Planning to have a baby? Here's where to allocate your funds.
Parenthood is magical, memorable, and extremely expensive, with the national average annual cost of child care alone being $11,582, which is about 10% of the median income for a married couple with children, according to a 2023 analysis by the nonprofit Child Care Aware of America.
To prepare for your baby's biggest expenses, you can make the following financial moves, but you cannot lower the costs of diapers and daycare.
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High-yield savings account
Swapping your standard savings account with a high-yield savings account can help you earn more interest on your cash, which can lead to more money for baby-related expenses.
High-yield savings accounts provide above-average returns without monthly fees or minimum requirements, making them similar to traditional savings accounts. They allow easy access to your money and can be set up for automation. However, be aware that some accounts may have monthly withdrawal or transfer limits.
We recommend the online-only Ally Bank Savings Account for new parents because it provides a strong APY on all balances and a savings bucket tool to allocate savings for various goals, such as childbirth costs and child care expenses.
Consider investing in a premium budgeting app, such as Monarch Money, to better manage your finances. By linking your high-yield savings account and other bank and investment accounts to the app, you can get a clear picture of your cash flow and collaborate with your partner to create a family budget.
Dependent Care FSA (DCFSA)
A dependent care FSA (DCFSA) is a tax-advantaged account offered by some employers to offset child care expenses such as daycare, babysitting, and nursery or preschool. You contribute pre-tax money throughout the year and use those funds to reimburse your child care expenses. However, you must use the funds before the year ends or lose them. The annual contribution limit is $5,000 per household or $2,500 per spouse for married couples filing separately. There is also a $2,500 limit for those earning $155,000 or more.
Enrolling in a DSFSA is a finance nerd tip for parents: this qualifying life event allows you to modify your employer-provided benefits outside the open enrollment period.
529 college savings plan
Saving for your child's future education should be a top priority, even if college isn't at the forefront of your mind when you have a newborn at home.
State-sponsored education savings accounts, known as 529s, allow parents, relatives, or friends to make after-tax contributions. The earnings on these accounts grow tax-free and withdrawals are tax-free when used for qualified college expenses, such as tuition, room and board, books, or technology equipment. Additionally, 529 funds can be used for private elementary or high school tuition, up to $10,000 per year per student, depending on the state's plan. You do not have to live in the state of the 529 plan you choose, but many plans, like my529 (Utah) and NY 529 Direct Plan, offer state tax benefits to their residents.
If the child you opened the 529 plan for doesn't need the funds, you can transfer the plan to another child, a grandchild, or use it for your own qualified educational needs. Additionally, you can roll over unused 529 funds to the same beneficiary's Roth IRA, tax-free and penalty-free, up to $35,000. However, rules may vary by state.
A finance expert suggests considering a 529 college savings credit card, which automatically deposits cash-back rewards from everyday spending into a designated 529 plan. Two of the best options are listed below.
Life insurance policy
Consider purchasing life insurance to protect your family financially in the event of your death, as adding a new member to the family is a good reason to start thinking about it.
One of the largest issuers of life insurance policies in the U.S., Northwestern Mutual® offers a range of policies including term, whole, universal, and variable universal life insurance, along with high financial strength and customer satisfaction ratings.
A finance expert suggests that while your employer's life insurance plan may be sufficient, purchasing a separate, standalone policy can offer higher coverage limits and more customization options.
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