6 Financial Planning Tips for New Parents

For most new parents, focusing on the big picture isn't easy. You're sleep-deprived, juggling naps and feeding schedules, and excited about the new little person in your life. But milestones are on the horizon, and you'll want to prepare for them while you keep your own finances on track.

Here are six tips for new parents:

Adequate health insurance is crucial, but you'll also want to consider life and disability insurance as well.

Life insurance can help protect your growing family by making sure that financial resources are available to them if you're no longer there, while also providing peace of mind for your partner and loved ones while you're alive. The payout from a policy could potentially cover things you'd like your survivors to have, such as a paid-off mortgage or school tuition.

Disability insurance can be a major help if one or both parents become unable to work due to severe illness or injury. While you may have employer-provided disability insurance, make sure that it will be enough to cover essential expenses like your mortgage, debt, childcare, and household expenses for a reasonable length of time. You may want to consider supplementing your existing coverage with an individual policy or using an individual policy instead to provide more customized coverage for your needs. While you shop around, keep in mind that some policies may pay benefits only if you can't perform any work at all, rather than being unable to do the specific type of work you currently do.

Having a child raises the stakes for "rainy day" planning. You'll want to be sure you can keep your household running smoothly in the event of job loss, illness, or a large, unexpected expense. Having an emergency fund can help. We recommend keeping at least three to six months' worth of essential living expenses readily available for emergencies. This money doesn't have to be in a single account but can be spread between interest-bearing checking or money market accounts, certificates of deposit, short-term U.S. Treasuries, or other liquid investments.

For many working parents, childcare can be as expensive as a second car payment or a mortgage payment. Tax breaks can help—at least a little bit. One key benefit to look into first is the Child Tax Credit, which is worth up to $2,200 per qualifying child. If you have little or no federal income tax liability, you may also qualify for the Additional Child Tax Credit, which can provide up to $1,700 per qualifying child depending on your income. To be eligible for the Additional Child Tax Credit, you must have at least $2,500 in earned income.

In addition to the Child Tax Credit, the Child and Dependent Care Credit can cover up to 50% of eligible childcare expenses—up to $3,000 in costs for one child or up to $6,000 for two or more—depending on your income, if you meet certain criteria. However, the maximum credit is $1,500 for one child and $3,000 for two.¹

A dependent care flexible spending account (DCFSA) is another possibility. This is an employer-sponsored program that allows you to set aside up to $7,000 per year pre-tax for qualified childcare expenses for couples filing jointly with one or more dependents. You typically enroll in or renew your election in a DCFSA through your employer during your Open Enrollment period each year, but certain changes in status for "qualifying events" during the year—like having a baby—allow you to make changes. Your human resources department or benefits administrator can tell you when employees in your organization can enroll in a DCFSA and help you get started.

You can use a DCFSA to pay for eligible pre-K childcare expenses tax-free, including nursery school, preschool, or similar programs below the level of kindergarten. Expenses to attend kindergarten or a higher grade aren't eligible FSA expenses, but expenses for before- or after-school care of a child in kindergarten or a higher grade up to age 13 are eligible. The care provider just can't be your spouse or another dependent child.

Generally speaking, high-income families will benefit more from a DCFSA than from the Child and Dependent Care Credit (you can't use both). A potential drawback is that the IRS requires money contributed to a DCFSA to be spent during the plan year (or a grace period extension). If the money isn't used, it's forfeited. Check with a tax advisor to see what can work for your situation or review for more information.

By the time a child born today packs their bags for college, four years of tuition and fees (including room and board) could potentially cost about $313,000 at a public university (in-state resident). But the earlier you begin saving, the better off you'll be. For example, if you begin contributing $500 per month for college savings at birth, assuming a 6% rate of return, your savings fund could total about $199,000 by the time your child reaches college. But if you postpone saving until your child is in 4th grade, your potential savings fund would only grow to about $64,000.²

And as you begin saving for college, remember that there are a few different account types available, with different limits, investment options, and tax considerations.

If you must choose between saving for a child's college and saving for your own retirement, choose retirement. Your child will likely have more than one way to pay for college—including scholarships, loans, work, and grants—but you can't make up lost retirement savings. Aim to save at least 10-15% of your pre-tax income—or more if you delayed savings beyond your 20s.

One of the things that a will does is allow you to indicate who you would like to serve as guardian for your child if something happens and you're not there. Have a conversation with an attorney to make sure other parts of your estate plan are in order, including powers of attorney for financial and health care decisions and up-to-date beneficiary designations. Your attorney can help you determine if setting up a trust makes sense for your situation and goals.