Starting a family fills your home with love and joy. But as your family grows, you’ll be faced with more responsibilities, including paying for your children’s education or insurance for the whole family. As a result, some families may experience a shrinking budget that requires better money management strategies.
In this blog, we will look at how to build a financial plan for your family and common mistakes to avoid. But first, let’s see what family financial planning is and why it is essential.
What Is Family Financial Planning?
Financial planning is the process of defining monetary goals and outlining the steps you need to take to reach them. Family financial planning focuses on financial goals concerning you and your family members.
Family financial goals can include saving to send your child to college, going on a vacation, or purchasing a larger home for your growing family.
Why Is Financial Planning Important?
Financial planning can provide a safety net for the future of your family. It helps you create a roadmap for ensuring that you and your family are well taken care of in the future. Keeping track of your expenses can help your family grow wealth and tackle unexpected financial emergencies.
There will always be situations where you will be faced with unforeseen expenses like medical bills or car repair fees. A carefully planned budget can help you have enough money on hand to take care of these expenses.
Additionally, a well-prepared budget can also aid you in anticipating your monthly expenses in advance and developing a spending habit that matches your financial goals. Therefore, the earlier you start developing a financial plan, the more you can save for retirement, your children’s education, and other family objectives.
6 Steps to Build a Financial Plan for Your Family
Most financial planning courses will tell you to start with establishing a budget and keeping a close eye on it over the years. While budgeting is a key step in building a financial plan for your family, we’ve also gone the extra mile to include additional financial planning steps. Here are six steps to help develop a family financial plan.
Check In On Your Family Budget
Budgeting wouldn’t be as important if your family’s spending stayed constant over the years. But you and your children grow, bringing about new expenses every year. For instance, as your family expands, you may need to purchase a new car or a larger home. Additionally, you will likely want to save for your children’s future college education.
To stay ahead of your spending habits, go over your family budget every month and do some personal accounting. First, determine your monthly income and expenses. Next, determine how much you are spending on fixed expenses, such as rent or mortgage payments, and variable expenses, such as eating out and groceries.
Once you have created a list of expenses, determine which areas you may be overspending and can cut back in. For instance, you can adjust the number of times your family dines out. Similarly, you may be able to find family plans and discounts for entertainment subscriptions, cell phone service, or insurance.
Although these cuts may seem minimal, they can add up over the long run. The extra money can then be redirected toward a savings account dedicated to large-sum expenses like upgrading your car or home.
Reconsider Your Family Insurance Needs
Acquiring suitable insurance coverage for the entire family is an integral part of financial planning. There are three primary areas you should ensure – life, health, and assets (such as a family car or house).
For instance, try looking for comprehensive coverage benefits that cover all medical expenses, including maternity expenses and out-of-the-pocket doctor consultations. In some cases, you may be able to bundle your home and auto insurance, allowing you to save money.
If you and your spouse work, you might already receive health insurance from your workplace. In most cases, the insurance may also cover your children. If not, you should consider buying health insurance for your kids too. A typical annual premium for health coverage for a family of four usually costs around $22,000.
If your income allows, you can also opt for term life insurance and disability income insurance. With a term life insurance of 10 to 30 years, the insurance company will pay the family a lump sum of cash if the insurance beneficiary passes away within that period.
Build a Family Emergency Fund
Building a family emergency fund is the foundation for a safe financial strategy. You never know what might happen to you at any given time. Maybe you lose your job, or your car breaks down suddenly, and you need fast cash on hand to deal with it.
Try to leave room in your budget for an emergency fund that would cover your expenses for six months. For example, following the 50/30/20 rule can help you budget your money more effectively. According to this principle, you should direct 50% of your monthly income to necessities such as food and clothing, 30% to discretionary expenses like vacation or entertainment, and 20% to savings.
Repay Your Debt
Taking loans to cover expenses is normal when you have a growing family. For instance, the U.S. Census reports that 64.8% of Americans obtain a mortgage to purchase a house. But try to devise a plan to repay those loans as soon as possible.
