12 Tips To Help New Parents Avoid Money Mistakes

“Don’t raise kids to have more than you had. Raise them to be more than you were.”



Having a newborn baby is a time to rejoice. However, the reality of raising a child can be daunting. As parents, we underestimate the costs. Even those with the best money habits may get carried away by a new family member. We justify our spending more quickly as we seek safety, comfort, and fulfillment. Costs will mount if we don’t put some brakes in place in advance.

We have tips to help new parents avoid money mistakes. They need to be financially ready to cope with their new responsibilities. Parents should increase their efforts to save and invest, spend within their means, take a fresh look at workplace benefits, and utilize tax credits to prevent financial blunders.

12 Tips To Dodge Potential Financial Mistakes


1. Be Financially Ready With An Emergency Fund

Every household should have an emergency fund with six months of savings set aside for unforeseen events. It is no different when we are expanding our family, and Arguably, we need this money cushion even more so.

Raising a child in the first year costs $13,186 on average, and these costs are before hospital costs which health insurance may cover. A LendEDU survey found that parents budgeted $9,371 for that first year, saving roughly that amount. However, this falls short of the actual amount, and diapers costs, among other items, are miscalculated.

Why Do We Underestimate?

Lack of experience blindsides us significantly when we are raising our newborns. Ask any new homeowner, and they will share significant home costs that were a surprise, and that’s why we need an emergency fund.

I recall being surprised by the many purchases we had to make in a rush for our baby. By moving up our delivery date a couple of weeks, we couldn’t do comparison shopping. As older parents, we felt more like helpless newbies. Excited at our upcoming birth, we acted like children in a candy store.

My Bad

One of my worst purchases (ever!) was handmade Egyptian cotton linens for the crib for $1,000. I was suckered into it by a salesperson at the now-defunct Bellini’s. How ridiculous a thing to buy for a newborn baby!

We were fortunate to have ample savings, having worked for several years. But I always wonder, what if we were younger or didn’t have a cushion to spend.

2. Don’t Overspend For Your Newborn’s Needs

We want the best for our children constantly. However, we need spending limits or go broke before they go to college. Be informed about spending early and learn to budget. We need good financial habits when planning for our new child. Not everything has to be the best, the latest, or the most expensive. Emphasize safety above all else. Plan out what is essential to get initially, borrow from family or friends for some items and consider thrift shops.

Find Acceptable Price Ranges For Needed Items

Initially, you need diapers, a place to sleep (crib or bassinet), and a car seat. I felt pretty overwhelmed with having to buy unfamiliar items like:


Cribs and mattresses

 Diapers (cloth is cheaper versus disposable)

 A Diaper bag

 A Changing table 

 Baby monitors (audio or video)

 Car seats

 Glider rocking chair and ottoman

Baby swing

 Bath tub

You probably don’t need the Louis Vuitton monogram mini Lin Diaper Bag, the world’s most expensive diaper bag at $2,200, or the other most expensive newborn items on this list.

What You May Need

Luxury is not a necessity. Some of your costs are one-time, like babyproofing your home, and other expenses will vary significantly by where you live. For example, if you are both working and want to hire a caregiver, the average fees can range from $400 to $1000+ per week. Additionally, you may need someone for the evenings, and their rates go from $15-$25 per hour.

The US National average for daycare is $612 per month. However, it will be well over $1,000 per month in major cities like Boston or New York. Well visits to baby doctors without health insurance average $95 per visit, according to WebMD. Costs may be significantly higher in New York and other urban areas.

You can bulk up on baby food and diapers. However, your baby may reject some brands or tastes.

3. Avoid Lifestyle Inflation

As your child gets older and makes friends, you may feel pressed to shop for more stylish clothing and sport a luxury stroller. Remember, young kids will size out of these things fairly quickly. Avoid throwing lavish birthday parties even though you want to celebrate each year. Their friends will have fun no matter where you have the party. Of course, we do it to impress the other parents but resist the temptation.

Speaking of lavish waste, we once received a beautiful box delivered to our doorman. It was from a friend of our son’s with an invitation to a 5th birthday party that read like a wedding invitation. My jaw nearly dropped, and I worried about what kind of party my son would want. The funny thing is I recall Tyler having the worst time at this birthday party.

It may start with birthday parties, but we soon may think about bigger homes and fancy cars. Keep your spending in check. 

4. Saving Early For College

Set up a 529 savings account as soon as you have a social security number for your child. Start saving early for college to benefit from tax advantages and compounding growth. You are not limited to the plan offered in your home state. There are many investment choices to suit anyone. Don’t get so overwhelmed at the options that you end up not activating the account.

