Well I am two months into the lifelong journey of raising a kid. So far it’s been very stressful but amazing at the same time. As you know, I am a financial advisor so I have made some big financial changes recently to make sure I am doing everything I can for my growing family. Many of these things you should be doing as well to prepare for or to take care of your own family.
Life Insurance – Stick with Term Insurance and Cover the Important Things
About 6 months ago my wife and I each got a term life insurance policy on each other. My goal in doing this was twofold. If I were to pass away I want our mortgage paid off. While I’m alive it’s easy to pay the mortgage every month. But if I suddenly weren’t around our family income would go down, so to make things a little easier on my wife I want her to be able to pay off the mortgage in full removing one of the biggest monthly expenses we have. Second, I want to provide for our new child’s education. Again, while I’m alive we will be much better able to save and invest for this big expense. These are two of the main things I want to protect which is why I purchased Term Life Insurance. Notice I said TERM and not Whole or Permanent Life Insurance. As I get older I will need less and less life insurance, eventually becoming self-insured or at the very least paying down the mortgage and getting the kids through school. This means I won’t need the insurance down the road so I am ok with it ending when the term is up. Not to mention all the additional fees and complications that come with whole life insurance policies. They are just not worth it. Stick with term and keep your investments separate.
Also, you do not need to insure for everything. If I die I don’t necessarily want my wife to never have to work again. That’s not the point of life insurance, it’s to help in the event of a death not so my wife can spend the rest of her life on a beach (sorry honey!).
Estate Planning – At least get the basics done.
I should have done this right after I got married but like a lot of people I put this off until a couple months before our daughter was born. I created a Living Will, Last Will, Healthcare Directive, and a Power of Attorney for both me and my wife. Then after our child was born a few months later I made some small updates to incorporate our new little girl. Not only naming her as an heir to our assets but adding a clause to set up a testamentary trust which takes care of those assets until she turns 25. This means I also had to choose a family member as a trustee to administer the trust until she becomes of age.
One of the most important provisions of these documents was to name a guardian to look after our little one in case she isn’t old enough to take care of herself. I consider these documents the basics of what someone should be doing from an estate planning perspective. I would also suggest hiring a professional attorney to help, even as a financial advisor I would find it very difficult to correctly prepare these documents without some assistance. If you need the names of a few good attorneys in the Maple Grove area I’d be happy to introduce you a couple. As a Fee-Only financial advisor I never receive any compensation for referrals so I choose the best attorney I know that fits your situation.
College Planning – Not done yet but coming soon!
I am still focusing on my own retirement funds. Yes, college is very important and always increasing but keep in mind a lot could change in education in the next 18 years. Not only is there a chance for scholarships, financial aid, and other cost reductions (especially through advancements in technology) but if I need to I can take out student loans. Ahhh!!! I know a financial advisor saying to take out a loan. Well, I’d much rather help my daughter pay for college on student loans than trying to fund my retirement with loans. What sounds scarier to you?
When I do start saving for college I am considering opening a Coverdell Education Savings account first before I open a 529 plan and here’s why. A Coverdell can be used to fund non-college education expenses and can be opened at any brokerage company like Scottrade or Fidelity. This means I’m not subject to the more expensive state sponsored 529 plans and I have almost limitless choice of investments. 529 plans are more like 401(k) plans where you are limited to a small selection of mutual funds, many times more expensive then alternatives found outside the plan. The downsides are that you can only put in $2,000 per year into this account (2015) and you are subject to income limitations so you might not even be able to contribute.
Retirement Planning – Not for the Kid
While it might be a nice idea to start an IRA (Individual Retirement Account) for my new child that’s not what I’m talking about here. My thought is to make sure my wife and I are set up well for retirement so that whatever issues come up we are not a burden for our children. Granted it will be nice to have kids to help in my old age but I do not want to be a financial burden. This means properly saving, investing, and funding our retirement. Will social security be there for me? It’s hard to say but if it is I’m sure it won’t be in the same form as it is now. The benefits will most likely be reduced or delayed. Either way social security was never meant to be your sole income source during retirement. This along with the reduction in private pensions means that my wife and I will be responsible for providing for ourselves in retirement. This includes the cost of health costs which continue to increase much faster than inflation. Leaving an inheritance would be nice too, which I’m sure the kids will appreciate.
Financial Education – The schools are terrible so I’ll have to fill the gap.
From kindergarten through college you can get away without taking any courses on financial education. We could discuss the failings of the public school system all day long but right now that’s just how it is. Therefore, I intend to teach my kid about bank accounts, credit cards, the stock market, and many other fun financial topics. Frankly, I can’t wait. Maybe it’s because I’m a financial advisor but I can’t wait to buy her first share of Disney stock and explain that she owns part of the company that made Frozen, or whatever the popular princess movie is out at the time. You don’t have to be a financial advisor to teach your kids about finance. Keep it simple. Help them open their first lemonade stand, give them an allowance, and let them babysit or mow lawns when their older. They don’t have to be the next Warren Buffet but, trust me, life is a little easier if you are competent with your money.
All of these things I listed here should be done by new or expecting parents in some form or another. For example your estate planning documents will most likely include the forms that I have listed in this post but they will likely be worded much differently to accommodate your family and situation. You’ll likely have a need for life insurance but the amount and term (# of years) will differ depending on your liabilities and goals. Likewise your tax situation and overall financial situation will determine what kind of college and education planning you do.
If you need help with any of this please reach out. I’ll walk you through exactly what I did and how I did it for myself and my family. Then I can help you do the same for you.