5 Ways For Young Families To Set Themselves Up For Financial Success

As a young family, you’re probably facing competing financial priorities like saving for college and retirement. You may also feel stress about making the right decisions when it comes to investing, taxes, or having the right amount of insurance.

To top it off, you’re likely at the busiest point in your life trying to balance a career, raising kids, and managing your ever-changing financial picture.

These 5 tips provide a starting point to set your family up for financial success.

1. Clarify your goals

It’s okay if you don’t know exactly what you want retirement to look like or how much you’ll need to have saved for college. But it is important to come up with some educated guesses – use the cost of a local school to estimate future college costs, or figure out what you’re spending now and use that as a starting point for how much you’ll spend in retirement.

It’s important to give yourself something concrete to work toward.

Both your life and your financial plan will change and shift over time, so be sure to reevaluate your goals regularly.

2. Align your savings and investment plan with your goals

Make sure you are saving in a way that best allows you to accomplish your goals. Here are the key pieces to consider:

• Think through each of your goals and how much time you have between now and when you will need the money for those goals.
• Make sure you are saving in the right type of account for each goal. A savings account isn’t a great place for retirement savings because you need to invest that money over time to allow it to grow at a rate greater than inflation. And an IRA or other retirement account is not ideal if you’re saving for a down payment on a house because you could pay a 10% penalty on early withdrawals.
• Take the right amount of investment risk. With your time horizon for each goal in mind, make sure you have the right allocation of stocks, bonds, and cash. For example, money you’re setting aside for retirement can have a larger allocation to riskier assets like stocks than money you are saving for next summer’s vacation.

3. Build financial flexibility

It can be easy to get caught up in trying to optimize every dollar of your savings. But for young families in particular, it’s important to maintain flexibility in your finances.

Chances are you will come across some unexpected expenses at some point in your life. And it’s also likely the goals you are working toward now are going to change.

So, ensure you have enough emergency savings, you aren’t stashing all of your money away in retirement accounts that can’t be accessed without penalties, and that you’re leaving enough cushion in your budget should something unexpected pop up.

4. Protect against major losses

Saving for the future is important. But don’t let major life events throw your plans off track. Make sure you’re doing the following to protect your family:

• Have enough life and long term disability insurance
• Put together an estate plan
• Build an emergency fund

5. Don’t pay more tax than you need to

Taking time to do some thoughtful tax planning can save you a significant amount over your lifetime. Here are some basic tips:

1. Compare your income this year to what you expect it to be in the future.
2. If you’re in a high income year, the goal is to reduce your taxable income as much as possible. Do this by taking full advantage of a traditional 401(k), realizing capital losses, or increasing your deductions via charitable contributions for instance.
3. In a low income year, aim to recognize more income while the rate you are paying is low. Roth IRA or 401(k) contributions can make sense in this case.
4. Some tax reduction strategies make sense no matter your income level – for example, using a Health Savings Account, or using an FSA for medical expenses or child care costs.

Considering working with a financial planner?

These tips should put you on the right track to setting your family up for financial success. But if your situation is becoming too complex to manage on your own, or you want someone in your corner to walk you through big financial decisions, here are a few things to consider before hiring a financial professional:

1. What is their area of expertise?

Some financial planners work specifically with retirees, others with young families or business owners. Look for someone who deals regularly with the issues you are facing.

2. How do they make money?

There are many different fee models used by financial planners. Understand how much you are paying and if there could be any conflicts of interest.

3. Are they the right fit for you?

The most important piece of working with a financial planner is that you feel comfortable having honest conversations and will value the advice they give. Take the time to make sure it’s a good fit before jumping in.