If you’re planning to have children soon or you’re already expecting, congratulations! After the celebration, it can be easy to become overwhelmed with questions. In 2025, the average annual cost of raising a child under five in the U.S. is over $27,000 per year. Children bring drastic changes to your life—including your finances. With numbers like that, it’s important to put a plan in place and prepare for what’s on the way.
How to budget for a baby:
Some people love it, some hate it, but budgeting for a baby is essential for navigating the major life change that expecting parents will soon experience—especially if this is your first child. It’s important to know where to start.
When planning finances for a new baby, first consider the big-picture items. Is your house or apartment a good fit for a child? Is it large enough to accommodate a growing family? Is it in a kid-friendly neighborhood? What kind of renovations do you need to make room for the baby? Do you need to upgrade your vehicle? Trust me, trying to put a car seat into a two-door hatchback gets old fast.
Another major decision is whether both parents will continue working once the baby comes, or whether Mom or Dad will stay home. If one parent stays home, will it be for a year or two, or permanently? Learn more about your company’s maternity leave benefits thoroughly. Benefits can vary widely by employer and state. Ask your HR representative if Dad will get paid time off to help get everything situated. Understanding these benefits will have a significant impact on your new post-baby budget.
How much to budget for a new baby
Once you’ve pondered some of the big decisions, create a list of expenses you anticipate will come with the baby. First, start a list of big-ticket items you only plan to purchase once. Here are some things to consider when financially planning for a baby:
- Delivery costs – review your health insurance benefits and try to select doctors and hospitals in your network, so you’re not surprised with a large, unexpected bill. Even if your doctor and hospital are in-network, you can still be responsible for a large portion of the bill, so be prepared.
- Crib/bassinette/changing station (and lots more baby furniture)
- Car seat/stroller
- Baby gates/child-proofing supplies
Now that you have a good sense of your initial one-time expenses, you can start a list of the things you’ll be buying regularly, like:
- Formula/food
- Diapers
- Clothing
- Toys
- Childcare – Usually the largest recurring expense.
When it comes to deciding how much to budget for a new baby, keep in mind that you may spend a lot less on yourselves when the baby comes to help offset some of these new costs. Date nights and events out with friends tend to take a backseat when your focus shifts to caring for a newborn.
Planning finances for a new baby means your attention will be focused on other areas once the baby arrives. It’s important to add your child to your health insurance plan, and as a contingent beneficiary on life insurance, 401(k)s, or IRAs, and other accounts you hold with a beneficiary. If you have any legal documents in place, now is a good time to set a reminder to include your new child.
While short-term needs and responsibilities are the most important to take care of right off the bat, it’s not too early to start planning for your child’s education. The diaper changing, Paw Patrol-watching days might feel like they’ll never end, but they go by quicker than you think. Try not to put off saving for their future, because that future will be here before you know it. Having to take out student loans can hold your child back when they set out on their own…possibly even forcing them to move back home after school. The average person takes 20 years to pay off student loans.
Now let’s look at some options for saving for your child’s education.
What makes the Coverdell Education Savings Account unique
Coverdell Education Savings Account (ESA): This custodial account’s sole purpose is paying for qualified education expenses. Anyone who falls under certain income limits can contribute to the account on behalf of your child; however, the maximum annual contribution to all Coverdell ESA accounts is $2,000 and contributions aren’t deductible. The main benefit of this type of account is Coverdell Education Savings Account withdrawal rules. Distributions for qualified education expenses are tax-free. Qualified expenses can be anywhere from K-12 to college and beyond.
Coverdell Education Savings Account vs. 529
Section 529 Plan: The 529 plan is a tax-advantaged savings plan designed to pay for qualified education expenses. Unlike a Coverdell ESA, there’s no annual contribution limit to a 529 plan. However, contributions are considered gifts for federal tax purposes. Therefore, individuals can contribute up to $19,000 per year (2026) before it counts against their lifetime estate gift exemption set by the IRS. There’s also an option for lump sum gifting. Up to 5 years’ worth of contributions can be made at one time, provided the contributor does not make any additional gifts to the beneficiary over the next five years. Contributions may be tax-deductible on your state income tax return.
There are two main types of 529 plans: a pre-paid tuition plan and an education savings plan.
A pre-paid tuition plan lets you buy college credits at today’s rates in anticipation that tuition will continue to increase. Your rate of return is the inflation rate of tuition, and the growth on your investment is tax-free. Not every state offers this type of plan, so you should check to see if it’s an option for you. Be aware that it only applies to certain in-state schools. The student must be a resident of the state where the pre-paid tuition plan was set up. These plans cover tuition only, not living expenses like room & board; they don’t cover K-12 expenses.
A 529 Education Savings Plan is what most people think of when they hear the term 529 plan, and these are the most popular college savings tools. They offer a variety of investment options for contributions. Typically, you can choose a more aggressive allocation initially, allowing for a greater return on investment while college is many years away. As they approach college-age, you can change the investment allocations to focus more on asset protection. As long as the expenses are qualified, distributions are tax-free. Qualified expenses include tuition, room & board and mandatory fees. Recent legislation allows 529 plans to be used for K-12 expenses up to $20,000/year starting in the 2026 tax year.
Financially planning for a baby isn’t just about expenses.
You’re entitled to some positive financial benefits once you enter the realm of parenthood. Along with understanding your employer’s maternity leave policy, see if they offer a Dependent Care Flexible Spending Account (FSA). This is a great benefit if both parents will be working and daycare is required. A Dependent Care FSA is funded through pre-tax withholding from your paycheck. In 2026, the maximum annual contribution is 7,500 per household or $3,750 per individual, including if married and filing taxes separately7. However, the funds in these accounts are normally use-it-or- lose-it by the end of the benefit period, so be sure to contribute only what you plan to spend on childcare in a given year. For example, if your baby is born in August and you’re able to start funding a Dependent Care FSA immediately, then $7,500 is likely too much for year one if your work also offers 12 weeks of paid maternity leave. This scenario would require the full $7,500 to be used in less than two months if your plan expires at the end of the calendar year.
Arguably the biggest financial benefit to having children is the child tax credit, which helps families with reduce their tax liability. The Child Tax Credit is worth up to $2,200 per qualifying child.8
The bottom line: A financial advisor can help you understand how to financially plan for a baby.
Whether you’re excited, anxious, or straight-up terrified about becoming a parent, a financial advisor can help guide you through the many financial decisions you’ll face in the years ahead—from budgeting for a new baby to planning for your child’s future.
Sources:
- Cost of Raising a Child in Each U.S. State – 2025
- Coverdell Education Savings Accounts
- An Introduction to 529 Plans
- Prepaid Tuition Plans
- Education Savings Plan
- Dependent Care FSA
- Message Board – FSAFEDS
- Child Tax Credit | Internal Revenue Service
Updated 3/12/2026
Allegheny Financial Group is an SEC Registered Investment Advisor. SEC registration does not imply a level of skill or ability. The information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. The information included herein was obtained from sources which we believe reliable. The views in this article are being provided for informational purposes only. It does not represent any specific investment or tax advice and is not intended to be an offer of sale of any kind. Past performance is not a guarantee of future results.
Allegheny Financial Group | January 2022
