Why is Family Financial Planning Important?
Although many families prepare a family budget, many do not take the next step of implementing a working plan, according to Taylor Kovar, founder and president of Kovar Wealth Management in Texas. “The part of the plan is ‘this is the amount we have today, and this is where we want to get to’,” Kovar said. Working with a plan provides a goal and allows the family to do things they want to do and explore options they may not have had access to before, such as owning a home or starting a family business.
How to Create a Family Financial Plan
The steps to create a family financial plan are straightforward, but they require some important conversations and commitment from the whole family. “We’re not saying that the person who earns more or the person who is smarter with money gets to make those decisions,” Kovar said. What’s critical is “working as a team, so everyone feels good. It goes a little deeper than just money and cents.”
Follow these guidelines to set up a family financial plan – whether with a long-term partner, spouse, or even with the kids – that works best for everyone.
Identify Family Financial Goals
Identifying big and daily financial goals for the family can help provide the “why” behind your plan. These goals can be long-term, such as saving for a home, a college education, or retirement. Or they can be short-term goals, like building an emergency fund, paying off debt, or taking a family vacation.
Once you’ve completed your list of goals, consider applying some general tips to your plan. “One of the tips that seems common sense is the 50-30-20 rule,” said Brandon Robinson, president and founder of JBR Associates Financial Services in Plano, Texas. “It simplifies things.” Here’s how the system works: allocate 50% of your income to meet your needs (food, housing, utilities, etc.), 30% for your wants (entertainment, dining out, travel, etc.), and 20% for investments and savings.
You can choose to allocate a different percentage or try a completely different method – and don’t be afraid to experiment with more than one way until you find what works best for your family. The key is to give your plan some boundaries.
Create a Family Budget
Why is budgeting a key tool for your family financial plan? “You can’t manage what you can’t measure. You need to know where your money is going,” Kovar said.
As about three-quarters of parents (73%) say they are struggling to keep up with expenses as of April 2023, according to a New York Life Wealth Watch survey, it’s more important than ever to focus on where your money is going.
Here’s a breakdown of how to do this on a monthly basis:
- List all your income: Include your salaries and any other sources of income you may have, such as child support.
- List all your expenses: Start with fixed expenses like mortgage/rent, car payments, tuition, utilities, mobile phone, etc. Then, log flexible expenses such as groceries and entertainment, etc.
- Save and invest the remainder: Subtract all your expenses from your income to see what’s left. This amount should be allocated for savings and investments.
- Track your progress regularly: The fourth step is to monitor your progress and make necessary changes. For example, if you notice in one month that your expenses exceed a certain limit affecting how much you can save, it’s time to make an adjustment.
Ways to Invest in Education
Families can save money for a variety of goals at the same time, but the top saving goal should be to create an emergency fund, if you don’t already have one. Having an emergency fund for unexpected expenses like home repairs or medical situations can save you from falling into debt or even financial bankruptcy.
If
you start from scratch, open a separate savings account and set up an automatic deposit on a monthly basis or with each paycheck. If you choose a high-yield savings account, you can earn a little interest above your contributions. Start by transferring a small amount like $50 to $100 monthly, but the ultimate goal is to build enough savings to cover three to six months of your expenses in case of job loss, a personal crisis, or another unexpected event.
Managing Debt as a Family
Debt can slow the progress you make toward your financial goals. While some debt, like a mortgage, may be necessary, according to Robinson, many families fall into debt due to overspending on wants, leading to a buildup of high credit card bills. Sometimes, not having an emergency fund means having to rely on credit to manage unexpected expenses.
Whatever the reason, if you have high-interest debt, you’ll want to prioritize those payments for a period and be consistent. This may require cutting back in some areas of your budget temporarily or bringing in extra income. If you’re not sure where to start, you can work with a credit counselor to help you or explore other options.
Protecting Your Family with Insurance
If you’re putting in the hard work to commit to a family financial plan, the last thing you want is to fall back on your progress due to unexpected circumstances. This is where insurance products come in to help. Key types of insurance should include home and auto insurance, health insurance, and term life insurance. With the latter, if you have people depending on you for income, term life insurance that is several times your annual income can help your loved ones financially if you unexpectedly pass away.
There are other types of insurance that may also benefit you, from pet insurance to umbrella insurance to business insurance. A financial advisor can help you determine what types of coverage you may need.
Investing for the Future
Family financial planning isn’t just about daily or monthly spending and saving; it’s also about planning for the long term. Retirement savings can help ensure you don’t become a financial burden on your children one day. The earlier you start investing, the better your growth potential. Maintaining a diverse portfolio with different types of investments can help you achieve steady growth while reducing risk.
Long-term investment options include stocks, bonds, mutual funds, or retirement accounts like 401(k) or IRA.
Investing in Education
College education is an investment that can increase your children’s earning potential over a lifetime. According to 2021 data (the latest available), the median earnings of bachelor’s degree holders were 55% higher than the earnings of those who completed high school.
However, college education is costly. To help reduce future student debt, specialized accounts like 529 plans can help you invest and grow funds tax-free. As long as you have a strong emergency fund and retirement savings, putting more money into a college savings account can be a smart investment.
Ways to Fund Their Future
You can save money for a variety of goals at the same time, but the top savings goal should be to establish an emergency fund if you don’t already have one. Having an emergency fund for unexpected expenses like home repairs or medical emergencies can save you from falling into debt or even financial bankruptcy.
If
You should start from scratch, open a separate savings account, and set up automatic monthly deposits or with each paycheck. If you choose a high-yield savings account, you can earn a little interest on top of your contributions. Start by transferring a small amount like $50 to $100 monthly, but the ultimate goal is to build enough savings to cover three to six months of your expenses in case of job loss, a personal crisis, or another unexpected event.
Teaching Children Financial Literacy
Financial education should be a family affair, according to Tyler Meyer, a certified financial planner and founder of the site RetireToAbundance.com. “You might consider hosting a ‘Family Finance Night’ where everyone, regardless of age, shares their financial insights,” he said. “This not only fosters financial literacy, but it creates a supportive environment for open conversations about money and reinforces positive financial habits.”
You can also look for educational opportunities while shopping together, or teach children to allocate their allowance and gifts into spending, saving, and donating containers.
Review and Update Family Financial Planning
A family financial planning plan should not be static – it should evolve as circumstances change.
Source: https://www.investopedia.com/guide-to-family-financial-planning-8418295
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