A mother, father, grandmother, and two small children sitting on a couch and spending time together.
Financial wellness

How to financially prepare for a baby

12 minute read
  •  
July 11, 2024
Financial wellness
Personal finance
Article
Page
Building an emergency fund
529 Education savings plans
Budgeting

Whether you're a new or seasoned parent or grandparent, a little one's arrival is an exciting time. And as with any big life change, it's natural to feel mixed emotions. In addition to the physical, mental, and emotional energy that raising a child takes, it's expensive—supporting a child to age 17 could cost more than $310,000.1 This checklist can help you prepare financially for your children or grandchildren so you can focus more on marking their milestones and spending quality time with them.

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.

Remember your why

No matter where you are in the process of preparing for a child, it's never too late to review your budget, revisit your financial goals, and adjust your savings as necessary. By doing this, you aren't just setting yourself up for success—you're giving your child or grandchild a solid financial foundation for their future too.

Digital Advisor is an all-digital advice solution that can help you financially prepare for your newest family member.

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1The Brookings Institution. 2022. Estimate based on a child born in 2015 to a middle-class family with two children.

2In case of emergency, break glass: Managing household liquidity (PDF)

3The Cash Plus bank sweep program annual percentage yield (APY) will vary and may change at any time.

4Earnings on nonqualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. The availability of tax or other benefits may be contingent on meeting other requirements.

All investing is subject to risk, including possible loss of principal.

The Vanguard Cash Plus Account is a brokerage account offered by Vanguard Brokerage Services, a division of Vanguard Marketing Corporation, member FINRA and SIPC. Under the Sweep Program, Eligible Balances swept to Program Banks are not securities: They are not covered by SIPC but are eligible for FDIC insurance, subject to applicable limits. Money market funds held in the account are not guaranteed or insured by the FDIC but are securities eligible for SIPC coverage. See the Vanguard Bank Sweep Products Terms of Use (PDF) and Program Bank list (PDF) for more information.

For more information about any 529 college savings plan, contact the plan provider to obtain a Program Description, which includes investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing. If you are not a taxpayer of the state offering the plan, consider before investing whether your or the designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program. Vanguard Marketing Corporation serves as distributor for some 529 plans.

Enrollments in Vanguard Digital Advisor require at least $3,000 in each Vanguard Brokerage Account. For each Vanguard Brokerage Account you wish to enroll, the entire balance must be in certain allowable investment types (based on eligibility screening by Digital Advisor at the time of enrollment) and/or the brokerage account's settlement fund. We'll typically invest your assets in a portfolio of Vanguard ETFs, all of which are commission-free through a Vanguard Brokerage Account managed by Digital Advisor. Vanguard Brokerage Accounts are offered through and maintained by Vanguard Marketing Corporation ("VMC"), a registered broker-dealer and member FINRA and SIPC. If you decide to manage your investments on your own, you can buy and sell Vanguard ETF Shares through Vanguard Brokerage Services or another broker (which may charge commissions).

Vanguard Digital Advisor's services are provided by Vanguard Advisers, Inc. ("VAI"), a federally registered investment advisor. VAI is a subsidiary of The Vanguard Group, Inc. ("VGI") and an affiliate of VMC. Neither VGI, VAI, nor its affiliates guarantee profits or protection from losses.