Take a moment to imagine your child’s future.
You want them to grow up in a good home, graduate from college and be ready to take on the world. How will they get there?
It starts with how you plan for your family’s financial future. In 30 years, you’ll be glad you used these six tips for parental financial planning.
1. Examine Your Expenses
The first thing you should do is examine your expenses.
Sit at the kitchen table with a calculator, pen, and pencil to tally your bills and see how they compare to your monthly income. You may have some discretionary income after paying rent and your other bills. With this money, you can treat yourself to something nice and save a little for investing.
The best part about creating a budget is seeing your monthly expenses and how they stack up. You’ll quickly see what costs are starting to exceed their worth. For example, you might not watch TV enough to justify your cable.
The average cable bill costs Americans $118 monthly, leading many to cut the cord and use streaming services instead. Removing wasteful spending frees up your budget for other priorities.
2. Start an Emergency Fund
Once you have your budget, consider making room for rainy-day funds. Emergencies can happen anytime, so you must prepare financially for the worst. You could wreck your car or injure yourself while working outside.
Regardless, the bills will quickly pile up, so set aside money now.
Starting an emergency fund is crucial because not having money when you need it most can hurt your family.
A 2023 Bankrate survey shows 22% of Americans have no emergency fund and 30% have fewer than three months of expenses. Consider setting aside what you can and preparing for that dreaded day.
3. Invest for Retirement
Retirement could be 30 or 40 years away, but time flies quickly.
Saving for retirement when you’re young is a spectacular idea, especially if you have enough discretionary income to spare.
Take advantage of your employer’s retirement program if they match your contributions. Retirement savings grow based on interest, so investing now allows your funds to compound as the years pass.
If you’re self-employed or want more investments, consider investing with an individual retirement account (IRA). You can choose a traditional IRA or a Roth IRA — either way, you have control over your investment approach.
Some investment firms let you start a Roth IRA for children, giving them a significant head start on their retirement. The contribution limit for a custodial Roth IRA is $6,500 — just like the typical investment accounts.
4. Build Your Credit Score
A good credit score can save thousands of dollars and headaches for your family over the years. Imagine it’s time to buy a car for yourself or your kid’s sweet 16 party.
You’ll get a much better interest rate and payment plan if you have a good credit score. The average credit score in America is 714, so aim to surpass this target for a brighter financial future.
If you don’t have stellar credit, take time to rebuild it. The following strategies increase your credit score:
- On-time payments: Always pay your credit card bills on time. Future lenders want to see you enforce good habits, so pay the bill immediately after it arrives each month.
- Low utilization: Rewards points are tempting, but don’t go overboard with your usage. Keep your credit utilization low — under 30% if possible.
- Credit line increases: Did you get a pay raise at work? Notify your credit card company of your new salary to increase your credit limit, thus lowering your utilization ratio.
5. Save for a House
A home with a picket fence is something many families strive for.
With today’s housing market, attaining this dream can be a struggle. In 2023, the median house price eclipsed $410,000, marking the second-highest peak in American history. Even if you’re five years away from buying, it’s a terrific idea to start saving now.
The down payment is the most important thing you need when buying a home. Experts recommend paying 20% of the home’s value because you’ll likely avoid private mortgage insurance. A higher down payment means lower monthly payments and faster equity building.
If housing prices are intimidating, you can seek financial assistance through the U.S. government. The Federal Housing Authority (FHA) offers loans to those who need income assistance. With FHA loans, you can qualify for a home with low down payments or a poor credit score. You can use the money saved and allocate it toward upgrades or other investments in your house.
6. Start a 529 Plan
When your child is small, you’re likely thinking about preschools and elementary schools in the area, not Stanford or Dartmouth.
However, you can start thinking about college now with a 529 plan. This strategy allows you to put away money now in a tax-advantaged account for your children. When your kids turn 18, they’ll be much more financially prepared for college.
Starting a 529 plan has numerous advantages. The most significant benefit might be locking in tuition rates. If you choose the prepaid plan, you’ll pay the current rate instead of the cost from the year your child enrolls in school.
Your kids may have leftover money after graduation. Starting in 2024, they can roll over up to $35,000 into a Roth IRA account if their 529 account is at least 15 years old.
Ensuring a Healthy Financial Future
If you’re planning for a family, you have a lot on your plate. There are a million things to do with insufficient time to do it all, but one way to start is examining your financial future.
These six tips show what you can do now to make a big difference for your family later.
