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Basic Financial Planning Strategies for Parents
November 20, 2019
Even if you have taken good care of your finances over the years, adding a child to the family can change your financial situation significantly. This is why experts recommend parents begin planning for their financial security as soon as possible. Here are a few tips for parents on how to get started with financial planning.
Plan for Your Future by Estimating Your Net Worth
Now that you’ve added to your family, proper financial planning includes planning for your child’s future as well as your own. Recent data suggests the average total cost of raising a child is around $204,000, adjusted for inflation. So, before taking action blindly, it is useful to calculate your current financial situation. Will you or your partner work less to take care of your child? Will you need to hire a babysitter or nanny?
Add these estimations to a column with other regular costs, like student loans, taxes, and insurance premiums -- the sum of these numbers is your total liability. Next, find your total assets by adding together your savings, retirement accounts, and the potential payout from your life insurance policy. You’ll also need to figure out your home’s worth (you can look at comparable properties in your neighborhood and adjust based on the amenities your house offers), then add it into your asset column. Finally, subtract your total liabilities from your total assets to find your estimated net worth.
Save for Your Child’s Future
Once you have established your net worth, you’ll be more aware of what to expect now that you have added a child into the mix, and you can start saving for the future. Start by creating a will, if you haven’t already, in which your plans are laid out. Ask yourself who you would like to be your child’s guardian in the event of your death, as well as how and when your assets should be distributed. Next, do you currently have life insurance? This is a critical, yet underutilized, part of financial planning. Similarly to health insurance, discuss options with your provider (or your employer if life insurance is provided as part of your employment package). Remember that even if the premiums seem higher than they should be, the coverage will be worth it in the long run. C
Consider putting a set amount of money into a savings account each month; while it may seem like an added drain on your wallet, starting early allows the annual interest rates to steadily increase your wealth. The same applies to both short- and long-term investment accounts. If you’re not able to save, look for ways to cut expenses. Consider ditching expensive cable services for streaming options, or you could work out at home and save on gym membership costs. You can also review what you’re spending on car insurance each month. You may be able to lower your premiums if you bundle policies (e.g., car and home insurance), raise your credit score, and drive a vehicle with certain safety features.
Prepare for College and Retirement
A college fund is another important part of financial planning for parents; however, keep in mind that you should also be funding your retirement -- it would be difficult for your child to have to support you after retirement age. Use a variety of accounts to maximize your wealth, ensuring that your own needs will be taken care of. Then you can focus on starting a college fund for your child. Ideally, this should start as soon as possible once your child is born. College preparation is all about saving what you can when you are able. The price of education will likely continue to increase, but proper preparation will help ameliorate the cost.
Financial planning is one of the most daunting -- and important -- tasks you can undertake. Particularly as a parent, it may seem like there are too many parts of the process to keep track of in too short a time. However, if you begin by charting out your current and expected financial situation, you can approach financial planning logically and realistically, which will ultimately strengthen your family.
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