When Life Happens – Having Children or What to Expect Financially When You’re Expecting

This is a game changer… financially and in every other way, children will fundamentally change your life. 

There tend to be two ways children may arrive: you can either plan for them with a long-term view, or they can take you by surprise, leaving you with just a few all-too-short months to prepare.

Or, for those reading who may have small children already, maybe there’s never really been a “plan” and you’re starting to feel there should be.

Having children will affect your finances, taxes and estate plans in some very obvious ways and in some not-so-obvious ways—and, good news, you can plan for most of it!

Spending Plan

On the most basic level, parenthood will incur more costs than you face without children, so you need to look at a major overhaul of your spending plan.  

When you have a baby coming, you’re focused on the fun stuff and getting your family and friends involved:  gender reveal party, getting the nursery ready, picking out a name… all that stuff that makes Facebook so fun!

However, in those days approaching the kid’s first appearance, you should take some time to think through your budget. It’s gonna change.

For sure, expenses will go up—and, if one parent is going to stay home either permanently or for a while on maternity or paternity leave, your income will go down.  This means your budget is moving in two directions that result in less bottom-line income.

I’m not suggesting having children is a “budget” issue, far from it: I am suggesting that knowing how an additional family member affects the budget is a necessary thing.

Emergency Fund

On a similar note, you want to look closely at your rainy-day fund, i.e. your emergency money that you’ve set aside. As the expense side of your budget increases, your emergency fund should increase correspondingly. That just makes sense, especially when you’re welcoming a whole new person to your family.

What you’ll also need to keep in mind:  if one parent is going to either stop working, take leave for a while, or work less, then you need to look at how the emergency fund is calculated. Generally, the emergency fund should represent about six months of living expenses; however, if one spouse becomes (even for a time) the sole earner, then this fund should be increased to 9 to 12 months.

Life Insurance

For many couples, pre-children era, life insurance may not have been a high priority.  Now is the time to give it some thought. There are basically two kinds of life insurance you’d consider:  term or whole. Generally, for a young couple, it’s going to make the most sense to look closely at a term life policy.

Term life is a type of insurance on which you make a monthly premium payment to insure someone’s life.  Think of it as protection for your family in the event that one parent dies. The common trend is to purchase the insurance on the life of the one earning the most money, but it really makes sense to consider a policy on both parents.  If a tragedy occurred that resulted in the loss of either parent, there would very likely be extraordinary financial burdens faced by the family.

Some folks contemplate term life insurance and feel that it is essentially throwing your money away; you have nothing at the end.  Term life insurance is not an investment and should not be thought of in that light. But, in many families, it does often make the most sense simply because it is less costly than some form of whole life policy. 

Although the case can also be made for some type of whole life policy on the parents, but now you’re now sidestepping a bit into the area of investing… combining the bare-bones protection of your family with some type of investment component. When you purchase a whole life policy, you generally pay into it for a period of time (usually several years) and at some point it is “paid up”—you own it at that point.  You are able to borrow from it or even cash it in. It has the traditional “death benefit,” but also allows you to tap into the policy during life. Forms of whole life insurance may be used in some families as part of a long-term, holistic, integrated financial plan.

You should consider some life insurance coverage, but it’s an area where you absolutely need a trusted advisor to help you look at the ins-and-outs of what’s available and assist in making a calculated decision on how much to purchase and exactly what type to purchase.

Disability Insurance

Another type of insurance to seriously consider at this time—if you do not already have it in place, as we regularly suggest—is disability insurance.  This is an area where many families are simply not covered properly.

Disability insurance is exactly what it sounds like:  it will pay you if you become disabled.

Disability insurance policies are extremely wide-ranging and notoriously difficult to read.  You may get the feeling that the policies are written more to protect the insurance company from ever having to pay, than to protect the one purchasing the insurance; many do. That’s why it’s absolutely imperative to have someone well-versed in these types of policies to explain them and answer your questions.

Statistically, a young person is far more likely to become disabled than to die early.  This type of insurance can be a lifesaver to a family in the event of life taking a very disastrous turn.

Estate Documents

Couples who do not have wills in place are simply not being prudent—and that’s putting it mildly.

Once kids are in the picture, the three basic estate documents are essential.  Those documents are:

When you have children, one of the first tasks on your to-do list should be to have your wills revised.  You want very clear directions about what is to happen to your children in the event of a worst-case scenario, like the loss of both parents.

None of these documents should be handled in a DIY manner; you should engage the services of an attorney who specializes in this area.  If you never use an attorney, this is one area where you should make an exception and hire one.

In this same vein, you’ll want to review all beneficiary designations in your retirement accounts, life insurance, and HSAs.  Prior to children coming into the picture, those designations could have reflected what you would have wanted to happen in the case of both spouses losing their lives—and they likely do not refer to your surviving children. By not revising the beneficiary designations, you could inadvertently disinherit your children.

Tax Credit

For couples whose combined income is less than about $400,000, they will receive a child tax credit on their tax return.  The income limits and amount of such credits might change from year to year, so just be aware that it exists.

If you are eligible for the child tax credit, then you might want to revise the withholding on your paycheck in order to increase your take-home pay from each check.  On the other hand, you may leave it as is and just keep in mind that, when tax time comes, you could have a larger refund that you normally do.

If both parents are going to continue working, then you will likely incur childcare expenses.  This can be quite expensive.

If you are going to face some childcare expenses, first check with your employer to see if it is possible to have pre-tax funds withheld from your check that you can use to pay for childcare.  If your employer has a plan like this, in 2021 you may have up to $10,500 per year set aside out of your check on a pre-tax basis.

If you don’t have a childcare plan at your work, but you’re incurring childcare expenses, you may be eligible for a child care credit.  This is different from the child tax credit.

In order to be eligible for the child care credit, you must report on your tax return the name, address and social security (or employer identification) number of the person or company providing the care.  Keep this in mind throughout the year: if you hire neighborhood babysitters, you must be able to provide this information on your tax return in order to receive the credit.

Some families hire a live-in childcare provider: an au pair, AKA a nanny.  It is absolutely critical that you understand the implications of this.  This childcare provider is your employee, and must be treated as such.  There is no wiggle room on this from an IRS perspective.  This is the famous “Nanny Tax.”

The full implications of this are beyond the scope of this article—you really need to engage the services and direction of a tax advisor who understands this area of tax law when determining your tax liability.  For a little more insight now, read “The ‘Nanny Tax’ Must Be Paid for More More Than Just Nannies” on our blog. 


We’ve been saving that one huge topic that’s generally on every parent’s mind:  education.

We all probably know from current events and news cycles that education costs are rising and are expected to continue rising.  The cost of an education can already be astronomical.

This is another topic beyond the scope of this article, but never fear: we’ll fully address it in an upcoming article.

Suffice it to say at this time, early planning is encouraged!  Don’t rush into any one plan without thoroughly thinking it through.  Consulting with someone well-versed in this area remains the best course of action and is going to be time and money well-spent.  This is such a deep and complex topic that we treat it as a separate component in an integrated, holistic financial plan.

In between setting up your baby registry and birthing classes, don’t forget to make an appointment with your trusted financial advisor; if you need someone to fill that role, we’re ready and waiting to help you. Just give us a call at 214-761-8304. 

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From the desk of David Freeze, CPA/PFS.