6 Steps Young Families Can Take to Improve Their Finances
When you're just starting out in your career and juggling new family responsibilities at the same time, managing your finances can seem overwhelming. But it doesn't have to be that way. With planning and prioritizing, you might find a little extra money can go a long way.
Here are six steps you can take to reach your financial goals.
1. Start an emergency fund
Regardless of your savings and investing goals, start building an emergency fund right away. If you and your spouse are working, you should save three to six months of your combined salary; if you are the only breadwinner, save six to 12 months of your salary, says Kimberly Howard, a financial planner at KJH Financial Services in Newton, Massachusetts, and Denver, Colorado.
This way if you lose your job or need money for an emergency, like a major home repair, you will have the funds available.
2. Create a financial plan
At its simplest, a financial plan means taking a look at your financial goals, creating a budget, and figuring out how much money you can afford to save and invest after you've paid all your bills, says Johanna Fox Turner, a partner at Milestones Financial Planning in Mayfield, Kentucky.
Professional help from a financial advisor can also go a long way toward getting you started and keeping you on track.
3. Pay off your student loans and other debts
When creating a financial plan, don't forget to factor in repaying outstanding student loans or other debts. As soon as these are paid off, you'll have more money for other investments, says Andrew Comstock, president of Castlebar Asset Management in Leawood, Kansas.
But if you have enough money only to pay off debts or build an emergency fund, the rainy day fund comes first. This way you won't be in a situation where you'll have to borrow yet more money to pay for an unexpected expense.
4. Take advantage of a retirement plan
Now is a great time to invest in your company-sponsored 401(k) retirement plan. The sooner you open a retirement account and start saving, the more money you'll have for your future — thanks to compounding interest.
Contributions to your 401(k) plan come right out of your paycheck before taxes, up to $18,000 a year in 2015. Better yet, your employer may offer a matching contribution — and this is free money, Howard says.
If you are self-employed or your employer doesn't offer a 401(k), you can open a Roth IRA or traditional IRA. You can contribute $5,500 annually after taxes to a Roth IRA, and the income grows tax-free. You are eligible for a Roth IRA as long as you and your spouse are filing jointly and earn no more than $183,000 ($116,000 if filing individually). If you can't open a Roth IRA, a traditional IRA is a good alternative. Contributions to a traditional IRAs are tax-deductible, although you will have to pay taxes down the line when you withdraw the funds.
5. Start saving for your kids' college
Even if you're still paying off your own student loans, it's time to start thinking about saving for your children to go to college. Financial planners advise that you start a college savings fund, particularly a 529 account, after you are comfortable routinely investing into your own retirement fund. Why? "You can get a loan for school but you can't get a loan for retirement," says Andy Tilp, president of Trillium Valley Financial Planning in Sherwood, Oregon.
Although contributions are made after paying taxes, the money withdrawn for future college expenses will be tax-free. If you want to start a 529 but don't have the money, Turner suggests opening an account and asking relatives to contribute in lieu of birthday and holiday gifts.
6. Buy life insurance
Buying life insurance usually isn't top of mind for young couples who may have other financial goals in mind. Yet buying term life insurance is an inexpensive way to protect your family's financial future, especially if you have young children or a mortgage to pay, Tilp says. It's also cheaper than most people think.
"If one parent were to pass away, this would help you pay for day care, college and give you the ability to take time off work," Comstock says.