Young families have the benefit of many years ahead to build a nest egg, nurture investments, and prepare for the future. Creating a financial foundation is an important part of life, especially when you have a family depending on you.
At Colorado Wealth Group, we have a passion for planning. We help young and upcoming families across the country and in Denver, Colorado work to make their financial goals a reality. Here, we’ll discuss some of the financial foundations to develop as a young family.
Estate Planning [i]
Young parents may not think far enough into the future to believe early estate planning is necessary. Estate planning early ensures your children have a plan in place if something should happen to you as parents.
Your last will and testament should include individual documents should incapacity occur. These documents include:
- Power of Attorney
- Living Will
- Health Care Surrogate
Your will should also name the hierarchy of guardians for your children in the event you can no longer care for them.
Develop a Budget
Understanding your spending improves saving efforts and ensures you have money in the future for things like:
- Medical/Dental Needs
- College/University Education
- Unexpected Emergencies
Budgeting software like Mint.com categorizes monthly finances by category. This helps you manage the realities of your financial situation by:
- Monitoring incoming and outcoming money
- Setting realistic financial milestones
- Managing short-and-long-term goals
With a budget in place and budgeting software to support you, you can plan your finances for one month to thirty years in the future.
Invest in Life Insurance Coverage
In a small family, children depend on their parents for financial security. That’s why we believe each parent should consider investing in a 20 to 30-year term life insurance policy. We also believe the policy should be 10 to 15 times the gross family income. Base this on your gross income. If something happens, this cushion potentially provides 10 to 15 years of your income to your family.
In addition to income replacement, a life insurance policy should be designed to cover things like:
- College/University
- Debt (Mortgage, Personal Loans, etc.)
- Inflation in years to come
Life insurance can be cheaper and easier to qualify for when you’re young and healthy. Taking out a long policy as a young family can be cheaper than applying for life insurance later in life.
Invest in Your Retirement
As your children grow up and you and your spouse retire, you will likely no longer have a steady paycheck or income to depend upon. To retain financial security as you age, we recommend investing in your retirement while you’re young. We know there are competing priorities as a parent, but remember, you can finance a college education , but you can’t finance your retirement.
Employer-sponsored retirement plans like a 401K and 403B are a good place to start . Invest up to the annual limit and investigate other company benefits like disability and life insurance. This life insurance can be used along with a standalone plan. We don’t recommend depending on employee-offered life insurance alone, as it isn’t portable if you switch jobs.[ii]
Contribute to a Roth IRA*
Contributing to a Roth IRA allows you to save above and beyond employer-sponsored plans. Even a non-working spouse can make contributions to a Roth IRA. A Roth IRA is a tax-free retirement account for individuals. You can withdraw money from the account tax-free if you are 59 and a half years old and up and have had the account for more than five years.
Roth IRAs are preferable to other retirement plans because they tax the “seed” at a known tax rate rather than at the “harvest” when the tax rate is unknown.
Work With a Financial Advisor
After your financial foundation is in place, you can begin discussing additional future goals, such as:
- Vacation or mountain homes
- Rental real estate
- Custodial Roth IRAs
- Whole Life insurance policies
- College savings
For more information on developing a strong financial foundation, let’s chat. We reserve complimentary consults each month for couples, individuals, and families just like you who want to make sure you’re doing the best you can with your money. If you are ready to see how Colorado Wealth Group can help you, go ahead and reserve your initial consult here today.