Whether you currently have young children or are thinking about starting a family, you know with certainty your finances are going to be impacted.
Review these top 5 tips to ensure your family is on the right path for financial success.
1. Assess your cash flow
Begin with assessing your cash flow. As your family dynamics change, there are many things that will affect your finances. For example, if you are thinking of starting a family, one of the first things you’ll want to consider is how taking time off for the birth or adoption of a new child will impact your income.
Create a plan to cover your anticipated income gap. Having this discussion early is critical. You’ll want to factor in employer benefits you have and how long you want to take leave.
Start by knowing what your employer offers in terms of parental leave. Just because you have a family leave policy does not mean it will cover all your income. Some employers provide 100% of your pay while others only a percentage or none at all. Maternity & Paternity leave is covered by FMLA (Family Medical Leave Act) in terms of your job security, but whether or not you get paid during that time could be a combination of short-term disability and or your remaining vacation time.
Another hit to your cash flow could be childcare. Paying for childcare can feel like adding on another mortgage, so do your homework ahead of time and be prepared for this added expenditure.
2. Build up your emergency reserve
Building up your emergency reserve, or your cash cushion will be next on your priority list when planning to grow your family. While the rule of thumb is to have a cash cushion equal to 3-6 months of living expenses on hand, your number could be more depending on your comfort level and lifestyle.
This is money you hope to never touch. It’s there for a true emergency, such as losing a job or serious illness. However, there are going to be ongoing expenses, over and above your base living costs, that will inevitably come up. You’ll want to be prepared to cover these anticipated expenses without going in the red.
An easy way to set aside extra savings is to automate it. Determine an amount that is comfortable within your budget and set it to auto transfer each month from checking to savings. If you’re thinking to yourself, “there’s no way I have room to save any extra”…trust me, I get it! Go back to step one and be sure your budget in order.
Completing a cash flow analysis and creating a budget provides a foundation for where you are and provides a lot of clarity into what’s possible. Laying the foundation for how you drive decisions moving forward and a framework for being able to save extra, cut unnecessary expenses, etc.
Going through your budget can be like financial housekeeping, allowing you to tidy everything up before you tackle this next adventure in life! In fact, we ask all our clients to go through a budget exercise as part of our Financial Life Plan, it’s really that important!
3. Create Your Family’s Estate Plan
Truthfully, this is not the most exciting topic but it’s an important one. Whether you already have children or are planning to, you definitely want to have some general estate planning documents in order.
The most basic document you will need is a will. This allows you to specify how you want things handled after you’re gone, rather than leaving that decision up to the state. Another consideration is who you want to act as guardians for any minor children, should something happen to you prematurely.
Lastly, review your beneficiary designations and make sure they stay up to date as your family evolves.
4. Get A Head Start On College Education Savings
I recommend getting a head start on college savings. The sooner you begin saving, the longer time horizon your dollars have to grow if saved in an investment vehicle such as 529 College Savings Plan.
While there are a few different vehicles to consider the 529 College Savings Plan offers many great benefits.
You can’t open the account until you have a social security number for your child, but once you do, here are a few highlights about the 529 plan.
- You are in control of what happens with the money. The parent/custodian owns the account. This means you are always in control of what happens with the money, even if your child doesn’t end up going to college or needing the money
- You can change beneficiaries…within certain limits. This means if child #1 doesn’t go to college or gets a scholarship but child #2 needs extra money for grad school, you can move the money around as long as it stays in your family.
- Funds can be used for more than just tuition. Think books, room and board and school related supplies such as computers.
- There is no time limit on how long money can stay in a 529 plan. Say your kid doesn’t go to college or gets a full ride scholarship… let the money stay in the account and grow tax free and they can use it for their future children. This makes the 529 a great legacy planning tool as well.
- You can always access the money you put initially put in. What happens if you need to access the money for non-college related expenses? This question comes up a lot! Simply put, you can access what you put in with no penalty or taxes. The money you initially put in was already taxed so you aren’t taxed again on this portion. You will pay taxes on the gains, and you will pay a 10% penalty on the gains.
5. Put Your Protection Plan In Place With Life Insurance
In its simplest application, life insurance is designed to cover outstanding debts or replace lost income so your loved ones can carry on should something happen to you prematurely.
Many employers offer some level of life insurance coverage in their benefits package. Even if you have coverage already, it is wise to do an insurance audit as you may not have enough for the needs of your new and growing family.
I also recommend considering independent insurance, to supplement any employer provided coverage. While it’s great if your company provides life insurance, definitely take advantage of this, keep in mind it’s tied to your employment. So, if you leave that job, you could lose out on those benefits.
Personally, I experienced this soon after my first child was born, and it was a wakeup call to get some life insurance in place that wasn’t tied to any employer. I then use the group term coverage through an employer as a supplement!
So, there you have it. Following these tips will set you on the right path for your financial future and the earlier you start the better. Even if you have to start out in small increments, chipping away at some of these goals will feel better than not doing them at all!
To get started on your Financial Life Plan, book your Right Fit call with our team today.