Financial dos and don’ts for new parents

Morgan Stanley Wealth Management


Summary: Congratulations on your beautiful baby. You’ve got your nursery and diaper bag ready to go—but what about your finances?

Person holding pairs of baby socks

As a new parent, you’ll receive no shortage of advice about how to prepare and care for your little one. While you ultimately know what’s best for your family, you may find comfort in learning some best practices that have helped other parents on their journey.

This can be especially true when it comes to the financial aspects of welcoming and raising a child. Let’s consider some common dos and don’ts to help you navigate this important time.

Do keep sufficient emergency savings

It’s often suggested that you keep at least three to six months’ worth of essential living expenses saved in an emergency fund.1 When surprise expenses inevitably arise, this money can act as cushion to help you continue meeting your needs and potentially avoid taking on debt.

A new baby at home usually means increased monthly expenses, so the target for your emergency savings may need to increase as well. You might even want to consider building in some padding above and beyond the six-month amount. If you’re able to, aim to save a little extra each month to gradually work toward your goal.

Don’t underestimate expenses

We all know that raising kids is expensive, but many of us would be hard-pressed to put a dollar amount on the experience. The Brookings Institute estimates that it will take upward of $300,000, accounting for inflation, to raise a child born in 2021 to age 17.2

Of course, every family is different—lifestyle, geography, and plenty of other factors influence your costs. Not to mention, certain phases may entail more expenses than others. For instance, cribs, car seats, and seemingly endless packages of diapers may inflate the early costs for a first child.

At each stage, review your budget and adjust as necessary to ensure you can comfortably cover new and upcoming expenses while staying on track toward your own financial goals.

Don’t get caught up in all the new “stuff”

For every baby product on the market, there are many more that end up collecting dust. Ultimately, what you do and don’t decide to buy is personal—but consider how fast kids grow and how quickly their interests change. It’s likely you could end up with piles of clothes and toys that never make it into the regular rotation.

Not to mention, certain items are often given as gifts or available in great condition second-hand, so not everything you get needs to be new with tags. Money saved on these non-essential items can go a long way toward meaningful experiences and longer-term goals, like saving for education.

Do make childcare decisions early

For many households, childcare represents one of the most significant considerations—and expenses—involved in welcoming a new baby. Will one parent stay at home? Will you hire a nanny? Will your child go to daycare?

The national average rate for a nanny was $694 per week in 2021, and $715 for two kids.3 There can also be an opportunity cost for those who choose to exit the workforce to become a full-time parent. The sooner you decide on a plan for your child’s care, the sooner you can budget for your chosen option.

Do make a plan for college expenses

As the cost of college has ballooned, many parents have realized the value of starting to save for higher education even before their child has learned their ABCs. The sooner you start putting money aside, the longer it has to potentially grow. If you utilize an education savings account, compounding interest and investment returns on your money have the potential to really add up over time. Here are three popular options:

  • 529 Education Savings PlanA tax-advantaged account that lets you invest for future education expenses. Earnings are exempt from federal taxes if funds are used for qualifying education expenses.4
  • Coverdell Education Savings Account (ESA)An account in which invested funds grow tax-free, which can be used to cover a variety of education-related expenses, including tuition, room and board, books and other costs, such as computers, calculators, and even Wi-Fi.4
  • UGMA/UTMA (Uniform Gift to Minors Act/Uniform Transfer to Minors Act) Accounts: Custodial accounts you can use to hold investable assets or cash that you’d like to reserve for your child. The money is an irrevocable gift that you control as the custodian until your minor child reaches adulthood. Once that minor is of age, they can use the money for whatever they desire—funds are not limited to qualified expenses.4

Planning for the cost of college is a major undertaking, so you may wish to speak with a financial professional about the various strategies available. 

The bottom line

Welcoming a child is an exciting milestone. Every parent, child, and family is unique and should make decisions that work for their circumstances and finances. Knowing some of these major money considerations early on can help you formulate the plan that’s best for you.

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