MoneyMonday: Family & Finances: Marriage and Children

This session, Family & Finances, best fits in the Accumulation stage.

There are lots of temptations and pressures to accelerate financial progress. But many of our most difficult coaching sessions are with folks who bit off too much, too soon. And while things like buying a home are without a doubt exciting at the start, they can quickly turn into a major source of stress.

So, taking steps to ensure you’re ready for these major life changes can help ensure they bring as much joy to your life as possible. Before you take on something like a mortgage, be sure you’ve taken steps associated with the Financial Safety stage including save $1000 in your emergency savings account with a goal of accumulating 3 months of expenses, creating a spending plan, and sticking to it, if you have debt, start a debt elimination plan and get started saving in your 401k especially if your employer offers a match.

With these foundational steps complete, you can look ahead to the major financial decisions we will cover in this session. Let’s start with preparing to purchase a home, making sure you start smart.

First, do not raid your 401k savings. I have friends who are terrific real estate agents and mortgage brokers but there are others who are even slightly concerned with how a home purchase affects you. Sometimes, they will recommend you raid 401k savings suggesting you’re trading one investment for another. But remember, while you can take a loan for a lot of things, the one thing you can’t take a loan for is retirement. If you need to raid your retirement in order to buy a home, it’s probably not time for you to take on a mortgage.

Next, don’t spend more than 40% of your paycheck on your mortgage payment. In fact, experts recommend you spend 28% or less. One way to keep that payment down is to save 10-20% for your down payment. This helps avoid PMI or primary mortgage insurance. The lender adds this extra fee to your payment when you don’t put enough down in case you represent a credit risk. For some loans, PMI stops when you build enough equity in your home but for other loans, the PMI lasts the life of the loan which means plowing a lot more dollars into paying off your mortgage.

If you’re buying your first home, be sure to check with your agent about programs for first-time home buyers.

Finally, and most importantly, I’ll share some advice my dad gave me when I bought my first home.   the mortgage is the smallest of home ownership costs. While our workshop Buying, Renting and Refinancing covers this topic in much more detail, remember that owning a home means you’re on the hook for major costs like replacing a leaky roof or a broken air conditioner as well as smaller costs like getting the furnace serviced before winter sets in and tending to the landscape. And that doesn’t include the money you’ll spend on renovations.

Remember I mentioned earlier that the excitement of buying a home can quickly turn into stress and a burden? This is the why. And the more you stretch yourself to cover the mortgage, the less you’ll have to cover those other expenses.

All that to say, while it’s true that a home is an investment, it’s also an obligation. Buy a home because you’re ready, not because you’ve been convinced that renting is throwing money out the window.

Another major change is the decision to join your life with another. Like buying a house, there’s a lot of excitement in the early stages but as a marriage unfolds, you’ll need to figure out how to compromise, problem-solve and handle stress together.

A major source of stress in relationships is… money. So, talk about it before you get married. Although it’s not a particularly easy or enjoyable topic of conversation, if you can’t talk about it before you marry, you might find it next to impossible to manage finances together after you’ve tied the knot.

Be sure you know each other’s income and credit scores. Be honest about the amount of debt you have and make plans together for eliminating it. Also, be honest about your spending habits. Are you an impulsive spender or a miser?

Talk about your financial goals, too. Discuss your individual goals, big and small, and set goals as a couple. 94% of couples who rated their marriage as “great” in a Dave Ramsey survey said they talk about money goals regularly.

Be honest about where you are starting. In fact, it might be good to consult the financial needs hierarchy together. You might find you’re in similar spots or you might be in very different places. Don’t be surprised or deterred. Just be committed to making decisions together, keeping each other on track, and celebrating successes and milestones along the way.

First comes love, then comes marriage then comes… the most expensive line item in your budget! Just kidding. Being a mom is my favorite job but that doesn’t mean it’s easy… or cheap.

When you’re getting ready for a baby, be sure you understand your health insurance coverage. If you have an HSA, try saving as much as you can. The dollars you contribute are tax deductible and the interest you earn, even if only a small amount, is not taxed when you withdraw it to pay for healthcare expenses like having a baby. Also, if your employer offers a Flexible Spending Account, remember that many of the items you might buy for a baby – like baby monitors, nursing equipment, and baby thermometers are eligible purchases.

Next, beware of the baby registry. When I had my first child, I lived in an 800 sq ft row home. When I went to the baby store to create a registry, I was left in tears. I knew my tiny house was not possibly big enough for all the stuff the sales lady insisted I needed to bring my son home. By the time my daughter arrived, I had learned that there’s actually very little you need to bring that baby home. Stay focused on essentials. Also, check with other new parents that might be a stage ahead of you. Most are happy to lend you the bouncy chair they used for about 4 months before their baby tired of it.

Also, now’s the time to really build up your emergency savings. Especially if you’ll be off work with reduced or no pay.

Having a baby also highlights new priorities. Things like life insurance take on new meaning as your family grows. Now is a good time to consider getting a little extra coverage. Also, review your spending plan since you’ll have new budget items to add for the baby.

Finally, if you and your partner will be working, plan ahead for childcare. Many facilities have a waiting list so don’t wait until it’s time to return to work to start searching. Also, childcare is incredibly expensive, maybe even costing more than your mortgage. Be sure you’re considering this new cost in your spending plan.

When you have a new baby, it seems like all you hear is “enjoy this time, it goes so fast.” As a parent myself, I can say this is most definitely true. I know it’s hard to believe when you haven’t slept through the night in 9 months but, in the blink of an eye, you’ll be planning a high school graduation party.

