By her mid-30s, Lisa Olsen of Pierce County had checked off some of the milestones of adulthood: marriage, home ownership, parenthood.
When her two kids reached preschool age, she and her husband decided they couldn’t put off the next one any longer: It was time to get their, ahem, docs in a row, financially -speaking. They hired a local attorney and dove into the estate-planning process, one that experts say too many new parents put off. By doing so, they put their family’s long-term security at risk.
There’s no way around it: Kids forever change family finances, from how you spend and save to your final wishes. But lots of new parents are too overwhelmed to make a plan, or worse, they postpone financial planning because they feel strapped, says certified financial planner Ali Criss of Financial Insights, a financial planning and investment management firm in Tacoma.
The good news: A little effort goes a long way. And the payoff of peace of mind is priceless. If you’re waffling, confused or overwhelmed, you’ve got lots of company. And now, you’ve got a guide: We break down what you need to know at every stage. Read on for how to make 2018 the year you get your sh*t together.
Early years: Prep and plan
After the arrival of a “little bundle of bills,” Criss walks new parents through a few essential steps. First, she says, parents need to create their estate-planning documents, including a will and power of attorney forms, or update the ones they have. These forms need updating after any big life change — marriage, new baby, divorce, death or major illness — and are usually crafted by an attorney. A financial pro can often recommend a few good lawyers in your area.
And if you don’t already have life insurance, it’s time to start shopping. Life insurance pays cash to a surviving spouse and children if you die during the policy’s term. It comes in two basic varieties: term (a policy that ends after a pre-set term and pays nothing thereafter) and permanent (one that pays your survivors after you die, no matter how long you live).
Term life insurance is a solid, straightforward choice for new parents. In most cases, coverage worth up to five times your annual income (a good benchmark, experts say) costs less than a meal out. Those with a child who may need long-term care may want to consider a permanent policy, which costs more but may provide more long-term security.
If you’ve already got life insurance, check the beneficiaries on the policies, and, while you’re at it, check those on retirement savings accounts, too. You may want all or a portion of the moolah to go to into a trust that your child will inherit as an adult, or to the person you’ve selected as your child’s legal guardian.
These payouts can be some of the biggest assets parents should consider, and the recipient is determined by the beneficiary designation — not, as many assume, by your will, says Xan Gerson, an estate planning and probate attorney with Seattle-based Metis Estate Planning.
You don’t need an attorney to make changes to your beneficiary designation; it usually involves just a phone call to the financial institution or insurance company where the account is held. However, an estate-planning attorney can help make sure you get this done; parents who craft their own wills sometimes forget this important step, Gerson says. “I’ve seen cases where a parent has specified that assets go to certain people in their will, but the assets actually went to the people named as beneficiaries instead, even though this wasn’t what the parent wanted.”
And you can’t escape the B word: It’s time for a budget, says Criss.
“New parents should start visualizing how they’ll change their spending and saving post-kids. And a budget is an important tool.” Criss has personally used Mint; other popular resources are BudgetPulse and YNAB, whose acronym stands for “You Need a Budget.”
If you cringe at the thought of tracking every penny, take heart: After inputting your info and linking your bank accounts, budget software streamlines month-to-month planning to give you a quick snapshot of your spending as well as ideas about where to pocket extra savings.
Elementary years: Good save
By the time kids hit grade school, it’s time to start thinking about college savings, if you haven’t already, says Criss. This is when your budget know-how comes in handy, she says: If you’ve
got a good handle on your spending, it won’t be too painful to set aside a small amount each month.
If money is tight, don’t get bogged down in how much you can save. “It’s much more important to get in the habit of regularly putting aside money for college,” Criss says. “I have clients who save as little as $10 a month. The important thing is that it’s a habit.”
Now, where to put that dough. Criss recommends 529 plans, “qualified tuition plans” sponsored by states or educational intuitions. These plans are tax-protected, meaning the cash grows tax free and won’t be taxed when withdrawn for educational expenses. (This year’s new tax legislation expands the scope of 529 plans, so funds can now be used for K-12 and private school expenses in addition to college.)
Choosing a tax-protected plan can yield a bunch of extra cash for college. Saving $200 monthly for 18 years in a tax-advantaged plan nets an extra $14K for college, compared to a savings account without tax protection. And since funds can be used for schooling in any state, you don’t have to choose your state’s plan; the CollegeAmerica 529 savings plan is the country’s most popular.
Too often, Criss says, parents say they can’t save for retirement because they’re saving for their kids’ education, but that’s backward logic. Your child can get loans and scholarships for college, but you can’t do the same for retirement. “One day, your child will thank you for taking care of your own future,” she says.
Saving about 10–15 percent of your income for retirement is a good benchmark, but individual goals and budgets vary. As with college savings, it’s better to build a habit of regularly saving a small amount than to skip it altogether. And cutting down on eating out by one meal each week can yield a couple hundred dollars per month to put into your 401K or an IRA.
Tween and teen years: Big kids, big expenses
Think babies are expensive? Try tweens and teens. It’s wise to get ahead of spending in one crucial area: health and dental care. Try a health savings account, or HSA. (HSAs are available to people with high-deductible insurance plans and allow you to set aside pre-tax dollars for medical and dental expenses; eligibility varies.)
If you’re late to the college-savings game, there’s still time. If your child is already in high school, you may want to skip investment accounts, including 529 plans, and deposit funds into a regular savings account instead. Every teen should also be thinking about scholarships, says Criss. The scholarship search on BigFuture is a good place to start; it lists scholarships from 2,200 programs worth a total of $6 billion.
Worst case: It’s possible to shell out for college expenses in real time as kids work their way through higher ed. Check out the blog SmartDollar for insight on ways to make it work without derailing your own savings.
The teen years are also a good time to build your child’s own financial savvy. Best-selling author and financial guru Dave Ramsey recommends setting up checking and savings accounts for your teen. (Your bank probably offers teen-specific options; locally, BECU’s Early Saver account is a popular option.) Also set up a monthly automatic transfer of the amount you’d normally spend on their various incidentals so they can get used to managing money. Resist the urge to rescue your spend-happy teen when they come up short; their paying a few overdraft fees could offer a valuable, if costly, lesson in self-control.
The takeaway: Getting your finances in shape isn’t as scary as it seems, says Criss. “I like people to think about small steps instead of this huge obstacle. Think about what you can do this month. If you don’t get it done this month, that’s OK. You can get back at it next month.”
Lisa Olsen of Pierce County agrees. The biggest surprise about finalizing her estate plan was how easy it was, she says. “It was a phone conversation or two. Then we made an appointment to get everything signed. It was all very easy. And having the paperwork signed and knowing it’s all done and decided is a good feeling!” And that’s priceless.
Writing a will 101
Confused about communicating your final wishes? Join the club. Here’s advice from estate planning attorney Xan Gerson of Seattle.