Financially Preparing for a Baby

A baby can bring joy, wonder—and substantial expenses. According to Brookings Institution, the average cost of raising a child through high school in 2022 is $310,605, and that doesn't even consider saving for college.

According to The Education Data Initiative, the average “Cost of Attendance” includes tuition, fees, supplies, books, room and board, but does not include transportation, daily living expenses and student loan interest. Below are the average “Costs of Attendance” for various college situations based on the 2023–2024 academic year:

• 4-year public university, in-state: $104,108
• 4-year private university: $223,360

As you prepare for having a child, consider the new expenses you may face.

• Health–care costs not covered by insurance,
• Need for a larger home, car, etc.
• Additional life insurance
• Start an education fund
• Baby food, clothing, diapers, and daily necessities

Consider taking the following steps before and after the baby arrives to make the financial side of parenting a little easier:

• Start saving for a baby. Try to get a head start by putting some money aside. If you're both working and one parent is planning to stay home indefinitely after the baby arrives, you might practice living on one paycheck and using the other paycheck to boost your savings before the baby arrives.
• Estimate expenses. Jot down all the one-time and recurring expenses that you will face, and then figure out whether these are manageable — or whether you need to trim or eliminate some costs.
• Look into company benefits. Many companies have a range of benefits that can help cover pregnancy, childbirth, and parental leave. While employers may be required to give you time off under the Family Medical Leave Act, they aren't required to pay you during that time. If they do pay, the percentage of salary — as well as the length of time this pay continues — can vary from employer to employer. Find out how much it might cost to add a new child to your employer's group medical coverage. If your employer offers a pretax health savings account, consider funding an account or upping your existing contribution. Many companies also offer a dependent care account for pretax savings for childcare expenses.
• Check your life and disability insurance. Even if you have life insurance, it may not be enough to provide for your now-growing family. You may want coverage equal, to five, to twenty times your annual salary or more. The exact amount will depend on factors such as your income, how long you need to provide for, your current level of savings, and how much mortgage, and other debt you have. You may also want insurance on the life of a nonworking spouse, since his or her death would likely increase significant cost for childcare and other expenses. In addition, consider disability insurance to replace some income in case you are injured and can't work for an extended period. Your employer may provide short-term disability coverage at little or no cost. These plans typically cover 60% of your salary, and you may be able to extend that coverage by paying an added premium. You might also consider buying a supplemental policy on your own
• Consider starting an education fund. If after all additional expenses you can afford to put something aside each month for your new child's primary or college education, you may wish to consider a 529 education-savings plan (ability to deduct from taxes varies by state). If grandparents or other relatives want to help, you might suggest they establish their own account for the child's benefit or contribute to the education plan account you set up.
• Evaluate your retirement planning. While a decent–size college savings fund can be a great help when your baby turns into a college-bound teenager, keep in mind that you may also be able to pay college costs with loans and grants. Until then, you will still have daily and long–term financial goals to consider. This may be a good time to evaluate how these expenses may impact your retirement funding goals.
• Name a legal guardian. If you didn’t have a will before you had a baby, it's now an essential. Both parents need wills that name a legal guardian in case you both die prematurely. Your will should also specify who is to manage the money left to your child, if different from the guardian, and also how or when your child can spend that money if you were to pass away before they are old enough to responsibly manage their finances. You may want to name one person to take care of your child and someone else who is better with money to handle the finances.