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Episode 23 - 5 Financial Tips For New Parents (REPLAY)
21 Plays1 month ago
Becoming a parent changes everything—including your finances. In this episode, we break down 5 essential financial tips every new parent should know, from budgeting and saving to planning for the future. Simple, practical advice to help you feel confident and prepared.
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Transcript
Introduction and Importance of Financial Planning
00:00:10
Speaker
Hi, everyone. Welcome back to the Future of Finance podcast. I'm your host, Marissa Wood, with Union Financial Services. And today, our topic is going to be five financial tips for new parents. And it's something I'm very passionate about, even though I'm not a new parent yet. I have a lot of friends and neighbors and clients who are new parents, and it's such a beautiful new part of their life, but it can be a little scary financially, a lot of changes happening, and I want to be there to guide you through the steps on how to be prepared financially during this new phase of your life. Now, we're going to go through the five tips, and they are actually in order of importance, and in my opinion, order of the chain of events on what you should focus on first.
Life Insurance for New Parents
00:00:55
Speaker
And so the first tip is going to be to establish life insurance plans for both spouses. Having life insurance in place is so important when you start a family because, God forbid, worst case scenario happens, one of the spouses passes away.
00:01:13
Speaker
We need to make sure that your family's taken care of and this new child is taken care of and they don't have to have a huge financial distress while they're already grieving in a time of really bad emotional distress. And so i want to talk to you a little bit about how much life insurance you should have in place, when you should apply for life insurance coverage, and why it's so important. And so the basics of life insurance is to provide a death benefit paid out, generally tax-free, to your loved ones in the event that you pass away.
00:01:46
Speaker
That is life insurance plain and simple. Now, of course, there's many different types of policies, whether that be term or permanent. That depends on your situation. Term coverage is for a specific period of time, most often 20 years. That's the most common term in life insurance terms. And so that means you're covered for 20 years. After that, you will then have to either reapply for coverage or you just won't be covered anymore. The policy ends.
00:02:16
Speaker
Term is very affordable and it's a great option for a lot of young families that might not have the financial resources, but they still want that level of protection for their family. Coverage of half a million dollars, a million dollars, it's so much more affordable than you could even imagine. I'm talking a couple hundred dollars a year.
00:02:36
Speaker
If you're in decent health and in your 30s or 40s. Super, super affordable. And I don't know any new parent that wouldn't be willing to spend a couple hundred dollars for their financial security of their loved ones.
00:02:51
Speaker
It's money well spent. And so that's term insurance. Very simple, just the death benefit. There's also a lot of permanent insurance policies that have a lot more features to them.
00:03:03
Speaker
The coverage lasts your entire life. That's why they call it permanent. And there is ways to access your cash value while you're still alive. Using it for things like purchasing homes, vehicles, funding children's college, maybe ah paying for their wedding, giving things to the grandchildren. you know Throughout your life, there's going to be different uses for those funds. But it's a great tool to use really as not just a life insurance policy, but also as an investment.
00:03:35
Speaker
and access that cash value while you're living. And by the way, those withdrawals from the cash value are also tax-free, which is amazing. And so permanent insurance can be a really, really good option for families that want something more than just a death benefit. They want that investment as well, but it is going to be a little bit more expensive. So it's not perfect for everyone's situation. It just depends on where you're at financially. But it's so important to have that life insurance coverage, whichever policy you decide is best for you. And of course, consult with a financial advisor to figure that
Creating a Will and Estate Planning
00:04:14
Speaker
out. But having that in place is so important because let's think about, you know, what would happen if, you know, Joe Smith is making $100,000 a year salary and his wife mom.
00:04:32
Speaker
takes care of the children. Now, Joe passes away suddenly, and all of a sudden, that $100,000 salary that his wife is counting on to pay their mortgage, you know, to pay for food, all of their basic living expenses, now of a sudden, that salary is gone.
00:04:49
Speaker
Where is that going to be replaced? You know, is is his wife going to have to get a job? And now, well, if that's the case, now they need child care. Will they have to sell a house and move the children out of their neighborhood where all their friends are, potentially change schools, basically flip their family's life upside down while they're already in a stage of grieving?
