Families that need to shore up cash after an unplanned birth tend to rely more on liquid assets rather than on home equity, my recent study found.
I looked at the portfolio adjustments families make when expenses rise unexpectedly. Although I focused on unplanned births, the same logic applies to other financial shocks: medical events, major home repairs, childcare or eldercare costs.
In all these cases, the distinction is between liquid assets, such as checking and savings accounts, and home equity, what the home is worth minus what’s still owed on the mortgage. Home equity can be an important source of long-term wealth, but it’s not easy to turn into cash quickly.
In the paper “Financial Literacy, Shocks, and Portfolio Adjustments,” recently published in the Review of Economics of the Household, I studied how families cope with unplanned births.
Unplanned births create a sudden need for liquidity to cover new expenses (the total cost of raising a child is estimated to be around $300,000), while planned births give families time to adjust their finances.
To understand what changes when the timing is not under a family’s control, I compared families with unplanned births to similar families with planned births. I found that families with planned births increase the share of their wealth in home equity by 4.3 percentage points, often even before the baby is born. By contrast, families with unplanned births tend to increase the share of liquid assets by 3.1 percentage points to cover the higher expenses.
Planned Births Versus Unplanned Births
When a birth is planned, families often invest more in home equity—by becoming homeowners or moving to a larger house. Because the event is planned, they tend to make these changes earlier. In my analysis, families adjust their portfolios about two years before the baby is born.
The magnitude of the move toward housing also differs by household net worth. I analyzed families with low, middle, and high levels of wealth.
- Middle-wealth households adjust the most. They often have enough resources to increase their exposure to housing and are more likely to change the housing share of their wealth in response to a new child.
- Families with low wealth may want to increase their housing exposure but can’t, in part because of limited savings or down-payment constraints.
- Families with high net worth may already have the desired amount of exposure to home equity.
But when timing is not under a family’s control, the financial plan changes.
Unplanned births are more common among low- and middle-net worth families. In my analysis, about one in four births in these families are unplanned. When they have an unexpected birth, families often prioritize liquidity, delaying investments in housing and building cash reserves instead. However, not all families respond equally, and financial knowledge is a big reason.
How Financial Literacy Can Ease the Impact on Net Worth
One of the main findings of the paper is the importance of financial knowledge—and, in many cases, a financial advisor—in helping families navigate unexpected increases in expenses. Financially savvy households tend to make smaller shifts toward liquidity because they are better prepared and have clearer plans for how to respond. In that sense, they behave more like families facing a planned birth, even when the birth was unplanned.
This is a powerful result. Even when a family faces an unexpected event, being financially savvy or having someone who understands the financial plan adjustments can reduce the loss in financial well-being for families. My estimates suggest this reduction is at least 20%. I measured well-being in annual expenses, so if a family with low financial knowledge sees a loss of $7,000 due to an unforeseen event, a similar financially savvy family might see only a $5,600 loss.
Financial knowledge helps most when households have enough savings to act on it. This is why the advantage of more financial knowledge is the largest for families with mid-level net worth. Those with low levels, even if financially savvy, may not have the resources to put a plan into action, while those with high levels of net worth can cope with unexpected events even if their financial knowledge is low, because they have a larger financial cushion.
The Role of a Financial Advisor
A financial advisor can help families capture some of these advantages, even if they already have a good grasp of financial terms.
- First, they can help families maintain adequate liquidity—often starting with an emergency fund—so they are prepared to face unexpected events.
- Second, if most of the household’s wealth is tied up in its home or other illiquid assets (like retirement accounts), an advisor can help map out the options before a shock hits, including the size of the emergency fund, what insurance coverage makes sense, and what realistic credit access looks like.
- And third, when the unexpected does happen, an advisor can compensate for parents’ lack of time or confidence to adjust the financial plan quickly.
With any financial shock, the goal is not to avoid building home equity; it’s to avoid being “house-rich and cash-poor.”
