Having Your First Child

Becoming a parent reshapes your financial plan not because your existing investments were wrong, but because you have a dependent who relies on you, and your financial arrangements must protect that dependency.

Key takeaways

• Update your will and designate guardians before or immediately after your child is born; without a will, courts decide who raises your child and manages their inheritance.
• Review and likely increase life insurance to replace your income if you pass away; many parents with young children need $500,000 to $2 million in coverage.
• Open a tax-advantaged college savings account (529 plan, JISA, or equivalent) early; even modest monthly contributions grow substantially over 18 years.
• Check that your estate plan names a custodian or trustee to manage your child's inheritance if you die; this person is not necessarily the same as the guardian.
• Consider adding a disability rider to your life insurance; loss of income from disability is more likely than death in your working years.

The three critical documents

When you learn you are expecting, or immediately after your child is born, three documents become urgent: your will, your life insurance policy, and your emergency contact list.

Will: A will specifies who you want to raise your child if you die (the guardian), who will manage your estate (the executor), and who will manage any money left to your child (the trustee or custodian). Without a will, a court decides these things, potentially appointing people you would not have chosen. The will also specifies where your estate is divided: does your spouse get everything, or does your child get a share? Does your estate go to your spouse for life, then to your child, or does your spouse manage everything?

You do not need a fancy lawyer to write a simple will. Many people use online services (LegalZoom, Nolo, Rocket Lawyer, or your state's bar association) to draft a basic will for $50 to $300. If your estate is complex—you own a business, you have significant assets, or you have children from multiple relationships—hire an attorney. The cost is $1,000 to $5,000, but the clarity is worth it.

Life insurance: If your child depends on your income to survive, life insurance is not optional—it is a primary financial obligation. Life insurance replaces your income if you die. The formula is simple: how much annual income does your child need until they are 18? If you earn $100,000 per year and your spouse will need that income to maintain your current lifestyle while raising a child alone, you might need $100,000 times 20 years, or $2 million, in coverage.

Most young parents with modest means are best served by term life insurance: a 20-year or 30-year term policy that costs $30 to $100 per month and provides $500,000 to $2 million in coverage. Whole life insurance is more expensive and often unnecessary for a parent in their 30s or 40s. Term insurance is straightforward: if you die during the term, your beneficiary receives the payout; if you don't, nothing happens. When the term ends, you reassess.

Emergency contact list: Who should raise your child if you and your spouse both die? Who has power of attorney if you are incapacitated? Who should access your bank accounts to pay bills? Keep a simple list (not a legal document, just a list) with names, phone numbers, and account information, stored somewhere safe that your spouse knows about. A safe deposit box, a password manager shared with your spouse, or a document given to a trusted family member.

Life insurance amount: a practical formula

Many websites offer insurance calculators that produce absurdly high numbers (10 times your income, 15 times your income). This is because they are calculating for a scenario where your spouse never works and relies entirely on investment returns. That is not the scenario you need to plan for.

Here is a simpler formula:

1. How much annual income does your household need to maintain its current standard of living? Let's say $120,000.
2. How much of that will your spouse earn after you are gone, if they return to work or increase their hours? Let's say $60,000.
3. The gap is $60,000 per year.
4. For how many years do you need to cover that gap? If your child is a newborn, you might say 18 years until they are independent (though likely your spouse will work part of that time and reduce the gap).
5. That is $60,000 times 18, or $1,080,000. Round to $1 million.

Add a buffer for unexpected expenses, college, or a few years of mortgage payoff. Most young parents arrive at $750,000 to $2 million.

You can also subtract assets: if you have $500,000 in investments, that might substitute for $25,000 per year in income (using a 5% withdrawal rate). So you might reduce the insurance amount from $1 million to $875,000.

This formula is rough, but it gives you a number to work with. A term life insurance policy on a healthy 35-year-old for $1 million over 30 years typically costs $30 to $50 per month. That is affordable insurance against a catastrophic loss.

Who is the beneficiary?