00:05:11
Speaker
That is the last thing that Joe would want to do for his family. He would never want that. And so the importance of life insurance is to provide a replacement for his income, to pay off that mortgage, to allow the family to stay in the family's home, to allow the kids to continue going to their same school.
00:05:30
Speaker
Super important. And I want to remind you that it's not only important just for the breadwinner of the family. You know, whether both spouses work or one might not, they still have a value on their life.
00:05:47
Speaker
And I mean financially. Of course, emotionally they have a value. But just because you're not the breadwinner doesn't mean you don't need life insurance coverage. All the things that you do, whether it be taking care of the children, cooking, cleaning, that all does have a value to it because if you weren't there, your partner would have to hire someone for child care, might have to hire transportation, maybe a cleaning service, food delivery service. All of that will add up.
00:06:17
Speaker
And so i would encourage both parties to get coverage on themselves, maybe not the same amounts of coverage, but something for each party. And we can talk about, on an individual basis, the dollar amount that makes sense.
00:06:31
Speaker
Good rule of thumb is taking your outstanding mortgage amount plus about three to five years of what your annual salary is. And that is the bare minimum life insurance coverage that you should have in place to adequately protect your loved ones.
00:06:46
Speaker
So that is step one. And I know i go on about it a little bit, but it's something that I'm so passionate about because I've seen, you know, even back in high school, I've seen one of my friend's parents pass away and they were very financially successful, larger than life, seemed like they had it all together. They died suddenly and left behind a family of four.
00:07:09
Speaker
who had to then move in with a family member in a different town, move schools. This person had to change you know sports teams their last year of high school. It just was such a terrible situation that compounded an already heartbreaking, tragic situation. and And it's something that, as a fiduciary financial advisor, feel like if I don't bring up that conversation to any clients that are new parents or wanting to try for a child soon, if I don't bring up that conversation of life insurance,
00:07:43
Speaker
then I'm doing their whole entire financial plan a disservice. So I would encourage you to at least have that conversation with your spouse or your partner.
00:07:54
Speaker
You can have that with me or your other financial advisor or agent. See if you have enough coverage in place. And even if you only have coverage through your employer, it might not be enough because what is the death benefit amount?
00:08:09
Speaker
Will it still be in place if you change jobs or will you then have to get re-approved? It's all things to think about. And when it comes to life insurance, the best day to get it is today because you will never be younger or healthier, at least in the eyes of an insurance carrier, than you are at this very moment.
00:08:29
Speaker
So you don't want to wait. All right, and so step number two, a great financial tip for expecting parents or new parents, is to also create a will or trust or estate plan of some type.
00:08:43
Speaker
Now, I am not an attorney that prepares wills or estate plans, but we have referral partners that are, or you might know an attorney that can prepare a will or trust for you, but it's very important. You want to name guardians for your children in that will. You might want to place some of your assets in trust so that, once again, God forbid something happened, the assets will be distributed in a way that you wanted.
00:09:09
Speaker
And, you know, I hate to say it, but kids can inherit money. Someone has to manage that money for them and distribute it as they turn 18 or 20 or 21. And you want to make sure that that will is updated over time, too, as you have more kids.
00:09:25
Speaker
God forbid if you get divorced or if you change where you're living, you want to make sure that everything is up to date and an attorney can help you do so. It's not the most exciting topic, but it's something that has to be put in place and you do not want your family to go through probate.
00:09:42
Speaker
So having a proper estate plan in place will help prevent that
Budgeting for New Parents
00:09:46
Speaker
probate. All right, now the third tip is to create a budget with your significant other. And it's important that both people are on the same page. You don't both have to be savers or spenders, but you both have to at least have an idea on what your household income is and what your expenses are.
00:10:05
Speaker
You have to be you know mindful of what you truly are spending. In the event that something happens to one of you, one of you loses your job, can you afford to stay in that home?
00:10:16
Speaker
It's all about knowing where you're at. And sometimes you do need to meet with a financial advisor to walk you through that, to give you a document where you can record each expense line by line, just taking that first step. And I know it's not fun, but it is it's a necessary evil.
00:10:34
Speaker
And now a good budgeting tool that we give clients, and it's it's a nice rule of thumb, and it's called the 60-20-20 budget. And what that says is that 60% of your household income should go towards needs.
