5 Financial Mistakes New Parents Make (And How to Avoid Them)

Becoming a parent is one of life's most joyful experiences—and one of the most financially transformative. Suddenly, you're not just planning for yourself anymore. You're responsible for another human being's wellbeing, education, and future.

In my years working with growing families, I've seen the same financial mistakes made over and over again by well-intentioned new parents. The good news? They're all preventable. Let's walk through the five most common pitfalls and, more importantly, how to avoid them.

Mistake #1: Waiting Too Long to Get Life Insurance

**The Problem:** Many new parents assume they're too young to worry about life insurance. Or they think about it but put it off until "things settle down." Meanwhile, your growing family is completely unprotected.

**Why It Matters:** Here's the hard truth: if something happened to you tomorrow, could your family maintain their current lifestyle? Pay the mortgage? Fund your child's education? For most families, the answer is no—not without adequate life insurance.

**The Solution:** Get term life insurance as soon as possible after your child is born. Don't wait. Term life insurance is affordable (often $20-50 per month for substantial coverage) and gets more expensive as you age. Plus, you're healthier now than you'll likely be in 10 years.

A good rule of thumb: aim for 10-12 times your annual income in coverage. So if you earn $75,000 per year, you should have $750,000 to $900,000 in coverage. This sounds like a lot, but remember—this needs to replace your income for potentially 20+ years.

**Action Step:** Get quotes from at least three carriers this week. Don't overthink it. A good term life policy in place today is better than a "perfect" policy you never get around to purchasing.

Mistake #2: Neglecting Disability Insurance

**The Problem:** Most parents think about life insurance but completely overlook disability insurance. Yet you're far more likely to become disabled during your working years than you are to die.

**Why It Matters:** If you can't work due to illness or injury, how will you pay your bills? Your family still needs to eat, keep the lights on, and pay the mortgage—even if you're not earning an income.

**The Solution:** Check if your employer offers group disability insurance. Many do, and it's often free or low-cost. However, group coverage typically only replaces 60% of your income and may not be portable if you change jobs.

Consider supplementing with an individual disability insurance policy that covers an additional 20-30% of your income. Yes, it costs money. But it's significantly cheaper than trying to support your family on zero income.

**Action Step:** Review your benefits package at work. If you don't have disability coverage (or only have minimal coverage), request quotes for individual disability insurance from a fee-only advisor or independent insurance broker.

Mistake #3: Not Building an Emergency Fund

**The Problem:** Between diapers, daycare, and baby gear, there's not much left over at the end of the month. Building an emergency fund feels impossible, so many new parents skip it entirely.

**Why It Matters:** Murphy's Law loves new parents. The car breaks down the same week the washing machine dies and your kid needs to go to urgent care. Without an emergency fund, these normal life events become financial crises.

**The Solution:** Start small. Seriously—even $500 in savings can be the difference between handling a surprise expense or going into debt.

Your ultimate goal should be 3-6 months of essential expenses saved in a high-yield savings account. But getting there takes time. Here's a realistic approach:

1. **First goal:** Save $1,000 as quickly as possible 2. **Second goal:** Build to one month of expenses 3. **Third goal:** Reach 3-6 months of expenses

**Action Step:** Open a high-yield savings account separate from your checking account (online banks often offer the best rates). Set up an automatic transfer of even $50 per paycheck. You won't miss it, and you'll be surprised how quickly it adds up.

Mistake #4: Forgetting to Update Beneficiaries

**The Problem:** You filled out those beneficiary forms when you first got your 401(k) or life insurance. That was before you got married, before you had kids. But updating them? That's been on the "eventually" list for years.

**Why It Matters:** Beneficiary designations override your will. Let that sink in. It doesn't matter what your will says—if your ex-girlfriend is still listed as the beneficiary on your $500,000 life insurance policy, that's who gets the money.

**The Solution:** Review and update all beneficiary designations NOW. Here's what you need to check:

- Life insurance policies (work and personal) - 401(k) and other retirement accounts - IRA accounts - Bank and brokerage accounts - Any other accounts with a "payable on death" designation

For most parents, your spouse should be the primary beneficiary, and your children should be contingent beneficiaries. However, naming minor children as direct beneficiaries can create complications. Consider setting up a trust and naming the trust as beneficiary instead.

**Action Step:** Make a list of every financial account you own. Contact each institution and update your beneficiaries this month.

Mistake #5: Not Having Proper Estate Documents

**The Problem:** "Estate planning is for rich people." This is one of the most dangerous misconceptions out there. If you have kids, you need estate planning documents—regardless of your net worth.

**Why It Matters:** If something happens to both parents and you don't have a will, the court will decide who raises your children. The court will also decide who manages any money you leave behind and how it's distributed. Do you really want a judge who's never met your family making these decisions?

**The Solution:** At minimum, every parent needs:

1. **A will:** Specifies who will be your children's guardian and how your assets should be distributed 2. **A healthcare power of attorney:** Designates someone to make medical decisions if you can't 3. **A financial power of attorney:** Allows someone to manage your finances if you're incapacitated 4. **A living will:** States your wishes for end-of-life medical care

Depending on your situation, you might also benefit from a revocable living trust, especially if you have significant assets or own real estate.

**Action Step:** If you don't have these documents, make them a priority. You can use online legal services for basic documents (starting around $100-300), but for anything complex, consult with an estate planning attorney. Yes, it costs money. But compare that to the cost of your family navigating the court system without these documents.

Putting It All Together

Here's the thing about these mistakes: they're not complicated to fix. They're just easy to put off.

The best time to get your financial house in order was before your baby was born. The second-best time is right now.

You don't have to tackle everything at once. Start with one action step this week: - Get life insurance quotes - Open an emergency fund - Update a beneficiary designation - Schedule a consultation with an estate planning attorney

Pick one. Do it this week. Then move on to the next one.

Your future self—and your family—will thank you.

Need Help Getting Started?

If you're feeling overwhelmed by where to start, we can help. We specialize in working with growing families to create comprehensive financial plans that protect what matters most.

[Schedule a free discovery call](/book) to discuss your family's unique situation.

Michelle Schee is a CERTIFIED FINANCIAL PLANNER™ professional serving families in Texas. This article is for informational purposes only and should not be considered personalized financial advice.