Your life insurance policy names a beneficiary—the person or entity that receives the payout if you die. Do not make it "the estate." Instead, name a specific person: typically, your spouse, or if you have minor children, a trust.

If you name your spouse directly, the money goes to them immediately, and they have full control. This is fine if you trust your spouse to manage the money responsibly. If you have concerns, you can use a trust: the insurance proceeds go into a trust, and a trustee (perhaps a family member or your spouse, but with instructions from you) manages the money for your child's benefit.

The same logic applies to retirement accounts and taxable brokerage accounts: each one should have a beneficiary designation. Review these once a year, especially after a major life event like a child's birth or a divorce.

College savings: starting early

You do not have to decide where to college-save the day your child is born. But you should decide in the year after birth, because time is your greatest asset in saving for something 18 years away.

There are several tax-advantaged accounts for education savings:

• 529 plans (in the United States): tax-free growth if used for qualified education expenses. You can contribute up to $235,000 (as of 2024) per child in a plan, and many plans allow you to front-load five years of contributions at once.
• JISA / LISA (in the UK): tax-free or government-matched savings for children.
• RRSP / RESP (in Canada): Registered Education Savings Plans with government matching grants.
• Taxable account: You can simply save in a regular account, though you miss the tax advantages.

If you are a U.S. parent, a 529 plan is usually the best choice. Contributions are made with after-tax dollars (no federal deduction), but earnings grow tax-free, and withdrawals are tax-free if used for education. You can even roll 529 funds into a Roth IRA under recent rules, providing flexibility.

The value of starting early: if you save $200 per month starting at your child's birth, earning 6% annually, you will have $60,000 by the time they are 18. If you start at age 10, you will have only $20,000. That $40,000 difference is pure compounding.

The allocation for education

A newborn has an 18-year time horizon until college, so you can afford to take some risk. Many parents of very young children use a 70/30 (stock/bond) or 80/20 allocation in their 529 plan, and gradually shift to more conservative as the child approaches college age.

By age 12, with six years until college, a 50/50 allocation is more common. By age 15, many 529 plans shift to 30/70 or more conservative. Some plans offer target-date portfolios: you specify the expected college start year, and the plan automatically rebalances toward less volatility each year.

The point is this: do not invest college savings in bonds from the start, because the money will not be needed for 18 years. And do not keep them 100% in stocks at age 17, because a market crash six months before college is a real risk. A gradual glide path makes sense.

Updating your investment policy statement

When you become a parent, revisit your household investment policy statement (from the marriage article). Your goals have changed: you now have a dependent child, a potential college bill, and a longer list of heirs. Your time horizon might be longer (you are now saving for two people: retirement for yourself, and education for your child). Your risk tolerance might be different: some parents are more conservative when they have dependents; others take more risk, knowing they have 18 years.

Make these updates explicit in your IPS. If you have $50,000 in investments and now you want to allocate $500 per month to college savings, where does that money come from? Your monthly contribution? Rebalancing proceeds? A bonus? Deciding this in advance prevents ad hoc choices.

The coordination with other accounts

Your 529 plan is not your only savings tool. You should also review:

• Custodial UTMA/UGMA accounts: Older mechanism for saving for a child, now less common than 529 plans because of less favorable tax treatment (the child pays tax once they reach age 24, and gains can be subject to "kiddie tax" rules). Avoid these if possible.
• Roth IRA for the child: If your child has earned income (from a summer job, for example), you can open a Roth IRA for them and contribute up to their earned income. This grows tax-free and can be used for education or retirement; it is a powerful tool for a teenager with a part-time job.
• Tax-loss harvesting in your own accounts: If you have taxable brokerage accounts with built-in gains, you can harvest losses to offset other gains. The cash from that tax benefit could go toward 529 funding.

How it flows

Next

As your child grows from infant to preschooler to school-age, the college savings bucket becomes more substantial. When they are around age 5 or 6, your household should revisit how college savings fits into your overall allocation. The next article addresses college savings in more depth and how to think about the college bucket when you have multiple competing financial goals.

Related concepts

• College Savings as New Bucket