When Eleanor joined our family, we had a lot of financial things to consider. How will having a child impact our budget? Which expenses would increase or be new? (Some answers: food, health insurance, and diapers, diapers, diapers).
In my planning mind the bigger question was how were our financial priorities changing? Kellie and I started thinking about saving for Eleanor’s schooling through a college savings plan. But did saving for Eleanor’s college trump or impede our other financial priorities?
Regardless of what stage your family is in (growing, maturing, or empty-nesting) it’s important to think about the financial implications of these different stages even if they feel far down life’s road.
Doing so can help you anticipate the changes that will inevitably come and make better financial preparations for the future.
Stage 1: As Your Family Grows in Size
I believe this is the stage of life when making the right financial decisions for your kids is most critical. In many cases, using financial tools helps you more when they’re put to use earlier.
For example, life insurance is cheaper when it’s purchased at a younger age. Investing in IRA accounts early gives your money more time to compound and grow. The same principle applies to college savings accounts like 529s.
The challenge, of course, is the kids. They tend to arrive between our 20s and 30s, and they’re not cheap. While day-to-day living expenses are important issues to consider, it’s best to first try to address the “big rocks” that may get you in trouble down the road.
Stage 1 Financial Areas to Consider
Health insurance and medical costs
Medical expenses continue to outpace the standard inflation rate by a wide margin. This means that if your wages increase by 2.5% each year, you aren’t earning enough to keep up with the rise of medical costs, which has averaged over 5%. How will this disparity be handled as your family grows (and costs pile up)?
Start with your health plan. When choosing your health plan each year--whether through your employer or the healthcare exchanges--do your homework to understand which plan is best for your growing family. Are you planning to have a child next year? A low-deductible, high premium health plan may be your best bet.
Next, think about ways to save. The US Government knows full well that health costs are soaring, so they’ve created programs and tools to health families make up the difference. One tool is a Health Savings Account (HSA), which gives families a nice tax deduction when they put money into the account, and the money is withdrawn tax-free when used for qualified medical expenses. Depending on your health plan, you may qualify for a HSA.
Are you a sole proprietor or part of a small business? There are additional tax incentives to help cover your health insurance premiums and other costs that may be available to you.
What if you die?
Every family should have at least some life insurance. Life insurance provides money to your surviving spouse and children if you die. If you think this isn’t necessary, just let your mind wander to the scenario of you--the primary breadwinner--no longer being in the picture...
How will your family afford your funeral expenses? How are your rent, heating, clothing, or car payment made? Is there money for the surviving spouse to use in order to go back to school so he or she can earn a living for your kids? Life insurance plays a crucial role here.
Determining how much life insurance you need can be complex or straightforward. A simple approach is to multiply your annual wage by 7. So if you earn $50,000 per year then you should purchase $350,000 of life insurance. This also implies that as you earn more, and your family expenses subsequently increase, that you’ll need to purchase more insurance. Since insurance is cheaper when you’re young a healthy, you may want to buy more up front by using a factor of 10 rather than 7.
Stage 2: As Your Children Grow Older
As your children continue to grow you tend to also move into your highest earning years. Thank goodness, because kids don’t get cheaper as they grow. They’re eating more and becoming more expensive to “furnish” (think clothing, sports uniforms, after school fees).
This is often the stage of life when family finances feel the most chaotic. You have a mortgage, a 401k, some student loans you’re still working on, 2-3 credit cards, and a car payment. It’s a balancing act between juggling your financial life as well as your family’s needs.
Stage 2 Financial Areas to Consider
Protecting your family through a will
This is usually when I get the “stink eye.” Life is busy and expensive in Stage 2, and now I’m telling you to round up your financial and family files (takes time) and sit down with an attorney (expensive)? Booooo!
Like life insurance, getting your estate in order doesn’t feel like it matters until it’s one of the few things that does. Estate planning should start with a will. Your will spells out what should happen to your property if you die.
Does this mean your assets are taken from you without a will? Not really, but your estate will go to probate, meaning your state determines who gets what. Your kids can still end up with your assets, but the state will charge you to straighten this out. A clearly written will can bypass probate, saving your family time and money.
Are your finances out of control?
Amidst the busyness of taking care of your kids it’s worth asking whether you and your spouse are on the right track for retirement. Financial emergencies during Stage 2 can often derail the most vigilant of financial plans.
I meet too many couples who half-jokingly say that their kids are their retirement plan. If that suits you and your family, go for it. Otherwise, take some time to at least review your current investment accounts and see where you’re at. Using a simple retirement calculator can give you an idea of what you could have and how much you’ll need. Is there a gap between the two? Then Stage 2 is your time to make a plan for catching up, primarily by contributing to your 401(k) or IRA plan through work.
Stage 3: When Your Children Are Out of the House
Your kids are now in the first stage from the beginning of this article. They’re attending college, getting married, and having their own children (and making Grandma very happy with more grand babies!) Congratulations--you’re nearly retired!
Even though the empty-nesting years are viewed as the “sunset” of life, most couples will live another 20 to 30 years in retirement! That’s a lot of time to work with! Unfortunately your earning potential is steadily declining in these years as well, so a reliance on a fixed income becomes the reality.
Stage 3 Financial Areas to Consider
Will you help support your children?
Recently someone at church made the comment about how they look forward to their kids being out of their home so they don’t have to worry about them so often. The older church members on the back row just laughed!
If you plan to partially support your children when they’re out of the house, make sure you’ve considered the ramifications. As stated earlier, you’re now probably on a fixed income; likely a combination of retirement account withdrawals, Social Security, and perhaps some pension income. Do your kids understand this? If not, is there a chance you’ll be paying for their expenses as they increase? This may mean you need to have some tough conversations with your children, but it’s worth it.
You’re retired. Now what?
What kind of role will your kids play in your retired life? Will you provide accommodations for a family vacation to bring them all together once in a while?
Are there assets you plan to leave to your children? If so, now is a good time to review your estate plan once more and perhaps establish a trust, which will provide you with the ability to direct how your assets are handled, and by whom. Are there opportunities to “gift away” some of your assets, perhaps to a college savings account for grandchildren?
I hope this discussion of how your kids fit into your financial plan has been helpful. When i think about my own life and what matters most to me, all I think about is my family. They’re all that really matters. I imagine it’s the same for you too.
No matter what life stage you’re in, your opportunity is to consider how to better prepare for your and their financial security. They overlap as you can see, and the day to day can feel messy and chaotic. But considering the areas I’ve explored can put you and your kids in a better situation down the road.