00:10:48
Speaker
Now needs would be your mortgage, your utilities, health insurance, transportation, food. These are the things that you absolutely cannot cut out of your budget.
00:11:02
Speaker
You need to pay them. And so 60% of that household income should go towards the needs category. 20% should then go towards saving and investing.
00:11:13
Speaker
Now, there's a few different ways you can save and invest. You can put it in the bank. You can put it in your brokerage account, your retirement account. You know, you're going to want to funnel into several different types of accounts. But 20% of your household income should absolutely be saved and invested for your future.
00:11:33
Speaker
And then the last 20% goes towards wants. goes towards once This is things like traveling, going out to eat, going shopping, discretionary spending.
00:11:46
Speaker
You know, all the fun things, which I got news for you. Probably most of our listeners are spending a lot more than 20% of their income on the once category. But I would advise you to spend what is left after saving.
00:12:00
Speaker
Do not save what is left after spending. It's not going to do you any favors. It's all about being disciplined and being balanced as well. You know, we understand that some months it might be more than 20%, but that next month, get back on track, make sure you hit your savings goals first, and then spend what is left after saving.
Building an Emergency Fund
00:12:22
Speaker
So 60-20-20 is a good rule of thumb.
00:12:26
Speaker
If you're not sure what your monthly bills are, it's a good time now. Let this be your sign to sit down with your partner or whoever you're living with and map them out. Let's see what the last couple months spending really looked like. And are you living beyond your means? Are you saving enough?
00:12:44
Speaker
Where could you be cutting down a bit? And then, you know, once we have that knowledge of what those monthly bills are, we can then plan for the future. And so with that being said, that fourth tip is to build an emergency fund.
00:12:58
Speaker
And we usually recommend that the emergency fund has about six months worth of expenses inside of it. And that's why we need to know what your expenses are. You need to know what your expenses are so that we make sure we have enough in that emergency fund. So let's say we calculate that those monthly expenses are $4,000 month.
00:13:20
Speaker
Well, now we know that we need to build an emergency fund with about $24,000 in it. six months of those expenses. So $24,000 in an emergency fund will be our target.
00:13:34
Speaker
And I would recommend that you have your emergency fund in something like a high-yield savings account where you're going to be earning some interest and keeping up with inflation, letting those idle assets still grow. And so when we talk about that, you know going back to the budgeting tool, the sixty twenty twenty well, 20% going towards savings and investments, the first bucket that we need to fill up as we're saving is that emergency fund.
00:14:01
Speaker
We should not be contributing anything to other investments until we have that emergency fund full and continually reinvested. Once we have that emergency bucket fund full,
00:14:15
Speaker
We can then start filling up the other buckets, you know, your IRA, 401k, Roth IRA, that brokerage account that you use for vacations.
00:14:27
Speaker
Those can come after the emergency fund is there.
Starting an Investment Account for Your Child
00:14:31
Speaker
And so that's why, you know, these tips really do work in order, because until we know our expenses, we can't figure out what the emergency fund should be.
00:14:40
Speaker
And until that emergency fund is full, we won't be able to really invest in other types of vehicles for our future. Okay, and the fifth financial tip for new parents, and by no means is this the least important, but that is to create an investment plan for your child. Start an investment account for them. And it's usually the first thing that someone says to me once they have a child. They email me or they call me and say, hey, you know, I just had a beautiful baby girl and I'm ready to start an investment for their future. I want them to have more than I had as a child. I want to set them up for better financial success in the future than even I was given. And I think that's an amazing thing. And I admire that whenever clients tell me that because, of course, we all want the next generation to have it even easier than we had it.
00:15:32
Speaker
And so there's a few different options when it comes to investing for your child's future. We can look at a brokerage account that there would be a custodian listed, you or your spouse or another family member, someone over the age of 18 would be the custodian owner, and then your child would be the minor owner.
00:15:53
Speaker
And it's a very flexible account. You can start it with $100 a month, $50 a month, maybe even just opening with $1,000 and setting it and forgetting it for the future. You'd be surprised you know with the eighth wonder of the world, that power of compounding interest, how even just $1,000 could grow to enough money to pay for a wedding or a down payment on a house in the future by the time your child's 18, 20, 21 years old. Incredible.
