Congratulations on your beautiful baby. You’ve got your nursery and diaper bag ready to go—but what about your finances?
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 the 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 go over some common dos and don’ts to help you navigate this important time.
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 serves as a 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—and you might even consider building in some padding above and beyond the six-month amount. If you’re able, aim to save a little extra each month to gradually work towards your goal.
We all know that raising kids is expensive, but many of us would be hard-pressed to put a dollar amount on the experience. Researchers estimate that it take $237,482, to raise a child born through age 18.2
Of course, every family is different—lifestyle, geography, how you formed your family 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. One study pegged expenses for new parents in the first 12 months after having a baby at nearly $16,000.1
At each stage, review your budget and make adjustments as necessary to ensure you can comfortably cover new and upcoming expenses while staying on track towards your own financial goals.
For every baby essential on the market, there are many more items that end up collecting dust. Ultimately, what you do and don’t decide to buy is personal—but considering how fast kids grow and how quickly their interests change, 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 towards meaningful experiences and longer-term goals, like saving for education.
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 is $766 per week, and $321 per week for a childcare center3—and The average cost of child care for two children is higher than the median cost of rent.2
But there are also opportunity costs for those who choose to exit the workforce to care for their children full time. The sooner you decide on a plan for your child’s care, the sooner you can budget for your chosen option.
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 Plan: A tax-advantaged account that lets you invest for future education expenses. Earnings are exempt from federal taxes as long as 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.
Welcoming a child is an exciting milestone that will change your life — and your finances — forever. Every parent, child and family is unique and should make the decisions that work for them and their finances. Knowing some of these major money considerations early on can help you formulate the plan that’s best for you.
Footnotes
1 Morgan Stanley, “Six Steps to Creating an Emergency Fund.” Available at https://www.morganstanley.com/articles/emergency-funds. Accessed September 11, 2024.
2 https://www.lendingtree.com/debt-consolidation/raising-a-child-study/
3 https://www.care.com/c/how-much-does-child-care-cost/
4 Morgan Stanley, “The Playbook: Your Guide to Life and Money.” Accessed at May 6, 2022.
Disclosures
This article does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this article may not be appropriate for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.
Asset allocation does not assure a profit or protect against loss in declining financial markets.
If an account owner or the beneficiary resides in or pays income taxes to a state that offers its own 529 college savings or pre-paid tuition plan (an “In-State Plan”), that state may offer state or local tax benefits. These tax benefits may include deductible contributions, deferral of taxes on earnings and/or tax-free withdrawals. In addition, some states waive or discount fees or offer other benefits for state residents or taxpayers who participate in the In-State Plan. An account owner may be denied any or all state or local tax benefits or expense reductions by investing in another state’s plan (an “Out-of-State Plan”). In addition, an account owner’s state or locality may seek to recover the value of tax benefits (by assessing income or penalty taxes) should an account owner rollover or transfer assets from an In-State Plan to an Out-of-State Plan. While state and local tax consequences and plan expenses are not the only factors to consider when investing in a 529 Plan, they are important to an account owner’s investment return and should be taken into account when selecting a 529 plan.
Tax laws are complex and are subject to change. This information is based upon current tax rules in effect at the time this was written. Morgan Stanley Smith Barney LLC and its Financial Advisors do not provide tax or legal advice. Individuals should always check with their tax or legal advisor before engaging in any transaction involving 529 Plans, Education Savings Accounts and other tax-advantaged investments.
Investments in a 529 Plan are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so an individual may lose money. Investors should review a Program Disclosure Statement, which contains more information on investment options, risks factors, fees and expenses and possible tax consequences. Investors should read the Program Disclosure Statement carefully before investing.
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