Financial Planning for Parents with Young Children
Often, an individual's financial picture changes when they get married. You now have shared incomes, shared expenses, and shared economic goals. Bringing children into the picture is another life event that can have significant financial consequences and drastically reorient financial goals.
This article provides an overview of key considerations and common strategies to help achieve those goals.
Managing the Impact
•Emergency Fund: One of the best first steps is to ensure you have an adequate emergency fund in place (oftentimes 3-6 months of expenses), that is set aside from your investments and held in a money market fund or other highly liquid savings vehicle. As those expenses associated with a new child begin to accumulate, the emergency fund enables you to cover them without more significant negative consequences (i.e., accumulating high-interest credit card debt).
•Retirement: In a perfect world, you would have had a stable job for a few years before having children. If that's the case, ideally, your employer offers a qualified retirement plan that allows you to defer a portion of your income for retirement. If you are a few years away from the point at which you plan to have children, it would likely be highly beneficial to do everything you can to get that savings rate to at least 15% (or the appropriate benchmark for your specific circumstance) before having your first child. Doing this first, before children, allows your post-first-child financial life to grow around your savings rate. If you are not quite able to save 15% (the general benchmark for retirement savings, inclusive of employer contributions), the next best solution is to start with what you can do, and gradually increase that amount as you get raises throughout your career.
•High Interest Credit Card Debt: One of the commonplace financial goals that competes with retirement savings is paying down high-interest credit card debt. Often, you will hear advisors say that you should first save enough for retirement to capture the employer match, at least, and then divert additional savings to pay off high-interest debt before circling back to contribute more to retirement. There are different tactics as it relates to the approach of paying down debt (start with the highest interest accounts first and work down to the lowest, or start with the card that has the smallest balance and work up to the one with the largest). The bottom line is that if you can pay off any credit cards before having your first child, then you will have increased optionality in managing new expenses and accomplishing new and existing financial goals as those milestones arrive.
Life and Disability Insurance
•Life Insurance: Whereas before children, if an emergency arose that resulted in death, it would be devastating, but it would (generally) only financially impact your spouse (excluding the possibility of other family members depending on you for financial support). Your spouse would likely be able to seek employment and support themselves (if not already employed). (Even with only a spouse, it is still oftentimes prudent to acquire the appropriate level of insurance coverage to cover funeral expenses, estate administration expenses, debt payments, and lost wages (to name a few). The addition of children brings with it all the costs mentioned above (to name a few), such as childcare, private school, vehicle purchases, college tuition, etc., not to mention the more subtle but, over time, high costs of daily essentials. This prompts a necessary assessment (or secondary assessment) of life insurance needs. Some general rules of thumb could be applied to determine how much life insurance you need (i.e. 5-10 times your income, leaning towards to the lower amount if you add the balance of outstanding debt or if you add a percentage or two per-dependent), and several companies offer online calculators to help drill into this number more accurately; however, the best approach is to consult with a qualified insurance expert. There are also many different types of life insurance policies available. While term policies are often the least expensive and achieve the goal of providing coverage, the complexity of the insurance world is, again, a reason to consult with a qualified professional to help determine insurance needs and the appropriate policy type.
•Disability Insurance: Disability can create many of the same problems, plus some. If you become permanently disabled, it may be the case that you can no longer contribute towards the family's financial goals. Yet, unlike the scenario of death, you remain in the picture as an expense to the family, highlighting the need for adequate disability insurance coverage. The first step in approaching disability is to check with your employer. Many employers not only offer this coverage, but also pay the premiums. You may be insured without even knowing it! Generally, the benefit payable is a percentage of your salary or base pay (commonly 60%). Sometimes, this percentage may not be sufficient for your family to maintain their current standard of living, suggesting the need for supplemental insurance beyond what the company provides. Additionally, some disability plans require a waiting period (elimination period) before benefits begin. This elimination period can force a disabled individual to accumulate the wrong kinds of debt (i.e., credit card debt) while they wait for benefits to begin. This reiterates the importance of having an emergency fund (as mentioned above) to cover the family's expenses during the elimination period.
It is also important to review health, auto, and homeowners' or renters' insurance to ensure coverage levels remain appropriate. Additionally, umbrella insurance may be a good addition to the overall risk management approach to create higher coverage levels across the board (generally at a fairly reasonable cost).
College Savings
Saving for college (or higher education in general) can seem like a distant concern when there are pressing needs today; however, if done correctly, it could create a scenario in which you look up eighteen years from now and are grateful that you started saving, even if you started small. While there are several approaches to saving for college, this article will limit its scope to 529 College Savings Plans (as opposed to UTMA).
Some of the most common considerations when saving for college are: 1) tax benefits, 2) control, 3) flexibility, and 4) financial aid.
•Tax Benefits: Once contributions have been made to a 529 plan, all earnings grow tax-free, as long as they go towards educational expenses. The implication here is that it is possible to increase the final after-tax savings in a 529 plan over a taxable account. Some other account types (including the Uniform Transfers to Minors Account (UTMA)) do not offer the same tax-free growth.
