Family financial planning prepares your family for financial success, helps you achieve your life goals, and reduces the sacrifices you have to make to achieve them. However, developing a financial plan can be complicated because there are so many factors to consider. You’ll also need to modify your plan over time as your family’s needs and life circumstances change.
“Creating a family financial plan is an important step toward achieving your financial goals and ensuring your family’s financial well-being,” says Jordan Mangalman, CEO of Goldline Financial Services in Fullerton, California. Here you can read how to create a family financial plan and what to keep in mind.
How to build a family financial plan
Good financial planning helps families make the most of their income sources and balance current needs while anticipating future needs. This plan should help your family meet their short-term goals while preparing you to meet your long-term goals.
1. Start with your family’s goals
Family financial planning starts with goals, so you’ll want to understand what those goals are.
- Do you want to retire early and only work on the projects you love?
- Do you just want to build wealth for the future? Do you want to finance a better life for your partner and children?
- Want to buy your dream home? Whatever your goal is, you need to define it before you start working on it. Defining goals will help you stay motivated to achieve them. This is probably the most difficult part. Your financial plan is tailored to your goals and the time frame in which you want to achieve them.
2. Create a budget to achieve these goals
The “book and potatoes” of family financial planning is identifying sources of income and expenses and making sure you’re not living beyond your means. A good monthly budget can help you balance your short-term spending priorities while also saving money for the future. A budget is the basis for making good financial decisions.
An effective budget helps you prioritize your spending so you don’t miss out on future expenses. This ensures that your wants don’t overshadow your needs and that you have money when you need it. A budget can also help you avoid debt (at least unplanned debt) that can make it harder to reach your financial goals.
A budget takes into account your regular income and expenses and then helps you decide which areas to prioritize. You can track your spending and see your overall spending habits and where your money is going each month. You can then cut back on certain areas to prioritize the expenses that are most important to achieving your financial goals.
As new priorities emerge – retirement savings, funding a child’s education, buying a home – you’ll need to adjust your budget to factor them in, or risk racking up high-cost debt. The budget becomes the place where you financially reconcile these competing priorities into a plan.
3. Build that emergency fund
It’s easy to overlook your emergency fund, especially if you’re having trouble balancing your income and expenses. However, an emergency fund can help you avoid taking drastic measures, making it a great way to protect yourself and achieve your long-term goals. “Establishing an emergency fund can help your family pay for unexpected expenses, such as a medical emergency or car repairs,” says Mangalman. “Make sure to have at least six months of living expenses saved in a liquid and easily accessible account.”
An emergency fund should be part of your budget, at least until you save that money. This money protects you and your family’s financial goals and ensures that short-term problems don’t derail your long-term plans.
4. Invest for the future
It can be easy to let your near-term expenses crowd out investing for the future, but you’ll want to be sure that you’re building for your financial future, too:
Retirement Account: Especially young people, it can be easy to overlook these accounts, but don’t. Time is retirement savings’ biggest ally, so it’s important to start small. Many employers offer retirement plans, such as 401(k)s or 403(b)s, which offer a variety of tax advantages, and most offer matching funds if you contribute. Additionally, anyone with an income can access an IRA, making it a tax-efficient investment.
Taxable accounts: In addition to special accounts, you can invest in general taxable accounts, such as investment accounts. The best investment accounts allow you to invest in potentially high-return assets such as stocks, and many offer attractive returns on your money.
Factor your investments in the future into your budget, so the money will be there when you need it. Investing for the future is one of the most difficult parts of the financial planning process, so it’s a great time to call in an expert to help you build this part of your plan.
5. Protect yourself with insurance
Life insurance is another thing that can help your family achieve your financial goals even if a family member dies. Like an emergency fund, life insurance can help you avoid taking drastic measures like paying off expensive debt. “If you have dependent children or a spouse, life insurance is an important requirement,” says Stuart Boxenbaum, CFP and president of State Financial Group in Jupiter, Florida.
However, many families can make mistakes when it comes to getting enough coverage. “The rule of thumb is to multiply your dependents’ gross income by at least five years or up to 10 years to qualify for the death benefit,” says Boxenbaum. “If your annual income is $100,000, your minimum death benefit should be $500,000 and can go up to $1 million.”
6. Revise your plan
It’s easy to make plans, but when life changes, you may not be able to execute them. And it changes. You achieve some of your goals, children are born, and others disappear from your life. And these changes mean your family’s financial plan will need to adjust in response. “Achieving goals like paying off debt on time or earlier can help direct your cash flow toward your next financial goal,” says Mangaliman. “With children no longer living at home, parents may need to downsize their living arrangements, which may require updating the family’s financial plan.”
“However, unforeseen circumstances, such as serious health problems or reduced wages, can delay the achievement of certain goals, so your family’s financial plan should be updated accordingly,” he says. “It’s important to do annual or semi-annual reviews,” says Boxenbaum.
Even if your regular review simply says “no change,” the review can help you think about your financial plan and how it might need to be adjusted over time.
Where family financial plans go wrong
Crafting a family financial plan is not easy because you have so many different variables to consider. Here are some common places where you could trip up:
- Lack of flexibility: Financial planning requires some flexibility, especially when it comes to budgeting. So make sure you can afford to cover any extra costs, such as winter heating bills or unexpected repair costs. It’s never a problem to save too much, and it’s better to err in that direction than to overspend.
- Not reviewing your plan regularly: Reviewing your plan regularly ensures that you’re working with the most recent figures for your income and expenses. You can also adjust your budget based on changes, such as a new child or your child’s future education expenses. your child
- If you can’t call a professional when you need one: Creating a proper financial plan can be complicated. “The best place to start is to hire a financial advisor to work with families and individuals to help them do the math,” says Boxenbaum. “I think professional counselors do that quite often.”
- Maintaining high debt: High debt can wreak havoc on your lifestyle, and if left untreated, it can get worse over time. “It may seem normal to have credit card balances and other debt, but it doesn’t have to be,” says Mangalman. “Intentionally paying off high-interest debt can accelerate your family’s financial success.”
- Don’t underestimate insurance: As your life changes, your insurance needs may also change over time. Check your coverage to make sure you have what you need and aren’t paying for coverage you don’t need.
- Listen to unqualified advisors: Social media is full of unqualified people offering advice. Be careful who you give advice to and make sure they understand best practice.
Creating a financial plan can be overwhelming, but you can call in pros to help you get it done.
“Financial planners can give you support and personalized guidance on how to most efficiently reach your family’s financial goals,” says Mangaliman. “It’s important to seek a financial professional who can help you with a custom overall strategy instead of pitching a single product or service.”
