6 Best Things New Parents Should Do With Their Paychecks, According to Experts
Written by
Jordan Rosenfeld
Edited by
Molly Sullivan
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Becoming a new parent is an exhilarating and sometimes nerve-racking experience — and while children are adorable, they’re also expensive.
The additional costs of child-rearing can take a new family by surprise, and make it easy to overspend or rack up debt.
Experts explained the best things new parents should do with their paychecks to build a solid financial foundation for their families.
Track Your Spending To Free Up Dollars
A smart first step is to track spending for three months to identify room in your budget that you can shift from other expenses toward child-related expenses, according to Christopher Stroup, CFP and owner of Silicon Beach Financial.
“Shift discretionary dollars like travel or dining toward recurring baby costs, such as diapers, child care and healthcare,” he said.
It’s also important to build a flexible “baby buffer” into your monthly plan to absorb surprise expenses without derailing long-term goals like saving or investing, Stroup suggested.
Budget This Much for Child Expenses
You should expect to spend about 10% of your paycheck on baby-related expenses, excluding child care, Stroup said. “You will likely not need to spend that much, but by overpreparing, you’ll have a cushion for absorbing unexpected expenses,” Stroup said.
However, the one area where child-related expenses can break your budget is child care — child care costs can easily consume 25% of a paycheck and even more, according to Melanie Musson, a financial expert with InsuranceProviders.com. “You can figure out how much that’s going to cost before you even have a baby. Then, you’ll know how to prepare,” she said.
Aim To Save This Much
An ideal savings goal is at least 15% in 20% of your gross income, even in the baby years, Stroup said. However, if that feels out of reach, start with 10% and increase it annually.
“It’s best to prioritize emergency funds and retirement savings, then automate contributions so savings don’t fall victim to lifestyle creep or shifting monthly priorities,” Stroup said.
Also, don’t fall prey to the marketing traps of buying everything new and high-end, Musson stressed. “When you have a baby, you can ease into the financial impact. You can find gently used clothes and gear second-hand.”
Additionally, as babies grow, you can adjust your budget to accommodate their needs.
Take Advantage of HSAs and FSAs
Since children often add healthcare expenses, remember to enroll in benefits during open enrollment and review paycheck deductions to make sure you’re contributing strategically, Stroup urged. Health savings accounts (HSAs) offer triple tax advantages, flexible spending accounts (FSAs) can cover day care and medical costs, and the dependent care FSA can save thousands annually, especially when paired with the federal child tax credit.
Avoid Credit Cards, Adjust Withholding
It’s common for new parents to charge up a credit card during the year and then use their tax refund to pay it off, according to Kari Brummond, an accountant with TaxCure.com. However, doing this subjects you to a lot of unnecessary interest.
“Instead, consider adjusting your withholding so that your employer takes less money out of your check, and quit using credit cards,” Brummond said.
That will help you avoid the interest on credit cards and could save you hundreds of dollars per year. To adjust your withholding, give your employer a new W-4 form, making sure to note your new child and doing the extra calculations for your partner’s income if applicable.
Open a 529 College Savings Plan
The best time to start saving for your child’s college education is immediately. Musson suggested opening a 529 college savings plan, where earnings can grow tax-free. Down the road, if they don’t use the funds for education, they can roll the investment into an IRA (with some restrictions).
When students don’t have a college fund to draw from, they’re often forced to take out student loans, which impact decades of their adult lives, Musson said.
If You Transition To a Single Income
Sometimes dual-income households become single-income households with a new child, Musson said, which can make the transition into parenthood more challenging.
While you may get the benefit of more time, if one parent stays home with the child, you lose the advantages of two incomes, according to Chad Gammon, a CFPl and the owner of Custom Fit Financial.
“With single income, you might want to consider disability insurance or a larger emergency fund in case both parents are out of work,” he said.
The more prepared you can be financially for a new child, the more energy you can put into enjoying your family.
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