00:16:22
Speaker
And so we have the brokerage account that you can add to on a monthly basis, quarterly basis, one and done. You can access those funds at any point throughout your child's life since you'll be the owner.
00:16:35
Speaker
But the idea is to set aside money on a consistent basis for their future. And they can use that money one day for anything they choose to. It's not just a retirement account. Another option would be a cash value life insurance plan on your child. And I know that sounds crazy. Why would you want life insurance on a baby? But it is a way that you can help accumulate wealth for their future, protect their insurability,
00:17:03
Speaker
Make sure that your wealth can then be passed along to multiple generations. And once again, have that flexibility where it's not just a retirement account for them. They could maybe one day use it to fund their own retirement, but they could also use it to pay for their college, a wedding, a car, a home.
00:17:23
Speaker
The list goes on and on. And then a third type of account would be a 529 college savings plan. And this is an account that you contribute to. Once again, it can be monthly, quarterly, one time. And the beauty with 529 college savings plans is that in the future, when you go to withdraw the money, if it's used for qualified education expenses, it comes out completely tax free, including all the interest it's earned.
00:17:50
Speaker
Now, they are a great option for college, but I would say they're losing a you know bit of interest, I would say, among our clients because you do get pinholed into, okay, I have to use this just for expenses for college, and maybe my maybe my child doesn't want to go to college. And so that's where we look at you know a brokerage account or cash value life insurance plan. a little bit more flexible in terms of what the money can be used for.
00:18:22
Speaker
But they are a great option.
Conclusion and Further Resources
00:18:24
Speaker
And, you know, anything that you can open for your child is going to be better than nothing. It's a wonderful gift for their future. And I did say at the beginning of this episode, these tips were in list of...
00:18:37
Speaker
importance or in order of when you should get them done. But that last one, you know, of funding an account for their future, it's by certainly no means the least important.
00:18:49
Speaker
It's just that you should have all of your own ducks in a row first before worrying about their investment account. You want to make sure you have a life insurance policy in place for you and your significant other, an estate plan so that your assets will pass in the most efficient way possible and your children will be taken care of by guardians that you designate. You want to have a budget that makes sense to both parties in the house and that you can try to stick to.
00:19:18
Speaker
And then filling up that emergency fund. That is also very important because, you know, it's that rainy rainy day money. If someone loses their job, we need to make sure we have the next couple months of mortgage payments in an account that we can get to if we need it.
00:19:34
Speaker
And then finally, funding an incredible investment for your child's future to ensure that they have wealth and wealth. financial peace of mind, and everything else that you could possibly want for your child. So if you or someone you know is a new parent, expecting parent, and you want to start taking care of these items and make sure that your family is going to be the most successful possible in this new journey of their life, I'd encourage you to go to my website, union-financial.com. Use my scheduling link. It'll take you right to my personal calendar, and we can schedule a phone call, Zoom call, or an in-person meeting and start discussing what will be best for you and your family's financial future.
00:20:17
Speaker
So thank you so much for joining in to this episode of The Future of Finance. I'm your host, Marissa Wood, and I look forward to seeing you next time. Investment advisory services offered through Brookstone Capital Management, LLC, BCM, a registered investment advisor.
00:20:35
Speaker
BCM and union financial services are independent of each other. Insurance products and services are not offered through BCM, but are offered and sold through individually licensed and appointed agents. The opinions expressed by Marissa Wood and guests on this show are their own and do not reflect the opinions of this radio station.
00:20:53
Speaker
All statements and opinions expressed are based upon information considered reliable, although it should not be relied upon as such. Any statements or opinions are subject to change without notice.
00:21:04
Speaker
Investments involve risk and unless otherwise stated are not guaranteed. Past performance cannot be used as an indicator to determine future results. Any strategies mentioned may not be suitable for everyone. Information expressed does not take into account your specific situation or objectives and is not intended as recommendations appropriate for you.
00:21:24
Speaker
Before acting on any information mentioned, please can please consult with a qualified tax or investment advisor to determine if it is suitable for your specific situation. This program is designed to provide accurate and authoritative information with regard to subject coverage.