General Dwight Eisenhower is often credited with the saying, “No battle plan survives contact with the enemy.” Similarly, most of us have experienced times in life when our “best-laid plans” got knocked off the rails by circumstances that seemed out of our control. Without a doubt—and especially in the early years of starting a family, when children are born, careers are being launched, and life starts to come at us with rapidly increasing speed—there are times when “financial planning” takes a back seat to “financial survival.”
On the other hand, there are some general principles of financial management and strategy that can help young, growing families weather the inevitable storms that life brews up, from time to time. In this article, we’ll discuss some basics that can help your keep your young family’s finances on track—and help you get them back on track after a “temporary detour.”
Handling Student Debt
For many young couples these days, taking care of student debt is a major issue in the early years. One key here is to take advantage of the typically more favorable terms available through federal student loan programs. The other major lever you’ll need is a good budgeting plan that takes into consideration the specific terms of your loan(s). You should also be familiar with various alternative repayment plans that may be available for your loans. Admittedly, in the past few months, student loan forgiveness has become a bit of a political football, but you should still remain alert to potential developments that could work in your favor.
Starting on the Right Foot
It’s important for new families to be centered on some basic financial principles that can provide structure and strategy for meeting the important obligations that come with this phase of life. Gaining such agreement and getting on the same page financially is vital to a healthy, mutually respectful relationship. In fact, it’s about the only way that you, as a young couple, can set an effective course for managing various needs in the short term while still growing your wealth over a shared lifetime. No doubt, it takes money to live and conflicts around money account for the #1 relationship challenge of about 25% of couples. Not only that, but according to surveys, around 70% of couples age 25 and older who make at least $50,000 per year argue about money.
On the other hand, when couples have a mutually agreed goal that they are committed to working toward, they typically experience fewer financial arguments. Challenges and surprises are inevitable, but when you’re aligned on your goals, it’s much easier to navigate setbacks and stay on track financially – together. Whether it’s paying for a child’s education, saving to buy a home, or planning a comfortable retirement, when couples agree on their most important goals and commit to helping each other achieve them, financial harmony is almost always the result.
Your “Money Mindset”
When you’re just starting out, there can be many distractions. For one thing, it’s common for recent college graduates to be bombarded with “pre-approved” credit card offers that make it sound like easy money is there for the taking. But beware: becoming dependent on credit cards is one of the main ways to set yourself up for a difficult financial lifestyle. Instead, one of the most important mindsets you can establish at this phase of life is the savings habit. Make it your goal to set aside a consistent percentage of your earnings in a savings account, with the goal of building toward setting up an investment program for long-term growth.
In fact, the number-one rule for growing wealth over your lifetime is to commit to spending less than you earn. This may seem obvious, but for those who don’t follow a budget, and especially for those who reach too readily for credit cards to obtain short-term gratification, monthly debt service can easily rob you of the ability to set aside savings on a regular basis. Make it a goal to save about 10% of your income each month. Admittedly, in the early days, you may have to start smaller than that, but even a smaller amount, set aside systematically, can help you toward your goal. Over time, as your savings balance grows, you should also set a goal of investing a portion of your savings in assets that can grow faster than inflation over the long term. In other words, putting money in a savings account, while an important start, is unlikely to enable you to grow the kind of significant wealth you’ll need to meet some of your long-term goals.
And speaking of saving and investing, you should also make it a priority to take advantage of any employer-sponsored retirement savings plans—like 401(k)s and 403(b)s—that might be available to you. Regular, systematic deposits in a tax-advantaged retirement plan are a primary wealth-building tool. And even if you don’t have access to an employer-sponsored plan, you can make contributions to an individual retirement account (IRA) and begin building a foundation for a more secure retirement.
Risk Management
When you’re starting out, it’s also important to pay attention to managing various risks. Having the right type of insurance—in the right amounts—is one of the most important decisions for young professionals and those starting families. Your life, health, and property are your most important assets, and making sure that these risks are properly insured is a foundational part of any financial plan.
Children’s Education or Your Retirement?
When children start to come along, it’s natural for young parents to start thinking about college funds. That’s great, but don’t forget that, as counter-intuitive as it may seem, prioritizing your own retirement may be even more important than saving for their education. Making sure your kids don’t have to take care of you in your later years is one of the best financial gifts you can give them. So, even though it can sound harsh, you generally shouldn’t sacrifice your retirement for the sake of your children’s education. Remember what the airlines say: “Put on your own mask before helping the child traveling with you.” By saving and investing regularly for your retirement, you will be ensuring that your kids don’t have to face the burden of providing for your care in your later years.
Having the Right Help
One of the best financial decisions anyone can make is securing the assistance of a professional, fiduciary financial advisor. The right advisor can be your financial coach, the architect for your financial plan, and a trusted guide through the various stages of life. At The Planning Center, we work with clients to develop plans that are designed specifically for their unique needs and resources. To learn more about how we can help at every stage of life, please visit our website.
