As a math and economics major in college and the wife of a financial advisor, I like to think I am slightly above average in terms of money smarts. That being said, money is always a tricky topic. This is especially important with a family. The financial advice every family needs may vary.
Some people love to Dave Ramsey it up, operate with envelopes and cash only, and pay off crazy amounts of debt in short amounts of time. Other people like to live life to the fullest and spend every cent they earn because they can’t take it with them when they die. Regardless of where on the spectrum between those two you land, there are a few things your family should consider when thinking about finances.
- Save for retirement early. Compound interest is your friend! Investing less money at an earlier age will result in more retirement funds than investing more money when you are older. Take advantage of any contribution match your employer offers and invest at least the highest matched percentage every paycheck. If you elect these deductions from day one, you won’t even miss those funds because you won’t know what a paycheck without them looks like.
- Pay down debt. Student loans, credit cards, and car payments can all take huge chunks of your paycheck on the first day. Starting with the balance accumulating the highest interest rate, make a plan to pay off debts one at a time.
- Don’t borrow maximum loan amounts. The bank tells you that you can spend up to $300,000 on a house. Do not, do not, do not buy a $300,000 house! Your entire paycheck will go to those house payments and you won’t be able to buy a couch for the living room! Start by deciding what maximum monthly payment is manageable for your family and use the maximum mortgage calculator by Chase.
- Know your credit score. This is how banks decide to give you loans, lenders decide to give you a mortgage, and what kind of interest rates you get. It can even affect your ability to rent a home. Check out Experian’s suggestions on ways to improve your credit score.
- Emergency funds. Everyone can think of a time when they had an unplanned expense. You had to buy a new tire after a blowout, had to buy a new water heater when the old one stopped working and started leaking, or had an unexpected medical bill. Having a reserve of funds set aside in a savings account can prevent those unplanned expenses from totally crippling your budget. Aim to have a minimum of three months of expenses set side.
- Life insurance and will. No one wants to think about dying and leaving their family. However, it is vital that you (and your partner, if you have one) make a plan just in case. Who will care for your children if something happens to you? A will does not have to be fancy to set your affairs in order. How will any unpaid bills and expenses get paid? The younger and healthier you are when you buy life insurance, the better rate you’ll get.
- Start college savings. Investing in a college education for your three year old might be the furthest thing from your mind. You have years to plan for that. However, please refer back to point #1. Compound interest is your best friend! The earlier you invest that money, the more your child will have set aside when the time comes.
- Get a financial advisor. While most people can navigate daily budgeting and household expenses on their own, figuring out the best retirement plans and the most efficient debt repayment strategies are not always clear cut. Just like you would hire a professional to manage the plumbing in your house, you should pay a professional to help manage your money. They will guide you and give you the financial advice your family needs. Your future self will thank you!
I realize that not a single one of these steps is easy or something you can do overnight. Take a deep breath and tackle them one at a time. It’s not always easy to take this journey, but it is always worth it.
