Family financial planning can help families reach their individual and collective goals, enjoy the material comforts and experiences that are important to them, and achieve financial security for those inevitable bumps in the road. Are you ready to start planning?Learn more about what family financial planning is, its main components, and some easy steps for getting started.
Why Is Family Financial Planning Important?Although a lot of households put together a family budget, many don’t take the next step of putting a plan into action, according to , certified financial planner (CFP), founder and chief executive officer (CEO) of Kovar Wealth Management, a Texas-based firm. “The plan part is, ‘This is how much we have today, and this is where we want to get to,’” he says. Working off of a plan provides purpose and allows families to do the things they want to do and explore options they previously may not have had access to, such as owning a home or starting a family business.
How to Create a Family Financial Plan
The steps for creating a family financial plan are simple, but they require some important conversations and commitment from the whole family.“We don’t say the person who makes the most or the one who is smarter with money gets to make those decisions,” Kovar says. What’s critical is “working as a team, so everybody feels satisfied. It goes a little deeper than dollars and cents.”
Follow these guidelines to set up a family financial plan—whether with a long-term partner, spouse, or children—that works best for all.
Set Financial Goals for the FamilySetting big-picture and everyday financial goals for the family can help provide the “why” for your plan. It could be things far off into the future, like saving for a home, a college education, or retirement. Or it might be short-term goals, like building an emergency fund, paying off a debt, or taking a family vacation.
Once you have your list of goals, think about applying some rule-of-thumb advice to your plan. “One that [often] makes sense is the 50-30-20 rule,” says , president and founder of JBR Associates Financial Services in Plano, Texas. “It keeps things simple.”Here’s how it works. You allocate:
- 50% of your income toward your needs (food, housing, utilities, etc.)
- 30% toward your wants (entertainment, eating out, travel, etc.)
- 20% toward investments and savings
Create a Family BudgetWhy is a budget an essential tool for your family financial plan? “You can’t manage what you can’t measure. You have to know where the money is going,” Kovar says.
Considering that nearly three-quarters of parents (73%) report having trouble keeping up with expenses as of April 2023, according to a New York Life Wealth Watch survey, it’s more important than ever to dial into where your dollars are going.Here’s a general overview of how to do it on a monthly basis.
- Add up all your income: Include your paychecks and any other sources of income you may have, such as child support.
- Add up all your expenses: Start with your fixed expenses like your mortgage/rent, car payments, tuition, utilities, cellphone, etc. Next, list flexible expenses like groceries, entertainment, etc.
- Save and invest the rest: Subtract all of your expenses from your income and see what you have left. This money should be allocated to savings and investments.
- Keep track regularly: Continue tracking your progress, and ultimately make changes where necessary. For example, if one month you notice your expenses reach above a certain threshold that impacts the amount you are able to save, it may be time to make an adjustment.
Ways to Invest in Education
Build an Emergency Fund
Families can save money for a variety of goals simultaneously, but your top-priority savings goal should be an emergency fund, if you don’t have one already. Having an emergency fund for unexpected expenses such as home repairs or a medical emergency can save you from going into debt or even financial ruin.
If you’re starting from scratch, open a separate savings account and set up an automatic deposit on a monthly basis or every payday. If you go with a high-yield savings account, you can earn a little interest on top of your contributions. Transfer as little as $50 to $100 a month to start, but the ultimate goal is to build up enough savings to cover three to six months of your expenses in case of a job loss, personal crisis, or other unexpected event.
Manage Debt as a Family
Debt can slow down the progress you make toward your financial goals. While some debt like a mortgage might be necessary, according to Robinson, a lot of families tend to have debt because they overspend on their wants, running up high credit card bills. Other times, a lack of emergency funds means having to rely on credit to manage unexpected expenses.
Whatever the reason, if you do have high-interest balances, you’ll want to prioritize those payments for a period of time and be consistent. It might require temporarily trimming some areas of your budget or bringing in extra income. If you’re not sure where to start, you can work with a credit counselor to help you or explore other options.
Protect Your Family with InsuranceIf you’re doing the hard work of sticking to a family financial plan, the last thing you want is for unforeseen circumstances to undo your progress. That’s where insurance products come in.
The major types to have include home and auto insurance, health insurance, and term life insurance. With the latter, if you have people who depend on you for income, a term life policy that is worth several times your annual income can help your loved ones financially if you die unexpectedly.
There are other insurances that might be beneficial to you as well, from pet insurance to umbrella insurance to business insurance. A financial advisor can help you determine the types of coverage you need.
Invest for the Future
Family financial planning is not just about day-to-day or month-to-month spending and saving—it’s also about planning for the long term. Saving for retirement can help ensure that you won’t become a financial burden to your children one day.
The earlier you start investing, the more growth potential you’ll have. And maintaining a diversified portfolio with different types of investments can help you realize steady growth while lowering your risk.
Long-term investment options include stocks, bonds, mutual funds, or retirement plans like 401(k)s or individual retirement accounts (IRAs).
Invest in Education
A college education is an investment that can boost your children’s lifetime earning power. As of 2021 (the most recent data available), the median earnings for bachelor’s degree holders were 55% higher than the earnings of those who completed high school.
That said, a college education is expensive. To help lower your children’s future student loan debt burden, special accounts like 529 plans can help you invest and grow funds tax-free. As long as you have a solid emergency fund and are saving for your retirement, putting additional funds toward a college savings plan can be a smart investment.