Handling money wisely takes on a whole new importance once you become a parent. “Can we afford for my spouse to be a stay-at-home parent? Will there be enough money for summer camps, piano lessons and a family pet or two?” All kinds of unknowns begin swirling around in your head. That’s where financial planning comes in. Good financial planning brings peace of mind and confidence. Below are tips on how to get started with a financial plan for parenthood and beyond.
- Create a workable budget for yourself. Take a month to track your spending to find out where your money is going. This can be a real eye-opener! It’s essential that you identify your expenses as well as your income. The money you have coming in must be enough to pay for the money going out. When creating your budget, record your fixed expenses (rent/mortgage, health insurance, car payments, student loans, cable bill, etc.) as well as your flexible expenses (groceries, electricity, gas, clothing, entertainment, etc.). After adding up your necessary expenses, you can then determine how to use any extra money. It’s all about first things first. The fixed expenses take priority over the flexible ones, and you can’t spend what you don’t have.
- Identify your goals. For some, the ultimate goal is to retire early in a beach house; for others, it’s the ability to send their children to private schools or to start their own business. Only you know what’s most important to you. Write your goals down, along with an estimate of the money you’ll need to accomplish each goal. For example, if that elementary school of your dreams has a tuition of $15,000 a year and you have two children, you can estimate you’ll need $180,000. Putting a price tag on your goals will help you stay on track.
- Determine your net worth. Hiring a good financial advisor now can save you money and heartache down the road. They can help you create a plan to enable you to achieve your goals and live comfortably in the meantime. Whether you decide to work with a financial planner, apply for financial assistance, or apply for federal student aid, you’ll need to know your net worth. This includes an inventory of all your financial assets minus your debts. Part of this is determining the value of your home. The best way to do this is to use an online calculator or ask a local realtor for a broker price opinion (BPO).
- Pay down debt. Parenting is stressful enough without having high-interest loans and credit card debt. Paying your debts needs to be a top priority.
- Save for emergencies. According to many financial planners who specialize in working with parents, saving for emergencies is even more important than starting a college fund. You should have an emergency savings fund of three to six months’ worth of living expenses to tide you over in case you lose your job or have unexpected bills.
- Live within your means. Ideally, you’ll want to live below your means so you can put more money into savings and pay down your debts as quickly as possible. Not only does living outside your financial means bring stress into your home, but it keeps you from achieving your goals.
- Plan for retirement. The best gift you can give your children is to be prepared for your own retirement. You can take out student loans for your child’s college education, but there are no loans to fix an ill-prepared retirement! You can spend your golden years enjoying your grandchildren or working until you’re 75 depending upon the choices you make today.
The best time to start instilling financial skills and values is when your children are young. You can teach them invaluable lessons by giving them an allowance, teaching them to set goals, and then allowing them to experience the consequences of how they choose to spend (or save) their money. By making financial planning a family affair, you’ll be instilling skills your children will have for a lifetime while hopefully achieving your own financial goals.
Special thanks to Chris Haymon for contributing this post as our featured guest author of the month! Chris Haymon runs Adulting Digest, a website that educates exclusively on the topic of financial literacy, which is one of LifePlan Labs’ core pillars in our curriculum. In alignment to our organization, he is also dedicated to increasing awareness on practical financial literacy topics to help others avoid learning them “the hard way”.