New moms are uniquely adept at creating a safe environment for their babies, putting cushions on corners and locks on drawers to keep dangerous objects out of reach. These are natural acts of protection by a parent for a child. But all too often the steps required to safeguard a child’s financial well-being get lost in the shuffle.
“Like all new mothers and parents, you no doubt took the time to baby-proof your home, but you also need to baby proof your finances,” said Eleanor Blayney, a CFP® professional and Consumer Advocate for the CFP Board in Washington, D.C. “It’s all about providing for their security.”
For tips on getting started, we asked financial professionals, marriage experts, and veteran moms to weigh in. Their advice falls into seven categories:
- College savings
- Emergency savings
- Estate planning
Keep your spending in check
It’s tempting to splurge on brand name frocks and next generation nursery room gear, but the first rule of mom club is: keep your spending in check, said Hui-chin Chen, a CFP® professional with Pavlov Financial Planning in Arlington, Virginia.
Estimate your expenses, develop a budget, and stick to it.
Typical middle-income parents spend nearly $13,000 per year, per child to raise a child in the U.S. according to the latest data from the U.S. Department of Agriculture.1 That figure includes food, shelter, and other necessities to raise a child through age 17. It does not include the cost of a college education.
Your costs, however, could be much higher—or lower—depending on where you live, whether you require day care, and how aggressively you plan to save for college, if at all. (Learn more: Budget basics)
Expect to drop another $4,000 (or more) on one-time costs for gear including car seats, strollers, diaper bags, bouncy seats, cribs, monitors, and changing tables, according to parenting website Babycenter estimates.
In summary, now is not the time to indulge in non-essentials. Keep your spending on budget and allocate any extra dollars towards your own (or your child’s) financial security, said Chen.
Start saving for college
College may feel like a long way off, but babies grow up faster than you think. If you plan to contribute to their future tuition, the time to start saving is now. (Calculator: How much do I need to save for college?)
529 plans — two types exist — are among the most popular savings tools: Prepaid tuition plans, administered by some states and higher education institutions, enable participants to pre-purchase future tuition at today’s cost, while college savings plans deliver a return based on market performance of the underlying investments, usually similar to mutual funds. (Learn more: 10 mistakes to avoid with 529 savings plans)
Earnings in a 529 college savings plan become tax-free if used for qualified education expenses. (Earnings not used on eligible education expenses are subject to federal income tax, plus a 10 percent penalty tax).
“There may be grandparents or relatives who are anxious to welcome your new child with gifts of money,” said Blayney, noting parents should look first to the 529 plan offered by their state of residence, which may offer an additional state tax deduction on contributions. “This is a great time to set up a 529 college plan, where gifts can be deposited for your child’s college education.”
Currently, grandparent-owned 529 college savings accounts are considered a form of financial support for the student, which could adversely affect the student’s eligibility for federal financial aid. But those rules are changing with the new Free Application for Federal Student Aid, which is set to take effect beginning with the 2024-25 academic year. Per those changes, generous grandparents will now be able to help save for their grandchildren’s college education without the potential repercussions. (Learn more: College tuition: Big changes for the FAFSA).
Other savings tools include Coverdell Education Savings Accounts, Uniform Gifts to Minors Act/Uniformed Transfers to Minors Act (UGMA/UTMA) accounts, and Individual Retirement Accounts (IRAs), all of which have different tax treatment and financial aid implications. (Learn more: Custodial accounts and Coverdells: How to use them)
Savingforcollege.com, a consumer education website, offers a side-by-side comparison of the savings options features. A financial professional can help you determine which option is right for you.
Invest in yourself
One caveat when it comes to college savings: Never compromise your own financial security to pay for your kid’s tuition, said Chen.
Scholarships, grants, and low-interest loans are available for higher education, but no such help exists for funding a retirement.
“Make sure you take care of yourself first,” said Chen. “Work with a financial professional or use online tools to figure out the minimum savings you need to maintain the lifestyle you want in retirement. Make sure you continue to fund your 401(k) or IRA so your kids don’t have to care of you.”
Indeed, said Chen, the best financial gift you can give your kids is your own financial security.