See our recent post here to read more about 529 Savings Plans and alternative savings devices for college. Start with a feasible amount and continue to add to this account. Tell your child’s aunts, uncles, and grandparents that you prefer a cash present over another toy or outfit. Make them aware of your savings account.

There are several ways to save early besides the 529 Plan, although that is preferable. Below, we discuss life insurance for babies and infants with a savings component that may appeal to you.

5. Keep Up Your Retirement Savings

While saving for your child’s tuition is essential, do not sacrifice your retirement savings. Many parents do that, but it is not a good idea. As much you may hate your child borrowing for college tuition, taking a loan our for retirement is a worse outcome. It is better to reduce your spending on unnecessary items to save more than face withdrawal of your retirement funds or borrowing against it.

6. How To Talk To Your Children About Money

Our children take their cues from us in several different ways. Start to teach your kids early about money at an age-appropriate time. They may be better able to soak in how to treat and respect money values.

We should be good role models in helping them learn how to save money. Teach them to know the difference between wants versus needs. Don’t give in to impulsive purchases when they get upset. Instead, delay gratification on purchases. Set a good example of investing now for future growth.

Both parents should be on the same page in this regard. My husband and I often argue from opposite sides, and he can’t seem to say no to the kids, so I play the heavy parent. However, my kids just ask me less for things and go around me and get what they want from Dad. I think I just admitted that my kids manipulated us. (They do!).

 7. Your Employee Benefits Need A Fresh Look

Once you have a child, it is an excellent time to take a fresh look at your employee benefits package. What may not have jumped out when you first started working there may be more important for your growing family now.

According to Harvard Business Review, when deciding between a higher paying job or a lower-paying job but better benefits, health insurance (88%), more flexible hours (88%), and work-from-home options (80%) scored the highest in their survey.

Childcare Are Among Our Largest Expenses

The cost of child care is high for those who are working and need support. According to Care.com’s 2015 Cost of Care Survey, 28% of families pay more than $20,000 annually for this. Childcare is the most significant expense for many families and may even surpass college tuition and housing costs for some families.

Among the employee benefits that can lift some working parents’ burden is dependent care assistance, child care financial support through tuition assistance and scholarships, long-term care resources, and referral. Back-up child care is also crucial when the caregiver is ill, and Some companies have onsite child care centers with nice facilities.

8. Flexible Spending Account (FSA)

If you have a health plan through your job, you can use a flexible spending account to pay for co-payments, deductibles, some prescription and non-prescription drugs, and other out-of-pocket health care costs. The FSA is a savings account with tax advantages.

This account allows employees to contribute a portion of their pre-tax earnings to pay for qualified expenses.  Employees have limits of $2,750 per year per employer in 2021. If your spouse has an FSA at their employer, you can put in an additional $2,750 per year. It is a “use it or lose” plan. Your FSA does not earn interest.

Another type of FSA is a dependent-care flexible spending account used for childcare expenses for children up to age 12. The maximum dependent care FSA contribution went up to $5,000 per household.

Making use of these accounts may provide you with beneficial cost savings.

9. Health Savings Account (HSA)

The HSA is similar to an FSA as it provides tax advantages, and HSAs are associated with high deductible health insurance plans that the self-employed often use. Like the FSA, you can contribute your pretax earnings, making your contributions tax-free. Here, the contribution limit in 2022 will be  $3,650 for an individual or $7,300 for family coverage.

Unlike the “use it or lose it” feature of FSA, you may roll over the unused contribution to the next year for the HSA. Your account earns interest, and if you leave the job, you may take the account with you.

10. Life Insurance Is Essential For Growing Families

To protect your growing family, you need to have life insurance coverage. You may have a starter plan from your employer, but generally, the amount is insufficient, especially with young children. If the family’s primary earner passes, your life insurance should cover your fixed living costs as college tuition and other child care needs depending on their ages.

There are other types of insurance families need to consider, including disability insurance. We cover several insurance types here.

Should You Have Coverage For Your Newborn Or Infant?

Generally, you don’t need to buy life insurance for your baby. Hopefully, they are healthy, and they don’t have earnings streams to protect.

Among life insurance providers, Gerber Life Grow-Up Plan has some attractive features:

  1. Parents, grandparents, or permanent guardians may purchase this plan. It is whole life insurance of $5,000-$50,000 of coverage. They may apply for their newborns or infants when they are 14 days to 14 years.
  2. As a whole life insurance policy, a cash value portion accumulates as you pay premiums. According to Gerber’s plan, coverage doubles during the child’s 18th year at no extra cost, and you can buy additional coverage as needed.
  3. It guarantees insurability and locks in an affordable premium for a child at a young age. For families with a high risk of medical issues, this may be an essential benefit.
  4. A whole life insurance policy provides death benefits, plus you build cash value in a tax-deferred manner. Individuals can use this savings component for college tuition, and they may surrender the policy for its cash value.

