Does it feel like one big tug-of-war game for your income? With so many financial needs, you can easily stress. Should you fund your retirement or the kids’ college fund? One major emergency can erase all your financial efforts.
This life stage isn’t about you anymore. It’s about the people who are depending on you. With careful planning, you can pursue your financial goals and protect your family at the same time.
Here are 5 actions to consider:
Maintain a Budget
The income you have is the amount of money you have to spend on living expenses. If you spend more than your salary, you need to either increase your income or reduce your spending, otherwise you will accumulate debt. You have to decide what is a necessity (like a mortgage payment, food, electricity) and what is a desire (like vacation, cable TV and going to the movies).
Sometimes staying in budget means saying no. Maybe the kids are limited to one or two after-school activities. Maybe you eat out once a week instead of three times a week.
Everyone in the family needs to track their expenses to see where the money is going. Once you know how you spend the money, you can find ways to make a budget work.
Create An Emergency Fund:
During the 2007-2009 recession, many people were out of work for several months. In some cases, both spouses found themselves out of work.
With so many people depending on you, increase your emergency fund to six months worth of living expenses.
We hope emergencies happen one at a time, but sometimes you get hit with a double whammy. A larger emergency fund will get your family through a difficult time.
Protect with Life Insurance:
You worry about your family. You protect them by using seat belts, locking the door at night and maybe you even buy organic foods. But if you suddenly weren’t in the picture, do they have enough financial resources to maintain the lifestyle you have worked hard to give them?
Life insurance provides a tax-free financial safety net when you aren’t there. Not only should spouses who earn income consider life insurance, but stay-at-home spouses need coverage too. Who will take care of the children and household chores if something happens to the stay-at-home spouse?
There are many different types of life insurance. The cost depends on the coverage amount, your age and your health. We can discuss your needs and what expenses you want the insurance to cover. We will obtain quotes for options within your budget.
Also make sure you have completed a living will, powers of attorney, guardianship papers and a trust if necessary so your family is taken care if something happens to you and your spouse.
Save for Retirement
Retirement seems like a long way off when you can only focus on the current school year. Saving a little bit now in a consistent manner will make a world of difference at retirement.
If you have a 401K at work, make sure you are contributing to the max that they will match. Your employer’s match is free money to you.
For example, you make $50,000 a year. Your employer will fully match contributions to 5%. You will contribute 5% of your salary, or $2,500, and so will they. That’s $5,000 a year toward retirement. If you did that for 10 years and earned an average of a hypothetical 7% annually, you would have almost $74,000 in 10 years. It was only $25,000 out of your pocket.
After you exhaust your employer’s match, consider continuing saving in an Individual Retirement Account, IRA. Even stay-at-home spouses are eligible to save through an IRA. What type you use depends on your earnings.
A Traditional IRA allows you to deduct your contributions from your taxes, but you will pay income tax on all the money you made over the years when you take it out at retirement.
Under current tax laws, a Roth IRA uses money that’s already been taxed and the growth is then tax-free. Also you can always take out your Roth contributions at anytime without a penalty so it provides flexibility in case of emergencies.
Save for Education
Many parents will sacrifice putting money in their retirement account in order to put money in their kids’ college funds. Don’t do it. There are other ways to finance college, but no one will give you a loan for retirement.
If you have properly planned and can stick some extra away through a college plan, that’s great. You may even be able to take advantage of some tax savings. Every state has their own rules for a 529 plan, which can be used for an accredited college or vocational training.