The Biggest Money Mistakes New Parents Make

Raising a child can be extremely rewarding—but it can take a toll financially. Parents can expect to pay between $16,227 and $18,262 a year raising a child born in 2023.

Creating a sound financial plan can help new parents avoid some potentially costly mistakes in the short and long term.

Mistake #1: Not Creating a New-Baby Budget

One of the most dangerous financial traps parents-to-be can fall into is underestimating the costs of having a baby. That includes the costs incurred before the birth, such as doctor visits and new-baby gear, the costs of the birth and delivery itself, and the expenses that come after, like diapers and baby essentials.

Budget planning for a baby can help create a realistic picture of what it costs to have and raise a child. At a minimum, a basic baby budget should include:

• Co-pays and doctor visits (both prenatal and post-natal)
• Estimated birth and delivery costs
• Baby gear, including clothes, furniture, car seats, etc.
• Childcare, if necessary
• Diapers, wipes, and other baby essentials
• Formula and bottle-feeding supplies, if applicable
• Breast pumps and milk storage bags, if applicable

It’s also important to consider how having a baby might affect household income. Two-income households might lose one of those incomes if a parent opts to stay home with the baby. For those parenting solo, having a baby might require a reconfiguration of your working hours or even a job change, either of which could result in smaller paychecks.

Mistake #2: Underestimating Childcare Costs

Different reasons can drive the decision to return to work following the birth of a child. Some parents cannot afford to lose a source of income while others may be motivated by an interest in continuing their careers. Regardless, this raises the question of who will care for their child during working hours.

There are different options, including daycare, hiring a nanny, or asking friends and family for help. Each one has its pros and cons—and its costs.

Underestimating the cost of childcare could be problematic when budgeting after the birth of a child. It could force parents to make tough decisions about their spending or even their capacity to return to work. Researching different childcare options and costs during pregnancy can help parents find a solution that’s workable and affordable.

Mistake #3: Upgrading Your Home

When growing a family, it’s natural to assume that a larger home is necessary. But upgrading your home could be a mistake if it means taking on a larger mortgage payment that ends up being burdensome for your budget.

Before shopping for a larger home, it’s important to consider your overall financial situation. If you’re paying down student loans or other debts on top of a mortgage, for instance, you may not have much wiggle room to increase your loan payment. Changes in income, either expected or unexpected, could also affect your ability to pay a larger mortgage.

If you’re renting, however, you might consider buying a home. This could make sense—if doing so would help you to save money on housing costs. You’d also need to have sufficient savings to cover your down payment and closing costs. Running the numbers with a mortgage affordability calculator can help you decide if the time is right to transition from renting to owning.

Mistake #4: Forgoing Available Tax Breaks

Having a child can offer some advantages at tax time for parents who are eligible to claim certain tax credits or deductions. Some of the tax benefits available to new parents include:

• Earned income tax credit: The earned income tax credit (EITC) is designed for low- and moderate-income families with one or more dependent children. The credit reduces the amount of tax owed on a dollar-for-dollar basis. Parents must be within IRS income guidelines to claim this credit.
• Child tax credit: The child tax credit is available to parents who have an eligible dependent child and meet annual household income guidelines. This credit also reduces your taxes on a dollar-for-dollar basis. You may be able to claim this credit even if you don’t normally file a tax return.
• Child and dependent care credit: The child and dependent care credit is intended for parents who pay a qualifying entity or individual for childcare so they can either work or look for work. You can claim expenses not only for daycare, but also for babysitters, day camps, and before- and after-school programs. For the 2025 tax year, the credit is worth $2,000 for each qualifying child, and the refundable portion is $1,700, provided your modified adjusted gross income (MAGI) is $400,000 or lower if you’re married and filing a joint return ($200,000 or lower for all other filers).

Mistake #5: Neglecting Long-Term Planning

Financial planning is an ongoing process but it can be easy to push certain goals to the back burner when a new baby arrives. It’s important, however, for new parents to keep an eye on the bigger picture while taking care of their child.

For instance, a comprehensive financial plan generally includes:

• Saving for retirement: New parents who have access to a 401(k) at work or an individual retirement account (IRA) may want to consider how they can continue contributing to those accounts if welcoming a baby means budgetary changes.
• Saving for emergencies: An emergency fund can help cover unexpected costs, such as car repairs or job loss. The most commonly used rule of thumb for emergency funds is to save three to six months’ worth of expenses, but new parents may consider increasing this amount, especially if only one parent plans to work.
• Saving for college: College is still years away when you have a newborn but it’s never too soon to start saving for it. Opening a 529 college savings account can allow parents to enjoy tax-deferred growth on the amounts they contribute.
• Life insurance: A life insurance policy can provide a death benefit to your loved ones should something happen to you. When a new baby comes along, it can be a good time for parents to consider whether their current coverage is adequate or shop for life insurance if they don’t have it yet.
• Estate planning: An estate plan can include basic elements, such as a will and life insurance policy, but it can also include a trust, power of attorney, and advance healthcare directive. These types of documents can help to ensure that your family and your assets are protected should something happen to you.

The Bottom Line

Planning for a new baby means buying the things you need and getting emotionally prepared—but there’s also a financial element to consider. Getting off to a good start financially means one less source of stress for new parents who may already feel harried by the demands of caring for a newborn. Reviewing your financial plan annually can help ensure that you’re staying on track with your goals as your family grows and moves through different life stages.