In my experience in working with younger investors, I find that many people start to get serious about their finances once they start a family. When you have a little one you're now responsible for, the stakes get a little bit higher, and everybody becomes more interested in getting a plan together, so they can make sure their needs are taken care of.
I've found there are four key things a young family needs to tackle as they’re getting started to help build a good financial foundation and stay on the right track as they go forward.
The first one is savings. If you're not doing it already, you need to have a savings account that can cover the expenses that arise in emergencies so you're not relying on credit cards or other less-desirable ways to get out from behind the 8-ball. You should start by socking away at least $1,000 in your savings account before anything else. Ideally, you're going to have anywhere from three to six months of expenses saved up and held in reserve for a rainy day. The key here is that you’re going to save some multiple of your EXPENSES, not a multiple of your income. Figure out what you spend each month, and that will provide the basis on which you calculate how much to save.
If two people in a household are working, generally saving three months of expenses can suffice. Although ideally, shoot for six months of expenses. If only one person in the household is working, then you want at least six months of expenses saved in case they get sick or hurt or can't work. Some people like to save even more than that, although I would seriously recommend not saving beyond one year's worth of expenses, because that's more than enough for a rainy day and at some point, you reach a level where your money is really not working for you. Too much in savings also means the purchasing power of your money is eroding as it sits in a savings account, being chewed up by inflation.
The second thing you must consider is an estate plan. Once you have a child, you'll need to make sure they will be taken care of if something were to happen to you. Doing this will involve meeting with an attorney, who will often recommend you create a trust, a “pour-over” will, a durable healthcare directive, and a durable power of attorney. Those four documents can put you in a good situation to make sure that no matter what happens, your family is in a good position to manage the family’s affairs if you’re gone. Nobody wants to leave their family too early, but the parallel I would draw with this is like putting on your seatbelt. You certainly don't want to get in a car accident when you hit the road, but you put on your seatbelt just in case. Your estate plan is your financial and administrative seatbelt.
The third item is life insurance. If the family is relying on someone's earning potential to help cover their expenses, that person needs to have life insurance. So, if there's only one breadwinner, that one person needs life insurance at a minimum, and if two people are working, you certainly want to have life insurance. I would suggest that you have as much as you can afford and sticking with a term policy where you're simply just paying month by month for insurance coverage. If someone is staying at home and they're not working, chances are you probably do need a little bit of life insurance coverage on them as well, because if something were to happen to the stay-at-home parent, the life insurance proceeds would then be used to help cover childcare expenses, so the remaining spouse can continue to work and support the family.
Finally, college savings. The costs of college are continually rising nearly every year, and just like retirement savings, you can't start saving soon enough for college. In an earlier blog post we covered lots of different ways to do this, and we generally us a 529 plan option in our office, but whatever you decide to do, it's important to start saving early and often for your child's college tuition in an investment vehicle that can work to their advantage the most. I have yet to run into a client that says they saved too much for college. So, as soon as you have your son or daughter's Social Security number in hand, you'll want to open up a college savings account, so you can made sure that they have a bright future in front of them.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Ford Financial Group and LPL Financial do not provide legal advice or services. Prior to investing in a 529 Plan investor should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program.