Create a financial safety net
On the road of life, you are bound to encounter a pothole—or three.
To ensure a short-term job loss or unexpected medical bills do not derail your financial agenda, or your child’s lifestyle, you need an emergency fund.
Most planners suggest families set aside three to six months’ worth of living expenses in a liquid, interest bearing account, but Chen said new parents may require an additional three months (or more) of savings if their job security is questionable, one parent decides to quit working to be home with the baby, or their bills are unexpectedly higher than average due to private school tuition or other expenses. (Learn more: How to build emergency savings)
“I usually recommend to people whenever they are facing new territory in life to build a bigger financial cushion so it buys you flexibility,” said Chen. “You need some money to make mistakes.”
Insure your family
Adequate insurance, of course, is the ultimate safety net.
Many health plans have a 30- to 60-day window in which to add a newborn to your policy. You must contact your plan promptly to ensure coverage, said Blayney.
“Get your baby on your health plan,” she said. “You now have a separate being, who needs to be covered, but that may be far from mind as you are coping with feeding and changing diapers and sleeping.”
To keep health care costs under control, new moms should also be sure they use their health plan wisely. To save money, consumers can use doctors within their network, avoid visiting the emergency room for routine problems, use generic drugs, price shop for tests and procedures, and check their medical bills so they never overpay.
Next, be sure your life insurance and long-term disability income insurance coverage are sufficient to protect your family if you should die, or get injured or become too sick to work, said Blayney. (Calculator: How much disability income insurance do I need?)
“The life insurance that a lot of people get from their employers is often not enough for the life of a dependent,” she said. (Calculator: How much life insurance do I need?)
As a starting point, financial professionals once suggested families purchase enough life insurance to cover 10 times their annual salary, but that figure may change depending on whether you plan to pay for your kid’s college education and your existing debt.
Remember, you may need the proceeds of a life insurance policy for more than helping to replace lost income, she said. “If you are the one staying home with your child and you don’t have an income, you still need to have coverage to replace the cost of the care you provide,” said Blayney. “How much would it cost to hire a nanny or put your child in day care if you were not there?”
A financial professional can help you determine how much insurance you need and what kinds of insurance are appropriate. (Get a life insurance quote)
Make a will
If you did not have a will before, you need one now.
Absent proper legal documents that clarify your wishes in the event you should die or become incapacitated, the courts would be left to decide what they feel is in your child’s best interest.
Blayney said parents should name a legal guardian for each of their children, someone they trust to raise their child and make decisions about their health, schooling and future.
They should also designate a trustee to distribute their estate to their child and any other beneficiaries according to their wishes, said Blayney. (Learn more: Will and estate planning basics)
“Your guardian and trustee could be the same person, but if the guardian you select is not good with money, you would want to select someone else as the trustee,” she said. “Many couples find this to be a hard decision because the mother may want her family to raise the child and the father may want his, but the real danger is not having anyone named.”
Take care of you
As you budget for baby, do not forget to put yourself (and your marriage) on the list of priorities.
New moms have a habit of ignoring their needs, which, over time, compromises their emotional health and ability to be present for their child, said Lauren Disner, a family therapist in Portland, Oregon. If the relationship with their spouse or partner suffers, it can also erode their long-term financial stability.
“I work with a lot of new moms and quite often they are so focused on planning their calendar, and building an emergency fund and saving for college that they forget about the things that are of value to them,” she said.
Invest the time, energy and resources to cultivate your support network, or “village.”
“Some people suggest that when you become a wife or mother you give up your ‘me time,’ but I really feel that is a negative social discourse that is a disservice to moms,” said Disner, a mother of four. “You need to make connections with others so you can be more energized with your spouse and children.”
Keep those date nights with your spouse, hit the gym, and join a moms group, where you can share the joys and challenges of motherhood with others in the same life phase.
“There is a lot of stress associated with becoming a new parent so anything you can do to bring some laughter and light heartedness is super helpful to your emotional well-being,” said Disner.
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This story was originally published in May, 2016. It has been updated.
1 USDA, “The Cost of Raising a Child,” Feb. 18, 2020.
2 USDA, "Expenditures on Children by Families, 2015".