•Control: The 529 allows the parent to retain control over the account assets, whereas a UTMA becomes property of the child at the attainment of age eighteen or twenty-one, depending on the state of residence.
•Flexibility: If the child decided not to attend school or received a full scholarship, this would create problems for money held in a 529, as it would be taxed and penalized if withdrawn for purposes other than education. The UTMA can continue to be used for the child's benefit at this point, regardless of whether it is for education, a down payment on a home, or starting a business, among other purposes. For this reason, some parents will over-save in their older child's 529 account, so that if the older child doesn't use all or part of it, they can roll the savings over to their next child's education. If the older child does not attend school, there is flexibility. Suppose the younger child does not attend school (or gets a full scholarship) and the parents have no other qualifying family members for whom they wish to cover the cost of education. In that case, there isn't much you can do with those savings without paying taxes and a penalty. That said, recent legislative changes allow a 529 plan owner to roll assets from a 529 plan (for which their child is the beneficiary) into a Roth IRA for the child, giving the child a head start on retirement savings. There are, however, many stipulations required by the IRS, one of which is that the 529 must have been opened for at least fifteen years. Additionally, no assets (or earnings on those assets) contributed in the last five years are eligible for a rollover, and rollover Roth contributions are still limited to the annual IRA contribution limit ($7,500 in 2026). There is also a lifetime limit to the amount that can be rolled over ($35,000).
•Financial Aid: When financial aid is being determined, the assets of the parent and the child are taken into consideration. Both account types will be considered when determining the amount of financial aid a child can receive for college; however, 529 assets generally count for less, and using a 529 plan results in more financial aid being approved than a UTMA account. Interestingly, it appears that when a child's grandparent(s) own a 529 plan for the child's benefit, it doesn't count against the amount of financial aid the child may be eligible for.
Many considerations go into developing a college savings plan. There is no right or wrong approach, as long as you have a plan and stay consistent. Some parents choose the control and tax benefits of a 529 plan, while others prefer the flexibility of a UTMA. Some use both and allocate their savings between them. Some use a 529 plan to provide a reasonable estimate of college tuition costs, but continue to save in their own taxable investment accounts with the intention of making up any shortfalls from their own funds.
Consistency and endurance are crucial in any financial endeavor. There is always a higher likelihood of success when savings rates are consistent, and the investor sticks to the investment strategy, taking advantage of all available compounding years. Always remember to view your college savings goals within the context of your other financial goals, namely, retirement. A qualified financial advisor should be able to advise as to whether your college goals are realistic with your retirement plan, or conversely, whether your college savings goals represent a potential detriment to your retirement goals.
Estate Planning
As discussed above, these strategies are essential to implement even before children are born; however, they become that much more pressing when children are brought into the picture. Meeting with a qualified estate planning attorney may entail a modest cost. Still, it will ensure that your financial affairs are handled appropriately (and in accordance with your wishes) in the event of death or incapacity.
Some standard documents to inquire about are listed below:
•Last Will & Testament: Creating a will can ensure that your assets are distributed according to your wishes. It enables you to select who you would like to serve as the executor of your estate, giving you the option to name a trusted family member or a corporate executor (if you wish to relieve your family of that burden and ensure competency in the administration of your estate). Also within the will, you can name who you want to be the guardian(s) of your children if both spouses pass away.
•Medical and Durable Powers of Attorney: These documents mitigate the risk of adverse financial or medical consequences arising in the event of your incapacity. It may be prudent to have these documents on file with your providers and advisors in advance of incapacity, to ensure they meet the respective firms' requirements.
•Medical Directive: The medical directive indicates to your family your preferences as they relate to life-sustaining medical support in a terminal circumstance. If your choice in such a situation is not to be kept alive, having this document in place can ensure that your family is aware of your wishes and can mitigate the risk of higher-end-of-life expenses, which could reduce the amount of your residual estate that would otherwise have been distributed to your spouse or children.
•Testamentary Trusts: Within the Last Will & Testament, you can ask your attorney about implementing provisions to establish a testamentary trust (or multiple trusts) to provide for a spouse or children after your death. If both spouses pass away, your will could dictate that your residual estate be funneled into testamentary trusts for your children The provisions of these trusts can be catered to your specific needs, allowing you to name a trusted family member or a corporate trustee to manage the assets on behalf of your children until they reach an age in which it would be appropriate to distribute the remaining assets for them outright. It may be the case that you name a family member as the guardian of your children and name a different family member or corporation as trustee of the trust(s) if you want to ensure a higher degree of expertise in asset management and trust administration.
Conclusion
Finally, as you navigate your financial lives with your children, be proactive in teaching them about prudent economic management. Where appropriate, share relevant details about your financial plans with them, positioning them well in the event of an unexpected inheritance. Always consult qualified attorneys, accountants, insurance experts, and financial advisors before making financial, insurance, or estate-planning decisions.
