Maybe you are one of those parents who feels totally financially prepared for your growing family. If so, you don't need to read this article. In fact, we'd like to interview you as a minor miracle of modern parenting. For the rest of us, knowing how to manage always-limited money and our seemingly unlimited needs is a complex and often frustrating problem. New parenthood and young children just make the problem that much bigger.
You may think of financial planners as the professionals who help rich people manage their money. However, financial planners also have a lot of good advice to help the rest of us manage our lack of money. We talked to two financial planning experts and asked them for their most important advice for new parents and young families.
Judy Miller is a Certified Financial Planner and heads up College Solutions, a company that specializes in helping parents plan for their children's education. Lisa Leff is vice president and portfolio manager for Trillium Asset Management Corporation, a company that helps clients, including many with young children, use their money to achieve both financial and social objectives. Here are their top five financial tips for new parents and young families:
1. Pay yourself first - This is the foundation of good family finances: Don't have every cent you earn immediately head back out the door. "Decide how much you are going to save for emergencies, retirement and college," says Miller. "Save out of every paycheck, bonus and raise. Saving now means you'll spend yourselves rich later."
That sounds good. But how the heck do you save? Have your kids wear their diapers for longer stretches? Restrict your spouse to one shower a week? Learn to love beans for dinner? According to the experts, the most important step is simply to decide to make saving a priority. Once you have done that, the "how" is a lot easier. So make a family commitment to paying yourselves first.
2. Learn how to spend - There are two basic categories of spending: the little stuff and the big stuff. Not knowing how to spend wisely on either can get you into financial trouble.
First, how do you spend wisely on the big stuff? Miller's advice starts off gently. "Rein in your use of credit cards," she says. "Debt today robs you of tomorrow's dreams."
For those of you who have trouble figuring out how to "rein in," she has more drastic advice: "Don't carry credit cards with you. Having to return home to get them means you have to really think about the value of what you are buying on credit. Where possible, wait at least 24 hours before making any purchase greater than $500." The woman speaks from experience - she locked her credit cards up in her safe deposit box.
That works for the big stuff, but the smaller stuff requires figuring out how to use your everyday dollars wisely. There are some excellent resources available to help you do this, with advice on everything from setting up a budget to hosting cheaper birthday parties. (See sidebar for a list.)
3. Plan for the unexpected - This is not news for parents, as we are managers of the unexpected. But planning for unwelcome surprises goes beyond extra clothes in the diaper bag.
"While no one likes to think about facing difficult times, it's important to be prepared," says Leff. "Be sure to have adequate life insurance and an up-to-date will, and explore trust funds and other options with an estate attorney to ensure your assets will be protected and available to your child."
In case you're wondering, trust funds aren't just for rich people, and wills aren't just for people who are old. Both are excellent tools for making sure you have a say in how your children are taken care of if something should happen to you and your spouse.
Surprisingly, life insurance and wills don't require a lot of time and money to put into place. For wills, there are two options: do it yourself or consult a lawyer. It's a bit like doing your taxes - if you are willing to spend a lot of time reading and researching and your situation is fairly straightforward, one of the online will kits might allow you to do your own will.
If you don't want to put in the time or you need more than a very simple will, it is advisable to consult a lawyer - the issues involved are very important. General practice and family attorneys will often produce a simple will for about $300 to $500. You can keep costs down by being well prepared before you visit the lawyer's office, ready to answer questions about guardianship of your children and an executor for your will.
4. Save for the long term - Long-term financial planning can be a scary thought when you are still trying to afford diapers and Legos, but the experts stress the importance of planning ahead for major future expenses like college and retirement.
"You've heard this before ... start saving early and often, especially for your child's college education," says Leff. "Designate funds, even if a small amount, for regular contributions to a savings plan." She recommends automatic paycheck withdrawal to save the money before you ever see it and encouraging relatives to contribute to your children's college savings.
However, college funds may not be the most important long-term saving priority. "If you have to choose between saving for college and retirement, save for retirement," says Miller. "If you build up your retirement savings when you are young, you will have more cash flow for college when that time arrives."
Sometimes it might feel selfish to prioritize your needs in front of your kids, so Miller recommends a way of saving that will do both. "The best solution: Make the maximum contribution to a Roth IRA each year," she says. "These funds may be used for college."
5. Teach your children financial literacy - Family financial planning is not just for parents. "It's never too early to educate your child about the importance of saving and how money grows over time," says Leff. "It's also important to share with your child your own values about financial, material and spiritual wealth." Your children will learn by watching how you handle finances.