Planning for the future can be a tough undertaking, especially, if you have recently tied the knot. We want to congratulate those of you that have started a family. The purpose of this information is to serve as a guide to help you make decisions concerning your finances. In surveys, about 57% of divorced couples cited money fights as the primary reason their marriage did not work.
Establish a Budget
The biggest financial mistake people make is not establishing a budget, whether single or married. It is important to take the time to track income, expenses, and debt (credit card, student loans, mortgage debt, car payments, and utilities). Once this is done, you know your whole financial picture, and can begin to set goals and plan for your future. Even if the goals are simple, you will have a game plan for meeting them. As a couple, you will be able to spend time together, establish responsibilities and plan for your combined future. This will alleviate a lot of the stress many young families face when beginning their lives together.
The Emergency Fund
When you have established your budget, the next important step is having an emergency fund. The purpose of the emergency fund is to help pay for unexpected expenditures. For example, if the transmission in the car fails, there is a medical emergency, or if one partner loses their job, the couple should have a cash reserve without raiding retirement accounts. Depending on your employment status and income level, the amount of emergency savings varies. We, generally, recommend six months of cash or cash equivalent investments as an emergency fund. In some cases, more is necessary. The emergency fund is not to be used for anything, except an emergency. Resist the urge to raid the fund for an extravagant purchase, such as, a flat screen TV or for a down payment on a new car.
Insurance Planning
A young couple should ensure that they have adequate insurance for their needs. This is an area that couples often overlook. We recommend disability insurance and term life insurance. Younger families often need more disability coverage should one partner become injured and unable continue in their line of work. We suggest checking the coverage offered by your employer. Then consider a supplemental policy to cover any gaps that may exist in coverage. Many people waste money on whole life insurance when term insurance will save money and should provide what is necessary.
Be Ready for Taxes
Once the couple has prepared a budget, you need to prepare for income taxes. Do not be caught off guard when April 15th rolls around. You should take a look at your combined income, and preplan for income taxes. Consider hiring a tax accountant to prepare your income taxes. There are some deductions that are eliminated or phased out when a family has a combined income over certain thresholds. In some cases, it can be beneficial to file separately. A tax professional will be able to provide advice, maximize your deductions, and minimize your tax liability.
Don’t Purchase a Home too Quickly
Another mistake young couples make is purchasing a home too soon after they are married, or purchasing more home than they can afford. It can be tempting to look at your combined incomes and think you can buy a home, especially, in this housing market. Take your time. This is a buyer’s market. To get the best deal on a home, you should have 20% of the purchase price as a down payment on the home. This keeps you from having to pay private mortgage insurance, and you may qualify for a better interest rate. It can be tempting to use your emergency fund as a down payment on your house. However, we strongly warn against this. When you purchase a home, remember to adjust the amount in your emergency fund to include your mortgage payments. If you own a home, sometimes people are tempted to pay down their mortgage early. We believe that a greater return can be realized by investing that money for the long term, or by paying off higher interest debt.
Retirement Planning
We have covered the short-term hurdles young families face. Let’s now address those that will be encountered well in the future. One area that is often overlooked is retirement planning. Sometimes it takes a back seat to more immediate needs. We recommend discussing retirement goals when establishing a budget. The most important aspect of planning for retirement is that the earlier you begin saving, the longer your nest egg has to grow. Therefore, you should have greater returns. As an overview, our philosophy is to invest any money not needed within the next 10 years into the stock market as a long-term investment. Any money needed within the next 10 years should be in fixed income securities. With liquidity needs covered, you should be able to avoid having to sell stocks in a down market.
Planning for Children
Planning for children is another area that many couples do not adequately address. Even if a couple has not decided to have children, the pair can still save for them. It is possible to set up a college 529 Plan in one spouse’s name that can later be used to fund a child’s education needs. Once the child is born, the beneficiary of the account can be changed to the child. This gives the couple extra time to plan for children and a leg up on saving. Obviously, it is not necessary to contribute excessive amounts to the fund. If the couple decides at a later time not to have children, they can use the funds for their own post graduate education, for culinary classes, or to fund a niece or nephew’s college. This is a simple way to plan for children.
As a parting thought, we want to remind you to update your beneficiary forms for any insurance policies, 401(k) plans, or wills you have. In some states, marriage or divorce invalidates an existing will. If you do not have a will, you should make one. Remember to update your driver’s license, social security card, credit cards, etc. and add your spouse to your health insurance plan. We wish you the best!
At Henssler Financial we believe you should Live Ready, which includes starting your financial life on the right foot. If you have questions regarding your financial decisions as you begin your new life, you may call our experts at 770-429-9166, or e-mail at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