While we believe college is not for everyone, odds are your child will need some post-secondary education or training. In fact, before you start your college visits, be sure you do career exploration. There are lots of trade and technical careers that offer better wages and far less debt than many jobs that require a 4-year degree. Investing in education is an investment like any other. Just make sure the jobs your child is interested in are worth the cost of getting that diploma.

Regardless of the type of post-secondary education or training your child pursues, one of the most tax-advantaged ways to save is in a 529 Plan. These state-sponsored accounts often have tax benefits for saving and are used tax-free to pay for higher education expenses. Another great thing is that anyone can contribute. So, you might want to encourage grandma and grandpa to add some dollars to the baby’s 529 plan instead of bringing a new stuffed animal every time they come to visit. We go into this in more detail in our Education Planning workshop.

With all these big changes, the cost of experiencing the unexpected grows. From a medical emergency to a car accident, the consequences of being unable to work or worse, losing a spouse, are much higher now. As your financial situation changes and your family grows, it’s a good idea to review your insurance coverages.

When you’re single with few responsibilities, your insurance needs are minimal. But as your situation changes, your insurance needs increase. As children leave home and mortgages are paid off, insurance needs decrease. All this to say, managing your insurance plan is a dynamic process. It’s something you should review regularly.

There are many different types of life insurance. Depending on your need, one might be better than another. Some policies, like the term, only provide coverage for a fixed period of time. That’s fine when it comes to planning for college costs or covering a mortgage. But permanent coverage life variable, universal, and whole life are best for insurance needs that don’t have an expiration date like coverage for funeral costs.

Another important type of coverage is disability insurance. As you merge your life and finances with someone else’s your ability to work takes on more importance.  

Policies are very different so be sure you understand when your policy will pay. In other words, how long you must be disabled before benefits start? Also, be sure you know how much it will pay and for how long. Finally, insurance carriers want you to return to work. But each policy has a different way of determining whether you can work. Some consider you disabled if you are not able to perform the duties of your own occupation. Others will only continue paying if you are unable to perform the duties of ANY occupation.

Again, our Insurance 101 workshop takes a deep dive into this topic.

Finally, time to consider what would happen to your family if something happened to you. Be sure you have your basic estate planning “ducks in a row.”

If you haven’t done so already, it’s time to prepare your estate documents including your Last Will & Testament. Some of the primary details contained in this document are instructions for the disposition of your assets and accounts that do not have a beneficiary designation or joint owner. You will also name key people like your executor, the person who is responsible for carrying out your wishes and executing the associated legal and financial tasks. Finally, if you have children, you’ll need to name guardians. Think carefully about the person or persons you name for these roles. You should talk to them first to be sure they are up for the task.

Another key legal document is a Power of Attorney designation. A POA is a person you authorize to act on your behalf in the event of physical or mental disability. It’s important to note that the POA is valid as long as you are living. Upon your death, your Will takes over along with your executor. Some lawyers allow you to make specific designations for the person responsible for your medical affairs separate from your financial affairs. Other attorneys combine these roles in a general POA.

A Living Will is a legal document that describes your wishes as it relates to life-sustaining measures you do or do not want to employ when your condition or illness is terminal, or you are permanently unconscious. The Living Will also describes preferences for pain control measures and organ donation.

Finally, especially if you have young children, you might consider establishing trust within your legal documents. In many states, children under a specific age, 18 in PA, for example, are not able to inherit assets. If something happens to you before your children reach that age, your assets may not be accessible unless you establish trust within your Last Will and Testament.

These types of trusts define rules for how money can be spent while your children are underage. For example, for their basic needs, education expenses, etc. Then, you can restrict the distribution of remaining funds to specific ages. For example, you might pay 25% of the remaining assets to each child at ages 25, 30, 35, and 40. This allows their financial decision-making to mature and avoids decisions they may regret later.

You will need to name a trustee to oversee the trust and to ensure the rules established within your legal documents are followed. We recommend a person or institution other than the guardian for this role in order to keep parenting and financial authorities separate.

Last but not least, whether it’s marriage or children, as your life situation changes, be sure to revisit your beneficiary designations. Your Last Will and Testament provide for the disposition of your personal property and things like bank accounts that do not have named beneficiaries.

For your 401k, IRAs, life insurance, etc., you name beneficiaries. Keep in mind, that updating your Will does not impact these beneficiary designations and vice versa.

The good news is that beneficiary recordkeeping for most company retirement plans is online making it easy to check and change your choices.

In the case of marriage, many states consider retirement accounts to be marital assets. That means that naming anyone other than your spouse as the sole primary beneficiary requires your spouse’s notarized signature. So, if you have children from a previous relationship, for example, and you want to divide your beneficiaries between those children and your current spouse, that’s not a problem. You’ll just need to have your spouse sign off to be sure your wishes are executed as you wish.

Occasionally, we see someone list “Last Will and Testament” as their beneficiary. We strongly discourage this. Your Will cannot actually inherit anything. In most cases, this will result in your 401k being cashed out and paid into your estate. If you have outstanding debts, your 401k can go to your creditors instead of your loved ones. So, we recommend naming a person or persons as your beneficiaries.

The exception to this rule is trusts. For example, if you establish the children’s trust we just talked about, you may want to list your beneficiary as “The Trust established in my Last Will and Testament” as your beneficiary.

Okay, we covered a lot of ground in this session. In most cases, we just skimmed the surface of important topics. To learn more about the topics most relevant to your situation, we encourage you to explore your MyMoneyNav dashboard or visit moneynav.com.

Let’s run through the key items we covered…

Financial wellness is a journey of a thousand miles. You can’t do it all at once so just focus on the best next step.

A great next step is to complete your MoneyNav assessment. This questionnaire takes about 5 minutes and results in a series of personalized To Dos, or best next steps, that are built into your MoneyNav dashboard. For an assessment link, email yourfinancialcoach@moneynav.com