique financial situation. However, some common options include investing in a 529 college savings plan, opening a custodial account, treasury bonds, or setting up a trust fund.

Should You Save Money Before Having a Baby?

Many financial experts recommend saving up at least six months of living expenses before starting a family as a financial safety net. Doing so will help ensure you can cover your costs if you experience a drop in income after having a baby. You can also use your savings to cover unexpected expenses like medical bills.

Why Is It Important to Be Financially Stable Before Having a Baby?

Well, for one thing, financial stability enables you to provide for your child. This is some of the best advice to new parents. You want to ensure that you can afford all the necessary medical care and have enough money for your child's future.

Moreover, being financially stable before having a baby will help you enjoy your life as a parent more. You won't constantly be worrying about money, and you'll be able to focus on enjoying your new role as a parent. So being financially stable before having a baby is worth it!

The Bottom Line

Parent life is a wonderful but also expensive phase to be in. Financial planning for new parents can help ease the financial burden of this new phase. This can include creating or finetuning your budget, saving for college, and investing for retirement.

Meeting with a financial planner can also be a helpful first step in getting your finances in order. And finally, remember to have at least six months of living expenses before starting a family to help cover any unexpected costs.

Financial planning may seem daunting, but ensuring a bright future for you and your child is worth it.

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