Family finances: Tips and advice for new parents (2024)

A new baby can drastically alter your family finances. On average, a child costs two-parent families in the U.S. between $12,350 and $13,900 every year, according to the U.S. Department of Agriculture. (That number is in 2015 dollars, the latest data available. Also, costs vary depending on how many children you have, whether or not you're a single parent, where you live, and your annual income.)

You can use our Baby Costs Calculator to get an estimate of how much you'll spend in your baby's first year on expenses like childcare, food, diapers, and gear. Then read on for advice on the most important ways to financially prepare for your newest addition.

Understand your family's new tax status

After your baby is born, your bank account may get some relief at tax time. Once you have a child, you can claim them as your dependent on your taxes, and you'll qualify for the Child Tax Credit.

If your baby was born in 2022, you'll be able to claim them as a dependent on the taxes you file in 2023 – and you'll need their valid social security number (SSN) to do so. The easiest way to get your child their SSN is to apply for it when you're filling out their birth certificate paperwork at the hospital before you head home. The state agency that issues birth certificates will share your newborn's information with the Social Security Administration, and they'll mail you the card. How much of a tax credit you'll receive for your dependent(s) varies, depending on your annual household income and a number of other factors. Still, many families find it helpful.

Some families may also qualify for a child and dependent care tax credit, which provides a credit towards what you paid for childcare (such as a daycare or a nanny) while you're working or looking for employment. The exact credit depends on how much money you make, and you'll need to be able to provide proof of how much you paid for childcare. Most daycare centers will provide tax information at the end of the year, but if you send your baby to a home daycare or hire a private nanny, make sure you keep good track of paperwork and receipts.

If you adopted a child, you're able to deduct some adoption-related expenses, such as court costs, attorney fees, and travel expenses. If you're able to hire one, an accountant or tax preparer can help you sort through all of this when you're filing your taxes.

Make sure to add your baby to your health insurance policy

It's easy to add your new baby to your health insurance plan. If you have a partner and you're both insured through your employers, you'll need to decide whose health plan to use for your baby. Do your research and choose the most cost-efficient option or the one that provides the best coverage for what you're looking for.

Most health insurance plans will cover your baby's expenses for up to two weeks as part of the birth parent's coverage. To continue coverage, you must officially add your baby to your plan within 30 to 60 days of birth or adoption (the time period can vary, so check with your insurer to be certain). To fill out the enrollment forms, you'll need your child's birth certificate and SSN card. Each plan has a different set of rules and policies for babies, so check with your policy holder or your HR representative for the details and for help adding your baby to the policy.

If you have an individual health insurance plan or you're insured under the federal or state Marketplace, you have 60 days to add your baby to your plan. Having a baby is considered a "qualifying event," which means you don't have to wait for an open enrollment period to sign them up for insurance. Plus, if there's a different coverage option that works better for your new family than your existing plan, you can swap plans during this special enrollment period.

If you don't have health insurance, there are options: You can enroll in the MarketplaceOpens a new window either online or by phone, and then add your baby to your policy. You may also qualify for MedicaidOpens a new window, which is determined by your modified adjusted gross income.

If you don't meet the income requirements for Medicaid, you may be able to get coverage for your baby through the Children's Health Insurance Program (CHIP). Each state offers different benefits under CHIP, but all of them provide comprehensive coverage including well visits, vaccinations, and prescriptions for children.

Buy life insurance and disability insurance

It's a very good idea to have life insuranceOpens a new window once you become a parent. Thinking about life insurance isn't easy: It forces you to face your own mortality and the thought of leaving loved ones behind. But as difficult as it is, it's important to ensure that your family will be cared for financially should you die before your children are grown and independent.

Life insurance is typically offered as part of your employer's benefits package. It's known as group life insurance, and is either included in your monthly benefits price or is available to purchase for an extra fee. You can also buy an independent life insurance policy through an insurance broker in addition to or instead of the one your employer offers.

If you're unemployed, you can still apply for an individual life insurance policy. You may find it's harder to obtain one since you don't have an income to buy into the policies and companies may consider that risky, but try not to get discouraged. Some companies may be willing to work with your circ*mstances or help you find a policy that has a shorter term or less coverage.

How much life insurance you'll need depends on various factors, but the rule of thumb is to buy coverage for an amount that's five to ten times your annual salary. You'll pay this premium in monthly, semi-annually, quarterly, or annual increments over the course of however many years you choose. Types of life insurance include:

• Term life insurance, which lasts for a finite period of time. If you die while the policy is active, your family gets the amount for which you're insured. If you don't die before the policy expires, the insurance company doesn't give you any money. Term life insurance typically makes the most sense for young, middle-income families with children because it covers a set period, with affordable premiums.
• Whole life insurance. This more complicated option, also called cash-value insurance, offers both an insurance policy and an investment account. The premiums for this permanent insurance are typically higher than those for term insurance, but a portion of those funds goes into a tax-deferred savings account. The rates are fixed: You pay the same premium at 60 that you did at the age at which you bought it. When you die, your spouse or family collects the death benefit. But you can also choose to cash out the policy when you're older or retired and access the tax-deferred savings.

It's also important to consider long-term disability insurance (which is different from the short-term disability insurance you may get during maternity leave), which pays you a portion of your salary if you're disabled or unable to perform your job duties.

