As a young family, your life is always on the run. Between work, dropping your kids off at daycare, attending soccer games, etc. it’s hard to carve out time for you, let alone time to properly manage your family’s financial life. With the addition of kids, you find your financial life all of a sudden becoming more complex with more competing demands on your cash flow than ever before.
You may have googled “financial planning for young families” and found yourself overwhelmed with the amount of answers. Unfortunately, every family is different and will have different financial priorities. There truly is no one-size-fits-all solution when it comes to financial planning.
However, there are 5 financial questions that are applicable to almost every young family that can help point you in the right direction of properly managing your family’s finances.
Are you holding the right amount of cash?
Holding cash is like adding salt to your food. You don’t want too much or too little. You want just the right amount to make your food taste good, but that amount may also be different for everyone (for my wife, it’s a lot 😂).
When I say cash, I’m referring to the aggregate value of your checking and savings accounts. There are two parts to figuring out what is the right amount of cash to hold – the objective part and the emotional part.
The objective part
As long as your income is steady, you typically don’t need to hold onto more than 3 – 6 months’ worth of living expenses in cash. Cash earns a very low interest rate and anything more than 3 – 6 months’ of living expenses could be put to better use, like investing or paying off debt.
However, the problem with this is that most families have no idea what they spend. It’s difficult to keep track of all the expenses for your kids, home, travel, etc. Yet, spending is the #1 driver of major financial decisions. How can you make any type of financial forecast if you don’t know how much it costs to live your lifestyle?
There is a huge difference between tracking your spending and setting a budget. Tracking your spending simply brings awareness to where your money is going. It allows you to reflect and ask yourself whether your spending is aligned with your values.
On the other hand, a budget is setting specific goals for categories of spending. The reason most people stink at sticking to budgets is because their budget wasn’t based upon their true spending in the first place.
If you are unsure about where to start, I suggest reviewing your spending in March and April of 2020. This was the beginning of the COVID-19 pandemic and likely reflected the barebone minimum cost to live your lifestyle. You probably spent more on Netflix and games for the kids, but you didn’t go out to eat, didn’t travel anywhere and barely spent money on gas.
If you take that number and multiply it by 3, that is the bare minimum amount of cash you should have in a separate savings account at all times. If your income is variable, or comes in chunks, then you may want to multiply that number by 6.
The emotional part
This part is more difficult to unpack. Money is emotional and cash makes us feel safe. The likelihood is that one spouse wants to hold onto a large amount of cash and the other wants to hold onto as little as possible.
These attitudes likely relate back to each of your experiences with money throughout your life. Some people associate money with anxiety. Other people associate money with an opportunity. The spouse who associates money with anxiety tends to hold onto a lot of cash. The spouse who views money as an opportunity tends to hold onto very minimal cash.
This is why it’s important to understand how you’re both hardwired to act with money and talk openly about your money history.
The right amount of cash to hold is the responsible mix between the objective part and the emotional part.
Do you have a student loan repayment strategy?
Most people don’t. It’s common for people to just ignore their student loan balance and keep doing what they’ve done since payments began after they graduated. The likelihood is that you are so busy with work and your kids that you haven’t reviewed your student loan strategy in a long time.
Are you trying to pay them off as fast as you can? Will you qualify for tax-free loan forgiveness? What about taxable loan forgiveness? The answer to this question has a massive impact on your student loan repayment strategy and could be a difference of tens of thousands of dollars.
The sad truth is that student loans are extremely complex. Most people think the best thing to do is to refinance and pay down their loans as fast as possible. While this may work for some people, you want to carefully consider the federal student loan benefits you are giving up if you do refinance.
Even if you have already refinanced your loans, you likely want to look into refinancing them again. Private student loan rates have significantly decreased and you may be able to get a much better deal on your student loans now compared to a few years ago.
Do you have an investment strategy?
When the market goes up, nobody asks questions. When the market goes down, everybody freaks out.
When you don’t have well-thought-out investment strategy, you don’t have the confidence that you are invested the right way. This makes it much more tempting to abandon ship when the market is in free fall. You start second guessing why you invested in the first place.
An investment strategy is not just picking funds in your 401(k), an investment strategy requires you to answer 5 things:
- Why are you investing?
- What is the appropriate amount of risk for you to take?
- What type of accounts should you invest in?
- What is your investment philosophy?
- Can you stick with it?
It’s difficult to answer how you should invest, before you answer why you want to invest. Now this is not easy. It’s a loaded question, which is why hiring a financial planner can be really valuable for you. It involves you and your partner articulating what you want your money to accomplish for you and how you would live your life if money wasn’t an obstacle. This is so important because you don’t want to a climb a ladder your whole life to realize it was leaning the wrong way.
Having the peace of mind that all of your investments are invested in a specific way to help you accomplish specific goals is a huge comfort when investment markets are in turmoil.
Do you have a plan for college funding?
