As a parent, your primary concern is ensuring your children have everything they need to grow up healthy, happy, and well-educated. However, it is equally important to consider their financial future, particularly in today’s volatile and uncertain economic environment. In this blog post, we will explore some of the most critical financial considerations parents need to worry about with young children.
Emergency Fund
One of the most important things parents need to consider is starting an emergency fund. You never know when an unexpected event may occur, such as job loss or a medical emergency, which can cause significant financial strain. Building an emergency fund can help weather these storms without relying on high-interest credit cards or loans.
Experts recommend saving enough to cover three to six months’ living expenses. This money should be kept in a separate account, such as a savings or money market account, where it can be easily accessed in case of an emergency.
Life Insurance
Another critical consideration is life insurance. Life insurance can provide a safety net by paying out a lump sum to the surviving spouse or children in case of the insured’s death. This is particularly important for families that rely on one parent’s income to support the household. If something were to happen to that parent, it could have a significant impact on the family’s financial situation.
You want to have enough life insurance to fill the gap of any monetary shortfall. You want to be able to cover everything you planned on paying for your house, college, vacations, etc. You should have enough insurance to be confident it will cover any shortfall, but not so much that it feels like a lottery jackpot.
There are two types of life insurance: term and permanent. Term life insurance is the most affordable and provides coverage for a specific period, such as 10, 20, or 30 years. Permanent life insurance, such as whole or universal life, provides coverage for the insured’s entire life and has a cash value component that can grow over time.
Let your investments be investments, and your insurance be insurance. Combining the two into whole life is inefficient and generally benefits the person selling it most. Generally speaking, independent financial advisors, like myself, prefer term life insurance.
Disability Insurance
In addition to life insurance, parents should also consider disability insurance. This type of insurance provides income replacement if the insured cannot work due to a disability. Disability insurance is essential for parents who are the primary earners in the household, as a disability could significantly impact the family’s finances.
This is where I see most millennial parents needing more coverage. Often, they don’t have any disability coverage at all. Insuring against the unthinkable is challenging to discuss and plan. However, doing so will prevent a family’s challenge from becoming a financial disaster.
There are two types of disability insurance: short-term and long-term. Short-term disability insurance typically covers disabilities lasting up to six months, while long-term disability insurance covers longer periods, such as two years or until retirement age.
Most employers offer short-term and long-term disability insurance as part of their benefits package, and I highly recommend you check it out. Disability insurance is something millennial parents need to take seriously and may require more coverage outside of their employer.
College Savings
Another financial consideration for parents is saving for their children’s college education. With tuition, room, and board skyrocketing, it is essential to start saving as early as possible. Many parents want to start saving for college but find it difficult to start. There are several options for college savings, including 529 plans, Coverdell Education Savings Accounts, and custodial accounts.
529 plans are the most prevalent option and offer tax-free growth and withdrawals for qualified education expenses. Coverdell Education Savings Accounts also provide tax-free growth and withdrawals, but contributions are limited to $2,000 annually. Custodial accounts, such as UTMA or UGMA accounts, are held in the child’s name but are subject to income tax and can impact the child’s eligibility for financial aid.
The more popular 529 college savings plans, while not tax-deductible at the federal level, most states offer tax breaks on 529 plan contributions. Over the past few years, Congress has tried to increase participation in the plans. By allowing participants to use them to cover tuition costs of primary education, the plans are now much more attractive for savers.
- Not federally deductible, but many states offer tax breaks.
- No annual contribution limits, but anything over $17,000 ($34,000 for couples) will count against your lifetime estate gifting, and you have to file an extra form with the IRS.
- May contribute $85,000 in one year and stretch it out over five years to avoid the contribution counting against the estate
- There are aggregate limits that vary from state to state on the amount someone can have in a 529 plan.
For those parents worried about sending their kid to college or not, don’t worry. As part of Secure 2.0, Congress is allowing for the conversion of up to $35,000 from a 529 college plan to a Roth IRA. There are a few caveats, duh:
- The 529 needs to be open for at least 15 years
- The beneficiary needs to have earned income up to the amount of the conversion
- The amount of the annual conversion is limited by the annual IRA contribution limit
- Contributions made in the last five years are not eligible for conversion
Don’t let the “college or not” decision stop you from starting to save. The changes to 529 plans give you more options. The earlier you start, the less you will have to worry about in the future.
Estate Planning
Finally, parents should also consider estate planning. Having an estate plan is crucial because it helps ensure that your assets are distributed according to your wishes after your death. Without a plan, the distribution of your assets may be left up to the courts, which can be lengthy and costly.
Here are some reasons why having an estate plan is important:
Control over your assets
With an estate plan, you can determine how your assets will be distributed after your death. This includes deciding who will inherit your property, money, and other assets. Without a plan, the distribution of your assets may be left up to state law, which may not reflect your wishes.
Avoiding probate
Probate is the legal process by which a court validates a will and distributes assets after someone dies. Having an estate plan can help your heirs avoid the probate process and distribute your assets more quickly and efficiently. Without an estate plan, the process can take months or years.
Minimizing estate taxes
Depending on the size of your estate, your heirs may be subject to estate taxes upon your death. By incorporating tax planning into your estate plan, you can minimize the taxes your heirs must pay.
Naming guardians for minor children
If you have minor children, it is important to name guardians who will care for them in the event of your death. Without a plan in place, the court will have to determine who should be responsible for your children, which may not reflect your wishes.
Ensuring your healthcare wishes are met
An estate plan can also include a healthcare directive, which outlines your wishes regarding medical treatment in case you become incapacitated. This can help ensure that your healthcare wishes are met, even if you are unable to make decisions for yourself.
Overall, having an estate plan is an important step in protecting your assets, ensuring your wishes are met, and providing for your loved ones after your death. By working with an experienced estate planning attorney, you can create a plan that reflects your wishes and gives you peace of mind knowing that your affairs are in order.
You need to be doing these things
In conclusion, parents have many financial considerations to worry about with young children. Building an emergency fund, securing life and disability insurance, saving for college, and estate planning are all crucial steps in ensuring that your family is financially secure. It can be overwhelming to think about all of these things at once, but starting early and taking small steps can make a big difference in the long run.
One of the best things parents can do is to educate themselves about financial planning and seek out professional advice when necessary. A financial advisor can help you create a personalized plan that takes into account your specific goals, risk tolerance, and financial situation.
Ultimately, the key to financial success is to be proactive and plan ahead. By taking steps now to secure your family’s financial future, you can rest assured that you have done everything in your power to protect them from unforeseen circumstances and help them achieve their goals.