Your needs will change dramatically
Growing a family is an exciting step in life that leads to a number of changes around the house. We get enveloped with tasks like furnishing the baby’s room or purchasing toys and clothes in preparation for when the little one arrives. Additionally, the newly-found joy and awesome responsibility associated with bringing a life into this world also requires a fresh look at the household finances.
As my wife Kimberly and I prepare for our new addition, we created a checklist of important financial topics to discuss and act upon. Each family’s situation will be unique and require specific recommendations, so a general overview by nature couldn’t possibly address all the nuances from family to family. However, some commonalities persist across the board and should be addressed by most, if not all, couples. Let’s review three topics that should help provide some financial protection and security for your family now and into the future.
Many of us have been told over the years, “it is wise to save for a rainy day.” It becomes even more important when you have one or more young dependent children. The typical recommendation is to have six months of non-discretionary expenses saved if one spouse is earning most of the household income. Three months of non-discretionary expenses saved could suffice if both spouses provide a reasonably comparable level of income.
What’s non-discretionary? It’s your mortgage, car payment, even food; in other words, things that you couldn’t do without. Let’s look at an example of why the emergency fund is so important and what its specific role might be in your financial picture. Let’s pretend you get into an automobile accident and are out of work for 2 months.
On top of a savings account, extra back stops like a Flexible Spending Account, FSA, or a Health Savings Account, HSA, are great vehicles to fund for use towards medical expenses and health-related emergencies. Depending on whether or not you have an FSA or HSA you may need more in your emergency fund to cover your medical deductible and other related expenses. Moreover, even if you do have these medical savings resources they may not have enough money yet in them to cover all expenses. Your emergency fund can help soften the impact that medical-related bills could have on your family’s financial well being.
Disruption to income
For most of us, if we don’t work then we don’t get paid. Short-term and long-term disability coverage through your employer may help in the event an unforeseen incident impacts your ability to work. If you do not have short or long term disability coverage through work, you may want to beef up your emergency fund. If your employer does not offer disability as a benefit, you could look into getting short- or long-term disability insurance through the open marketplace. The need for coverage will vary depending on the type of work and level of income you stand to lose should you be indisposed for an extended period of time. Clearly, the more hazardous the work or the more financially impacted you would be from a loss of income, the greater the need for coverage. If you do not have coverage through your employer and/or are premium-sensitive, do yourself a favor and have sufficient funds saved up to protect your family from financial disruptions.
This is just a surface level view of the potential impact that an unforeseen accident may have on your family’s finances. The bottom line is you should do what you can to save for the unexpected.
Life insurance is not exactly the most interesting or pleasant topic to discuss, especially when you and your family are dreaming about all the wonderful joys the future holds. However, should something terrible unexpectedly occur, you will want to make sure your family has protection. There are several ways to go about calculating the level of coverage you may want to consider. A general rule of thumb pulled straight from the financial planning textbook is 12-16 times your gross pay. Please bear in mind this is very generic, and a more in-depth analysis of your personal situation is not only recommended—but required—to uncover your family’s true need.
The amount of coverage necessary will be a function of whether or not one or both spouses are working and therefore the ability of the surviving spouse to continue to generate income. Common objectives include, but are not limited to, paying off the mortgage or other debts, providing some degree of supplemental income to the surviving spouse for at least of period of time, and helping to fund future needs like college or the surviving spouse’s retirement. The length or term of coverage should match the time frame when your family would be most vulnerable; i.e. when you are young, still accumulating wealth, and have debt to service. As time goes by, the need for life insurance may diminish.
Having a conversation with a professional to help assess the proper level of coverage and length of term is advisable. In my opinion, most young families should keep it simple and stick with Term Life Insurance as you can get a lot of coverage inexpensively if you’re in good health. Additional bells and whistles that other life insurance products can offer might be appropriate for some; however, don’t be lured by the sales pitch. They are often more complicated and expensive than is necessary to accomplish the objective at hand, in my opinion.
College Savings Plan
We all know the facts around rising education costs. If you graduated recently you may still be paying off your student loan. While it is reasonable to believe there could be push back to college costs in the foreseeable future, it may still remain a large looming expense. If you start funding a college savings plan early you may help reduce the burden by allowing your contributions to grow. Similarly to funding your retirement, the secret ingredient of time helps compound your earnings, allowing smaller dollar amounts to grow into meaningful savings.
While many options are available to you to help pay for college, the flexibility that a 529 college savings plan can offer you makes it a great option. Furthermore, when friends and family are wondering what to get your little one for their first birthday or other holidays, you could ask them to contribute to “the college fund.” Work with a professional to better understand the ins and outs around college planning and to help you set up the most appropriate strategy for you and your family’s needs.
You are never too young to start planning for the future. The stakes get higher once you begin to build a family. Don’t think that financial advisors are only for people who have a lot of money. Even if you aren’t ready to begin investing, you should discuss some basic personal financial principles with a qualified professional. Don’t wait until later on down the road to start thinking about these things. Set yourself up for success today by scheduling an appointment with a financial advisor.
Please consider the investment objectives, risks, charges and expenses carefully before investing in a 529 savings plan. The official statement, which contains this and other information, can be obtained by calling your financial advisor. Read it carefully before you invest.
Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC, Member SIPC.
About the author: Nicholas R. Sicina CFP® is the Associate Vice President-Investment Officer, Wells Fargo Advisors.