True, the death benefits are a bit macabre and hopefully not needed for children.

The Criticisms:

I don’t believe life insurance for babies is needed, and I have read some criticism of Gerber’s plan. Despite having a longstanding good brand name for baby foods, review the details carefully.  Look into the fee structure for additional insurance coverage, its strict cancellation policy, and how slow the cash surrender value builds.

Although this plan has some appeal, I prefer the 529 Savings plan for college tuition, and it is debatable if you need life insurance for babies.

11. Several Tax Benefits For Your Children

Our children may be helpful when it comes time to pay taxes. There are several other tax credits that you can use if you have a child. Check with your tax professional for possible changes associated with the 2017 Tax Law.

Expanded Child Tax Credit

You may be able to reduce your tax bill up to $3,000 for each of your qualifying dependent children for children over the age of six to 17 years in 2021. The amount of $3,600 is for children under the age of six. The credit is intended to offset the cost of raising children. These expanded tax credits are for those families earning up to $150,000 if married and filing jointly or $75,000 for individuals. 

Parents with higher qualifying incomes will receive $2,000 0r less (i.e., married couples who make under $400,000 or single persons under $200,000).

Child And Dependent Care Tax Credit

Paying for childcare and dependent care can be pretty expensive. The Child and Dependent Care credit  has been increased and worth up to 50% of $8,000 for a maximum of two children.

This tax credit may help you defray childcare costs for dependent children under the age of 13 years. For dependents, other than children, the IRS requires that they must have lived in your home more than half the year.

Adoption Tax Credit

There is a federal adoption tax credit of up to $14,440 per child for finalized adoptions in 2021. This credit is not refundable but can be carried forward for five years. You can use this credit for qualifying expenses you paid to adopt a child. These expenses include adoption fees, attorney fees, court costs, traveling expenses (including lodging and meals while away from home), and other expenses related to the adoption. You would need to have supporting documents that you received. 

American Opportunity Credit

Tax credits are for qualified education expenses for an eligible student for the first four years of higher education. The maximum amount you can claim is $2,500 per eligible student per year in 2021. The amount of credit is 100% of the first $2,000 of qualified education expenses you paid for that student. However, if the credit pays down your taxes to zero, you can have 40% of the remaining credit (up to $1,000) refunded to you.

There are income limits to claim full credit with modified adjusted gross income pegged at $180,000 or less for a married couple filing jointly (or $90,000 for a single filer). The American Opportunity Credit is preferable. However, if you don’t qualify, you can try for the Lifetime Learning Credit.

Student Loan Interest Tax Deduction

You may be able to claim the Student Loan Interest Deduction for interest paid on a qualified student loan, even if you choose to claim a student tax credit. If you decide to claim the deduction, you could reduce your taxable income by up to $2,500 of the student loan interest you have paid for your dependent child in 2021. You don’t need to itemize your deductions to claim this deduction.

To qualify for this deduction, see respective modified adjusted gross income limits.

12. Estate Planning

The best time to think about your plan is when you don’t have a compelling reason to do so. It is a great time to think of your family’s best interests when you are raising children.

Set Up Your Designated Beneficiaries

By creating your estate plan, you will have control over your asset distribution to your loved ones during your lifetime. Beneficiary designations enable the transfer of a significant portion of your assets to your intended heirs. This will help you to avoid often painful and lengthy probate court procedures.

When setting up your beneficiaries, think carefully about identifying for your children as there may be complications for you to be aware of, and we discuss here.

Creating a will, possibly a trust, and advance directive documents are essential estate planning components.Read  our guide to basic estate planning in 6 steps.

Make sure to consider your digital assets as part of your estate. We have addressed why you need to make an inventory of digital assets here.  


Final Thoughts

Planning for a newborn is essential. It is an exciting time in your life, and it is easy to get overwhelmed. We have all been there and made mistakes, especially financial ones. Hopefully, this will help you avoid some more apparent errors by organizing well ahead of time.

Thank you for reading! Please visit The Cents of Money for more articles of interest.

Hearty congratulations to you and your expanding family. What steps have you taken to prepare for your child’s experiences? What mistakes did you encounter that you may want to share with us?

We look forward to hearing from you!



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