You may have already started saving for college, or you may be at the very beginning of this. Either way, I encourage you to ask yourself these 3 questions to help you figure out what your college funding plan is.
Similar to creating your own investment plan, it’s difficult to feel confident in your college funding plan if you haven’t fully answered the why and the how in the first place.
The why requires you and your partner to openly discuss your desire to fund college for your kids. Would you like to save enough to pay for 4 years at Harvard? Or 4 years at a state school? This likely will tie back to your own college experience and how/if paying for college impacted your life.
The how requires you to understand some of the different vehicles to save for college. Should you save in a 529 plan or a taxable account? The answer is not simple, especially given the uncertain landscape of college in the next 15+ years.
After creating an initial long-term funding plan, I encourage you to break down college funding into an annual decision as opposed to a set-it-and-forget-it strategy. There are so many variables every year to consider – travel plans, kid’s sports, home renovations, etc. that you may restrict yourself to invest in other meaningful experiences for your family if you set your college savings on autopilot. What if you skipped a year of college savings so your family could take an African Safari? There are creative ways to invest in your kid’s education besides just saving money for an uncertain tuition bill in the future.
It’s important to find the responsible balance between saving money, paying down debt, but also experiencing life now. This is best done on an annual basis to reflect your ever-changing life.
Do you have enough life insurance?
*I do not sell life insurance. I am completely independent and don’t sell any type of insurance. I am writing this from a purely objective standpoint 😊.
If you have kids and you don’t have life insurance, start looking into this right now. Seriously. You do not want to leave your spouse and kids behind with a mess. You probably have heard of horror stories in the past when someone did not have life insurance in place.
Are you unsure if you need life insurance? If someone depends on you economically, you need life insurance. It’s that simple.
As with saving for education, this is not a set-it-and-forget-it plan. The amount of life insurance you need when your kids are born is very likely different from the amount you need when they are 10. Why? Because your life has changed over the past 10 years.
There are two parts in determining the right life insurance plan – the amount of life insurance you need and the type of life insurance you need.
How much life insurance is enough?
There are two main factors to answer this – 1) what level of monthly expenses do you need to maintain so your standard of living doesn’t dramatically change and 2) would the surviving spouse generate income?
Ideally, you would want your family to maintain a similar lifestyle if something were to happen to you. If you are spending $15k/month right now, you probably want to plan for continuing to spend that same amount moving forward.
A good starting point is to take the amount you spend on an annual basis and multiply it by 25. This stems from the idea that a 4% spending rate from your investment portfolio has historically been a sustainable withdrawal rate. This means if you spend $15k/month (or $180,000/year), you would need to have $4.5 million of life insurance to safely spend $15k/month.
What if you already have money saved up? Then subtract that from the $4.5 million. So, if you have $500,000 saved up now, you would need $4 million.
However, this calculation assumes that the surviving spouse would not work. Using the same $15k/month expense amount, let’s assume that the surviving spouse would in fact go back to work and earn $8k/month after-tax. This means your monthly shortfall is now $15k – $8k = $7k, which means your annual portfolio withdrawals are $7k * 12 = $84,000. In turn, this implies that you would need $2.1 million of life insurance, as opposed to $4 million.
You can see how this isn’t black and white. There are many variables to consider when figuring out how much life insurance is right for you. Bottom line – get life insurance coverage.
What type of life insurance should you buy?
I consider life insurance to be a necessary expense to protect against a very unfortunate event. I do not believe life insurance is an “investment”. Often times, people try to sell life insurance to you as an “investment vehicle” by having you buy some type of whole life or universal life insurance policy.
These types of policies are permanent insurance and often carry extremely high costs.
In my opinion, there are very few instances where permanent insurance is needed. The overwhelming majority of young families simply need life insurance to protect against the loss of their income. This is why I strongly recommend buying term life insurance.
This type of insurance works exactly like it sounds. You buy low cost insurance to cover you for a certain amount of time. You likely don’t need insurance when the kids are out of college, so why pay for it?
Term insurance gives you the ability to buy the exact amount of coverage that you need at a certain time. Don’t make it more complicated.
- Carve out time to review your finances. Take stock of all your student loans, investment accounts, education savings accounts, life insurance, etc. Reevaluate whether or not you have a well-thought-out strategy for the various components in your financial life.
- Start tracking your spending. I can’t stress this enough – it is so important to know where your money is going and how much it costs to live your lifestyle. If you don’t, you can’t make any informed financial decisions about the future.
- There is a lot to unpack here and you may be thinking, “I know I need to do this, but I don’t have the time or the ability”. This is why it’s helpful to work with a financial planner to guide you through this process. But not any financial planner, a fee-only financial planner. You always want someone acting in your best interest – no hidden costs, no BS.
- Surprise, surprise, but yes – I am a fee-only financial planner and I specialize in working with travel-loving young families. I’d love the opportunity to help your family reevaluate your finances. You can check out my website, or schedule time with me to figure out how I can help you.
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