Once you decide that getting married and/or having children is in your future — and especially once those events come to pass — your finances can rapidly grow more complicated. Making a family financial plan can help you stay on top of things.
You’ll want to take specific measures at each stage:
These family budget and financial planning tips will help you at each stage.
At this stage, your finances are legally combined with another person’s, perhaps for the first time. Ideally, you disclosed your financial details to each other before you got married — even before you got engaged — and you know what you’ve signed up for. Better yet, you’ve already started independently working toward mutual goals.
But now that anything you do financially affects your spouse and vice versa, being on the same page about your habits and goals is more important than ever. Your goals might include paying down debt — especially high-interest credit card debt — sticking to a budget, establishing a joint emergency fund, and saving for a home. Honesty is imperative: the only thing worse than overspending or making a money mistake is jeopardizing your partner’s trust and your joint finances by hiding it. (Related: How to be on a budget: The essentials)
If you don’t already have disability income insurance, now is a great time to apply. Your ability to earn an income is one of your greatest assets. Protecting that asset with disability income insurance means you’ll be able to replace part of your income if you get too sick or injured to work for several months or years.
“If your income stops because of a disability — illness or injury — everything stops,” explained Paula C. Brancato, a MassMutual financial professional, Certified Financial Planner® professional, and author of the guidebook “Financial Guide for New Parents.” You can easily deplete your retirement funds, and couples who were solvent and doing all the right things often fall into debt. Even if you have disability insurance through work, it often falls far short of what you need. (Disability income calculator)
“Disability coverage for a young, healthy couple is so inexpensive,” she added. “Why take this risk?”
Marriage is also a logical time to purchase life insurance.
“Once you start to contribute to a household with another person, you now have a partner and a new responsibility,” Brancato explained. Life insurance is a way to fund that responsibility even if you are no longer alive. “You wouldn’t want your significant other to have to move, stop what they are doing in their career and find a new one, or be unable to pay down debt or a mortgage and lose the house just because you are no longer here and cannot help. You want to be sure that, no matter what, the people you care about can land on their feet.” (Learn more: Why you should get disability insurance and life insurance)
When you’re starting a family, financial planning and budgeting becomes even more important. Someone else will soon depend on you to provide for them — for at least the next 18 years. (Learn more: How new parents can start budgeting for their kids)
Creating a family budget is imperative for new parents because whatever budget may have been in play before is now irrelevant, explained Brancato. She said a family budget is the engine that drives your financial plan, as a tool for spending and saving responsibly, being accountable, and achieving your financial goals and dreams. (Related: How to grow wealth: 3 strategies)
Also, she argued, if you don’t already have life and disability insurance at this stage, now is the time to get it.
Planning for college
Saving for a child’s education is an admirable goal, especially if you want to spare them from the burden of student loans — a burden that you yourself may have endured. But the competing priorities of building an emergency fund, buying insurance to protect your family, buying a home, and saving for retirement can make it hard to know where saving for college fits into the picture.
Brancato points out that saving for college is of no use if it creates long-term financial strain for parents.
“If you need help from your children during your own retirement,” she said in her guidebook, “you can make it impossible for your grandchildren to get a great education, because your adult children will be too busy taking care of you.”
While your children can work, get scholarships and grants, and borrow money at reasonable rates for school, she explained in her book, you can’t do many of these things to pay for life in retirement. Still, establishing a tax-advantaged education savings plan such as a 529 college savings plan that grandparents, aunts, uncles, and friends can contribute to is a great idea. (Learn more: A primer on college financial aid)
Another option is to use the cash value in a whole life insurance policy to fund all or part of your child’s education. Because withdrawals reduce your death benefit and increase the chance a policy will lapse or result in a tax bill, and the main purpose of life insurance is to provide protection for your family, it’s important to talk with your financial professional about the pros and cons of this option.
Planning for retirement
Once you near retirement age, financial planning is about setting aside as much as possible and developing a prudent withdrawal strategy to help your nest egg endure while affording you and your spouse a comfortable retirement. You’ll need a plan for taking required minimum distributions, minimizing taxes, adjusting your investment mix over time, and withdrawing your money at a sustainable rate.
In your 50s or early 60s, it’s also a good idea to consider purchasing long-term care insurance or whole life insurance with a long-term care rider, while premiums are likely to be relatively low. These products can help cover the cost of in-home care, assisted living, or nursing home care if you need help with activities of daily living such as getting dressed, feeding yourself, and bathing.
No one likes to think about being so helpless, but having a stroke, breaking a hip, and developing dementia or Alzheimer’s are unfortunate realities for many people in their later years. Medicare covers surprisingly little of this care, and Medicaid doesn’t help until you’ve exhausted your assets.
Further, being a Medicaid patient limits your care options. Long-term care insurance provides the broadest range of choices and prevents you from burning through your savings if you or your spouse ever ends up in these circumstances. Purchasing a joint policy can reduce premiums and increase coverage for you both.
Financial planning for your legacy
How will you pass any remaining wealth, assets, and family heirlooms down to your children, nieces, nephews, and favorite charities? The best way to make your wishes known and to legally formalize them so they’ll be carried out is through an estate plan that includes, at a minimum, a will. However, while a will is easy and relatively inexpensive to set up, it requires your assets to go through probate after you die, which costs money and ties up your assets for at least a few months before they get distributed to your heirs. Probate will also make your private finances a matter of public record.
Adding transfer on death designations to your accounts lets you avoid probate for free. For more complex situations, placing assets into a trust requires more initial setup and costs but adds flexibility and can also help with estate tax avoidance, as can whole life insurance. Because of how much is at stake, experts generally recommend working with a financial professional and an estate planning attorney to get everything right.
Legacy and estate planning are especially important for individuals who own businesses, said Priyanka Prakash, a business finance expert at Fundera, a marketplace for small business financial solutions.
“You'll need to decide who will step into your shoes if you can no longer run the business. This might mean that you have a buy-sell agreement with a partner, or you might specify a spouse or other family member,” she explained.
It’s also important to have a formula in place to value the business and a plan set up to pass on your unique knowledge to a successor or store it safely in a document, she said. (Learn more: Estate equalization for business owners: How to do it)
Teaching the next generation
Finally, Brancato emphasizes the importance of passing on what you’ve learned about personal finance by instilling in your children the solid financial education they are unlikely to get in school. You can start as young as age 3 with teaching your kids about the value of different coins and demonstrating how money works by paying with cash, not plastic, when you shop with your kids. (Learn more: Money and children: Teaching by age groups)
As they get older, you can teach them about saving, impulse control, goal setting, comparison shopping, and the link between income and work. In high school, it’s important to impart lessons about interest and debt, especially credit card debt. You can even help them set up an IRA to start using their work earnings to save for retirement and teach them how to do their own tax returns.
Bottom line for family budgeting and financial planning
Financial planning is important at every stage of life, but it’s especially important when other people are counting on you. With the right combination of working, budgeting, saving, investing, and insurance—and maybe some help from a financial professional along the way—you’ll be able to secure a comfortable, even prosperous future for your family.
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This article was originally published in May 2019. It has been updated.