Some young adults get started with basic financial planning when they enter the workforce, which is of course a smart idea. Hopefully you already have a savings account and contribute to your company’s retirement plan. You already have a handle on setting a budget and living within your means. This is a great start, but wherever you are with financial planning before having kids, becoming a parent puts your whole world, including finances, into a whole new perspective.
Make the Most of Your Money
Raising children clearly puts extra pressure on your budget. The USDA reports that middle class families spend an average of $12,980 on each child annually. This staggering figure is enough to leave parents worried about how to support their families. We understand that worry, but one of the best things you can do to allay those fears is to think about more than just how much money you earn. You also want to think about how to make the most of that money through investments.
In many ways, investing is about making your money work harder. For example, buying a house is an investment that comes with costs, but the reward is that your money goes into building wealth, whereas money spent on rent is money you’ll never see again. Owning a home gives your family stability in a very tangible, physical sense, but it’s also stability in an asset that you or your children can access in the future.
If you’re a first-time homebuyer, you may feel confused by the process. To make sure you’re investing wisely and don’t lose money along the way, start by doing some research on the steps involved in buying a home, from setting a budget and getting pre-approval for a home loan, to finding a reputable real estate agent to work with and browsing homes for sale online.
Save for the Future
Along the same lines as building wealth through homeownership, parents should also think about other investments to save for your family’s future. When it comes to your family’s overall financial security, the general rule is to have a three- to six-month emergency fund. However, many families with children feel more comfortable having an even greater cushion.
If you still aren’t sure how much to save or how to start, the finance experts at CNBC provide a formula for determining your ideal emergency savings amount that’s based on your income and the length of time you want to be covered. They also recommend setting up a high interest savings account and making automatic draft deposits so you never get behind on your savings goals.
While every family needs a rainy day fund as a safeguard against big financial hits, parents should also establish savings that are specifically for your children. To start saving for college, the most well known option is the 529 plan, which allows you to contribute tax-free over the years. However, Money Under 30 explains how colleges consider how much you have saved in a 529 plan in determining financial aid packages, which is why some families save for college through other options like Roth IRAs.
Set a Smart Budget
While much of your financial planning is focused on these big picture issues like investments and savings, don’t forget about keeping up with the smaller stuff, like where your money goes on a daily basis. As US News explains, it’s very common for parents to underestimate the costs of raising children, especially when it comes to how much they’ll spend on child care. This is why families need to set a budget based on the best possible estimate you can make of what your expenses will be.
Parenthood is all about expecting the unexpected, and this is a good rule for financial planning too. If you’ve already got a basic financial plan, you’re ahead of the game. Tweaking that plan now doesn’t mean undoing what you’ve already done. It just requires a little extra attention to what your growing family needs to stay stable and even thrive - now and well into the future.
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