How to financially prepare for a baby

Create or adjust your budget

Having a clear understanding of your current financial situation can help you understand how much you can set aside for the children in your family. You can do this by creating a budget that tracks all your income and expenses.

First, list any sources of current income, like your salary, side jobs, or investment income. Next, list current expenses, like housing, food, transportation, and—if you already have children—child care. Once you have complete lists of your income and expenses, compare the two. If you have money remaining, you can allocate some of it to savings and investments. If you don't, start looking for ways to cut back on your expenses or increase your income, including checking your subscriptions, limiting how much you dine out, starting a side business, and selling things online you don't need.

Build an emergency fund

An emergency fund serves as a financial safety net to cover unexpected expenses that may arise. A common rule of thumb is to aim to save 3–6 months' worth of living expenses for emergencies. However, we suggest planning separately for spending and income shocks.² Spending shocks can include unexpected health care costs, home repairs, or other unwelcome expenses. For these shocks, we recommend saving the lesser of $2,000 or half a month's expenses in a highly liquid account. On the other hand, income shocks involve the unexpected loss or reduction of employment income. Saving for these shocks should be tailored to your household's situation in a manner that balances investment risk and return. For example, dual-income households can have fewer reserves than single-income households, but one with children may need a larger reserve.

In addition, by separating your emergency fund from your other accounts, you can help prevent the temptation to use it outside of its intended purpose. Consider choosing a savings account alternative—like the Vanguard Cash Plus Account—that offers access to a competitive interest rate to help maximize the growth of your emergency fund over time.³

Since life circumstances can change, regularly review your emergency fund and adjust as necessary. It can help to have a consolidated view of your investments so you can keep track of how much you're putting toward different goals. To save consistently, you may also find it beneficial to set up automatic purchases into your emergency fund. 

Save for education

While your child or grandchild is still young, it may be difficult to imagine them growing up and going to college. But by starting to save for their education now, you can help them reduce their student loan debt.

There are many ways to save for education. One of them is to open a 529 college savings plan. A 529 plan is a tax-advantaged savings account that allows you to contribute money for your child's or grandchild's future education expenses. You can contribute to an account tax-free, and those contributions can be state tax deductible depending on where you live. Withdrawals of contributions and earnings for qualified expenses may be tax-free too.⁴

When choosing a 529 plan, it's important to research and compare different plans to find the one with the lowest fees and most suitable investment options. Once you've chosen a plan, you can set up automatic contributions from your bank account to make saving easier. Relatives and friends can also contribute to a 529 plan as a gift, which can be a great way to help your child or grandchild save for college.

Revisit your financial goals

Your priorities and financial situation may change with the addition of a child to the family. Revisiting your goals can help you assess where to save and whether your investments are in line with where you hope to be in the future. Here's how you can help yourself stay on track:

Reevaluate your retirement and nonretirement goals

Since caring for a child can be expensive, you may have less to contribute toward your retirement accounts. Consider increasing your retirement contributions before you welcome a new child into the family to make up for potential financial shortfalls in the future. Remember that the earlier you start, the more time your money has to grow. That's because what you contribute now could add up over time through compounding—when your investment earnings generate their own earnings.

You may have other financial goals, like buying a house, saving for a vacation, or paying off debt. Adjust your budget and savings plan to accommodate your child's needs while still working toward your long-term financial aspirations. While there are foundational goals you should meet first—like covering your basic retirement needs by the time you can begin to collect Social Security—you may need to reprioritize aspirational goals like early retirement or a vacation home.

It's normal for your financial goals and circumstances to evolve as your child grows. Make it a habit to regularly review your financial plan and adjust it as needed. Consider automating some of your financial planning so you can focus on other priorities while still working toward your goals. Stay informed about changes in tax laws, education costs, and other factors that could affect your financial situation. Talk to an attorney about your estate plan and regularly review and update the beneficiaries listed on your financial accounts—like bank accounts, retirement plans, and life insurance policies.

If you're looking for an easy way to plan, track, and get guidance on your retirement, nonretirement, and education savings goals, consider Vanguard Digital Advisor®—an all-digital advice solution that can factor in various goals to help optimize your financial plan.