Unless you can obtain it through your employer, who will pay a portion of your premium, long-term disability insurance is expensive – about 1 to 3 percent of your annual income. The cost depends on several factors, including the policy you choose, your job, your health status, your age, and whether or not you smoke. With disability insurance, you insure yourself for a monthly payment that you determine – typically, about 60 percent of your earnings. Then, if you become disabled, you'll receive those monthly payments for a set period of time.

Create a budget for your family finances

Budgeting is an essential component to smart financial planning, especially for families. Taking stock of all your expenses and bills helps you understand where your money is going and how much you can afford to spend on other purchases.

There are many budgeting plans and approaches: One, for example, is the "50/20/30 rule," which means you spend 50 percent of what you make on needs, use 30 percent for wants, and put 20 percent into savings. Not every budget approach is feasible for everyone, but establishing and sticking to some sort of plan is a wise idea.

To come up with a budget plan, calculate your household income (including any money you make from side hustles or independent contractor gigs), calculate your average monthly expenses, and go from there. There are various strategies you can use to stay on budget:

• Use a budgeting app like You Need a Budget or Mint, which helps you track finances digitally
• Make a spreadsheet where you track all the money that comes in and goes out. You can download a free template online or create your own.

If you have any leftover money at the end of the month, start an emergency savings fund. This is money that's set aside for unexpected expenses or financial emergencies, such as job loss, unexpected medical bills, car repairs, or necessary home improvements. This cushion can give you peace of mind when financial surprises and setbacks pop up. (If you're using the 50/20/30 rule, this money is accounted for in the 20 percent savings bucket.)

Financial experts recommend saving enough money to cover three to six months of your living expenses. This can take some time, and can seem daunting, but it's okay to start slow. Set a goal for how much you think you can realistically save each month. Set aside what you can, and that will eventually help you build healthy savings.

Make sure you have a will

A will is a legal document that specifies who will inherit your bank accounts, real estate, jewelry, cars, and other property after you die. Making a will is important for parents because it also designates your child's legal guardians. These are the people who would care for your child or children if you and your partner died. Without a will, you're leaving these major life decisions to the court.

There are two ways to make a will: You can work with a lawyer who specializes in estate planning, or find a template or software program online that guides you through doing it yourself. Your will must explicitly state the beneficiaries for your assets, guardians for your children, exactly how your assets will be divided up and to whom, and who the executor of your will is (who'll be in charge of the document in case of your death).

Laws for wills vary by state – for instance, some require you notarize it or have a witness sign it. Before you start the process, check with your state's government office (or your lawyer) to learn about any additional requirements or specifications.

Know the cost of childcare where you live

Childcare can be very expensive, and childcare costs can vary widely depending on where you live, how old your child is, and whether you need part-time or full-time care. Shop around and consider the costs of different types of care – daycare, home daycares, nannies, au pairs, and having a relative watch your child, if that's possible for your family.

There are pros and cons to each type of childcare. What's best for you will depend on your budget and what you're looking for in a caretaker; there's no one option that's "better" than any other. If you're part of a two-parent home, being a stay-at-home parent is an option too.

Sometimes, one parent staying at home can be less expensive than paying for childcare – look at your family's income and expenses and weigh them against the average cost of childcare in your area. As you consider your finances, think about expenses you can eliminate from your budget by not going to work, such as restaurant or take-out lunches, commuting costs, and a work-appropriate wardrobe (though this may not apply if you work from home).

There are other factors to consider before choosing to be a stay-at-home-parent, such as how it might affect your family dynamics, social life, mental health, career path, and future earnings.

Start a college savings plan

It's never too soon to start planning for your child's college education, which is why it's a good idea to consider putting money aside for it now, if you can afford to. One of the most popular ways to set up a college savings fund is by opening a 529 account, also known as a "qualified tuition plan" or program that allows you to subsidize college savings for your children.

A 529 is a tax-advantaged investment with no annual fees or premiums where all the money saved goes toward future education costs. The two types are a prepaid tuition plan, where you can purchase credits at participating universities, or an education savings plan, which can also be used at private elementary or high schools.

In most cases, you can fill out a 529 application online or at your bank, and set up automatic withdrawals from your bank account. The national average annual contribution for a 529 is $5,143, but how much money you put into your college savings account depends on what you can afford. There's no minimum amount that you have to contribute, and you can stop making contributions to your account at any time without penalty.

More advice for managing family finances

Raising kids is expensive, and managing your money once you become a parent can be a challenge. The estimated cost of raising a child from birth to age 17 in the U.S. is a mind-boggling $233,610 (and that's in 2015 dollars).

Keep in mind, though, that there's a lot of wiggle room in that estimate. The largest share of that cost is housing (26 to 33 percent of total expenses) – and you may not need to buy a house or invest in a bigger home after having kids. Also, expenses vary significantly depending on where you live and how much money you have. (Wealthy families spend more on their kids; less wealthy families spend less.)

Some of the biggest baby costs include diapers, formula, childcare, healthcare-related expenses, gear, clothes, food, and toys. These are all important basic needs – but there are ways to save on them. For example, if you're able to, breastfeed for as long as possible to cut down on formula costs; shop big-box stores and sales for diapers; swap childcare with friends or find a nanny share; create a baby registry to help offset costs of big-ticket baby items; make your own baby food; and ask for hand-me-downs and shop for used clothing, gear, and toys.

Read more:

• Used baby gear: What's safe, what's not
• The benefits of paid family leave