Revisit Your Financial Plan After These Three Life Events
Manage Your Family Finances with These Three Milestones in Mind
Your family’s financial needs naturally change and evolve over time, but life transitions make it especially important to revisit your financial plan. Life events like marriage, the birth of children, and sending your kids off to college bring significant financial ramifications. By planning for each of these milestones, you will be setting yourself up for success so you can enjoy the important events of your life as they happen without worrying about money matters.
Below we’ll examine three common life transitions and how they may impact a family’s financial plan.
When you’re single, you may have had the luxury of worrying only about your personal finances. What makes marriage the first catalyst for financial adjustment is that it brings together two people — and two sets of finances, too. Understandably, this can set the stage for both change and challenges.
The key to a healthy blending of finances is communication. Create open lines of communication before the wedding and discuss your financial goals to see if they align. You should discuss your financial history, your debts and assets, and your values surrounding money. Having these conversations will grant you both a clearer picture of where you stand individually and as a couple.
In addition to the big picture discussions, you should also make sure you’re on the same page when it comes to day-to-day spending and bill payments. Decide whether you want joint checking and savings accounts or whether you prefer to keep them separate. You should also talk about expectations for the type of discretionary spending you’ll each be doing. Creating a plan together before the wedding bells chime will help you relax and enjoy the wedding – and move into your marriage with less money stress.
On average, it costs roughly a quarter-million dollars to raise a child from infancy to age 18 — and that does not include the cost of college! That is an average cost of about $14,000 added to your family’s financial plan each year. Having a family savings plan is a necessity if you are planning on having a baby.
When it comes to saving for kids, getting an early start is key. Having a resource to draw from will be instrumental when large bills approach. The average cost of delivery in the United States is $4,500 with insurance. You may also be interested in moving to create more space for your growing family, which may take a bite out of your savings and also increase your monthly bills. Of course, you’ll take on new monthly expenses, too. These include diapers, food, clothing, toys, and the possibility of tuition for primary and secondary schooling.
Once you have children, set up extra protection against financial hardship for you and your family. Sit down and have a difficult discussion about both disability insurance and life insurance. Having a safety net in place will protect your family in the future and give you more peace of mind in the present.
Recent reports have shown that the average cost of a college education doubles every eight years, which means it has an 8% inflation rate. With the rising cost of college, it is more important than ever to create a family financial plan and have an awareness of the impact that paying for higher education will have on your finances. The three areas to focus on are financial aid and savings, your budget, and post-college costs.
Financial Aid and Savings
It’s preferable to start a savings account for your children's education as soon as possible, and many parents use a 529 college savings plan. The 529 is similar to a Roth IRA or Roth 401(k). You can invest after-tax money, then withdraw it tax-free when needed. The only requirement is that withdrawals be used for educational purposes. This includes tuition and school supplies, like books technology.
A similar option to the 529 is the Coverdell Education Savings Account or ESA. It operates similarly to the 529, except it has a cap on how much money you can invest per year, and you pay taxes on money withdrawn that exceeds what is used for educational purposes.
You can also consider taking advantage of the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act to gift money to your children without them being responsible for paying taxes on it. You can also help them apply for a Free Application for Federal Student Aid (FAFSA) for funding. The FAFSA offers several bonuses like lower interest rates and loan forgiveness.
While creating a budget for your children's college education, you will want to include some non-educational expenses, as well. Consider the cost of travel for trips to visit them on campus, for instance, or the cost of travel for their holiday breaks. You will also need to budget for standardized testing, like the ACT, and for college applications. If your student has their sights set on traveling, you may need to save for a study abroad opportunity, too.
Many families use the strategy of cutting down expenses and reworking the family budget when a child enters high school. This four-year period is an opportunity to begin accelerating the savings you have already started for them. This period is also a time for open communication so that everyone is on the same page about college finances. Will your child be expected to finance costs like entertainment and phone bills? Will they be expected to work part-time throughout college? Answering all these questions ahead of time will help you form an accurate budget as college approaches.
As if planning for college costs isn’t enough, a new – often necessary – trend is to plan for is the post-college period, too. Among young adults, there is a rising trend of 18-to-29-year-olds living at home with their parents. Many parents will end up supporting their children after they graduate college. This support can take the form of letting them move back home or paying for some of their monthly bills, like utilities or rent.
As a parent, you probably have a natural urge to protect and provide for your children, but it is also wise to consider your retirement finances and to prioritize keeping them strong. Helping your children overly can often endanger your retirement nest egg, so keep in mind that they have many earning years ahead of them to pay student loans. If you’re providing financial support, you shouldn’t feel guilty about asking them to help with payments or to do more around the house or your family business.
Final Thoughts on Revisiting Your Financial Plan After Life Events
Family financial planning can get complicated, but it is an essential task. It is also one that you will want to revisit as milestones and life transitions occur. By looking ahead to how your family financial plan will change after marriage, having a child, and paying for education, you will bolster your financial stability and gain more peace of mind.
If you’d like professional guidance in building your family’s financial plan, please contact us today. At Charles Carroll Financial Partners, we are committed to providing personalized financial planning based upon your unique needs, goals, and aspirations.