There are different strategies you can implement to get out of debt quickly. One of these tactics is called the snowball method, which suggests paying off the smallest of your loans first. Then, once you’re done with that one, you move to the next smallest one until you get rid of all your loans.
Another strategy is to rank your loans with the highest to lowest interest rates and pay off the ones with the highest interest first. You may also negotiate with your creditors to refinance your mortgage or student loan to a lower rate.
Check In on Your Retirement Plan
You can never start saving for retirement too early. In fact, the earlier you begin putting money away for retirement, the more comfortably you can maintain your lifestyle in the future. If both you and your spouse are employed, chances are that your employers offer a 401(k) plan. Take advantage of that account and start saving early on in your career. You can contribute up to $20,000 per year individually as of 2022.
The amount you can contribute monthly depends on your income. For example, if your salary is high, you can contribute 10% to 15% of your monthly paycheck to your retirement account. However, we suggest you consult a financial advisor and plan administrator before making such investment decisions.
Save for College
Even while your kids are young, it’s good to start thinking about their college education now. You can open a 529 college savings plan, which is a state-offered investment plan that allows you to save money for education expenses. Then, when you send your kids to college, you can withdraw the funds from the account tax-free.
Common Mistakes to Avoid
Creating a financial plan for your family usually takes some time and a few months to adapt and learn to stick to it. As you go ahead in crafting your family financial plan, watch out for the following common mistakes:
Failure to Communicate
In some families, spouses may have different saving and investing habits. It’s crucial to communicate your long- and short-term financial goals with your spouse and create a plan that would benefit you both. Otherwise, you can risk damaging your family budget and even cause relationship problems. It would also be wise to discuss family finances with your children and teach them about healthy financial habits, financial independence, and the value of money from a young age.
Procrastinating to Save
Many people refuse to save by making excuses such as “I don’t earn enough” or “I’ll do it later.” But the earlier you start saving, the better your finances will be, thanks to compounding. Let’s say you invest $100 monthly with an 8% annual return. You’ll have almost $150,000 accumulated in 30 years. But if you start investing 10 years later, you’d have to invest $260 each month to reach the same amount in 20 years.
Not Diversifying Personal Finances
Investment diversification can allow you to grow wealth while mitigating some risks associated with volatile market fluctuations. As a result, you may consider spreading your investments among stocks, government bonds, or precious metals.
Chasing the Market
In the 1990s, many investors tried to outwit the market by buying high-risk stocks to sell them at a higher price later. Ultimately, it led to a market crash. Remember that the reason for investing is not to beat the market but to reach your financial goals. This is usually achieved by investing early, regularly, and with moderate risk.
Ignoring the Possibility of Mishaps
One area that is often overlooked when planning family wealth is assuming emergencies won’t occur. For instance, medical emergencies may happen, and necessary procedures are usually very expensive, even with insurance. Therefore, to mitigate the chances of falling into debt, it is best to maintain a general savings account that you contribute to regularly.
Meeting Every Financial Demand of the Family
While you should consider the financial goals of every family member, you should also be realistic with what you can comfortably afford. For instance, your children may want expensive gaming consoles for the holidays, but it may be more practical to skip the large purchase and save money instead. Although this is bound to cause your children to become upset, it doesn’t mean you can’t enjoy the holiday season. Also, it can be another opportunity to discuss finances with your children and the value of money.
Imitating the Lifestyles of Other Families
While planning your future finances, always remember that different families have different spending habits. Sometimes, social pressure may tempt you to stretch your budget. But try to stay grounded and don’t give in. If your friends live an extravagant lifestyle, don’t try to imitate their spending if you can’t afford to.
Bottom Line
Family financial planning is an extensive and ongoing process, but the hard work can pay off when you finally afford the upgrade for your family. When creating a family financial plan, you should start by defining your goals first. Then, focus on creating a budget and try to stick to it. At the same time, aim to secure your family with insurance, pay off your debt, and build savings. Your goals may also change over time, so review your plan once in a while to make it more relevant to your current situation.