Financial planning for the future is a gift for your children that they can never open — but it is one that can keep them secure and give you peace of mind. When you take care of your family financially, you make sure everyone has as many opportunities as possible.
A secure financial plan can help your children go to college or provide a safety net to fall back on in case you or your spouse becomes unemployed or injured. Furthermore, practicing fiscal responsibility sets an example for children on how to make smart money decisions when they grow up.
Step One: Evaluate Your Debt
In our current financial system, it’s almost impossible to build credit without debt. And when you’ve got a family to support, it’s pretty easy to let some of that debt grow out of control.
Evaluating your family’s debt and coming up with timelines on how to responsibly reduce it is always the first step in financial planning. Debt consolidation and debt refinancing can help with things such as student loans and credit cards.
Step Two: Compare Child Care vs. Working
If your family is a two-parent household, you are already at a tremendous advantage. Childcare prices are astronomical and the costs only compound with each additional child. If both parents make above-average wages, you probably don’t have to worry about covering these costs.
However, for many lower- and middle-income families, it makes more fiscal sense to have a parent stay at home with kids rather than pay the $23,000 per year in care per child. Add up to two children, and American parents spend nearly $50,000 on child care a year.
The Department of Health and Human Services (HHS) recommends that parents should not spend more than 10 percent of their salaries on child care. If your child-care costs are greater than that 10 percent limit, it is worth it to consider having one parent stay at home rather than outsourcing care.
If paring down to a one-income household feels too risky for your family, consider having the stay-at-home parent take on a part-time job they can do from home for extra money without the same extreme time commitment of a full-time job.
Step 3: Establish Savings Goals
Saving for the future isn’t fun, but having money you can turn to when the time comes can reduce your financial stress significantly. When making savings goals, organize each one into its specific purpose: retirement, education, health care, etc.. Once you have each goal established, create a timeline from today to the estimated date when you may need to withdraw funds. For things including education and retirement, there are obvious end dates you can use.
For a health savings account (HSA), it’s okay to make the timeline indefinite. From here, you can go over your monthly income and current budget to find ways to cut spending and contribute more to each particular goal. Finally, use the right savings tools to make the most of every cent you save.
For instance, an HSA lets you put money aside for health care costs tax-free. The funds can be withdrawn to help pay for emergency services if a child falls ill or the funds can sit there and multiply to be used for your long-term care needs in retirement.
During this time, it’s important to consider whether you will need life insurance, which can help provide for your family financially should you pass away. And contrary to popular belief, purchasing life insurance won’t do irreparable harm to your household budget.
Many people opt for term life insurance, which, as the name implies, lasts for a predetermined period of time, whether it’s 10, 20, or 30 years. One of the best aspects of term life insurance is that the rate you pay at the beginning will remain the same until the end of the term you’ve selected. So, determine what will work best for your family and check into the rates you can afford.
Financial planning isn’t fun or exciting, but it can mean a better future for your family. The first three steps to create a solid plan include evaluating debt, considering the costs of childcare, and establishing savings goals.
Getting a handle on debt means you can improve your credit scores for more lending opportunities in the future. Many new parents are surprised at the costs of child care and find out that is financially smarter to have one parent stay home. Finally, establishing savings goals and making a plan means you have funds to turn to when life’s big events occur.
Guest Blogger Sara Bailey of thewidow.net.