Sure, your adult kids are living in a different world than the one you experienced when you were their age, but the fact remains that you’ve already faced similar challenges and overcome them. As we’ve mentioned in a previous article, financial planning for young families can get sidelined by many distractions: getting used to parenthood, juggling work schedules with childcare, carpooling, and helping with homework … not to mention squeezing in some time for each other and getting enough sleep.
But, while keeping your adult children focused on the financial future can be tricky sometimes, there are some particular financial milestones for young families that, with timely notice and prioritization, that can help them stay on the right track as they build a successful future. So, as your adult children go out on their own, here are some tips you can share to help them recognize and respond to these important steps toward financial independence.
1. Explain the importance of an emergency fund. Few things derail the finances of young families quicker (or produce more stress) than too much debt. As you probably remember from your own experiences raising a family, it can be tough to think about “extra” savings, especially when you’re dealing with a mortgage, car payments, and especially for young people these days, student debt. But even if they have to trim back on non-essential spending, one of the most important things you can encourage them to do to set the right course for their financial future is building and maintaining a liquid emergency fund equal to 3–6 months of household income. And by the way, when your grandchildren start arriving, this “rainy day” planning becomes even more important. By having an emergency fund to fall back on in the event of downsizing at work, illness, or even having to replace a major appliance or big-ticket car repair, young families can more easily avoid reaching for a credit card and incurring the type of debt that can torpedo their financial plans.
2. They need the right kind and amount of insurance. More than most, young families can’t afford to assume the risks associated with losses involving health, property, or most crucial of all, the life or disability of a breadwinner. They need enough life and disability insurance to replace, at the very least, the income of one or both partners until all children in the home have reached age 18 (in many cases, more coverage will be needed, especially if one spouse has been a full-time caretaker or if college savings or other future expenses are anticipated). They should also maintain adequate coverage on the home, their vehicles, and other property.
3. Encourage them to take advantage of tax-advantaged savings. If your kids are fortunate enough to work for an employer offering a tax-qualified plan like a 401(k) or 403(b), they should set up payroll-deducted monthly contributions as soon as possible and aim to contribute 10% of their income to the plan. The fact is that, after too much debt, a lack of savings for retirement and other major financial goals is the second-biggest hurdle most Americans face. For young people starting out, student loan debt (mentioned above) can pose another obstacle. On the other hand, perhaps the most important component of achieving financial success is the principle of spending less than they earn so that they can build funds for savings and investment. Contributing to a tax-advantaged plan can allow them to do that plus leverage non-taxed growth within the account. And now, with the passage of SECURE 2.0, their employer-sponsored plan may even include a provision that allows the employer to make a matching contribution based on qualifying student loan payments: they can build retirement savings and pay down student debt at the same time.
4. Don’t let them forget about estate planning. Yes, even young couples have a marital estate that deserves consideration. And especially when children (i.e., your grandkids) come along, their estate plan (wills, trusts, and other similar documents) is what governs who will have guardianship in the event of the death or incapacity of one or both parents. What many don’t realize is that, even if there is no will in place, your state of residence has an estate plan for your children and grandchildren. Wouldn’t you rather your kids decided who will take care of your grandchildren and how their assets will be distributed, rather than leaving those decisions to the state? So, young families need to have valid wills in place, and those with more complex estates may also want to create trusts and other documents to ensure that their affairs will be managed as they would wish if they are no longer able to do it themselves.
5. They should prioritize saving for retirement. Certainly, providing for children’s education is a major focus for young parents and grandparents. However, in those cases where difficult financial choices must be made, young parents should fund their retirements before putting money in an account for future education costs. This follows the principle of the airlines: “Put on your mask first, before helping your children.” We don’t do our children any favors when we fail to provide for our own upkeep as we age, and the same applies to adult children concerning their own children. They should secure their own futures first, then think about education funding. (And of course, there’s nothing stopping grandparents from opening a tax-advantaged 529 education plan or gifting a Roth IRA, in the meantime.)
6. They should establish and maintain a long-term investment account. As you already know, one of the hallmarks of financially successful people is their familiarity with investing for the long term and owning assets that can grow in value faster than inflation (which preserves purchasing power). Even if your kids are already funding a retirement account containing assets for long-term growth, their future financial success (and likely, that of your grandchildren) will be enhanced by establishing a regular (usually taxable) investment account, early in the family’s life. This will incentivize them to learn many of the ins and outs of the financial markets, and that knowledge will be useful, no matter the direction of their career.
At Mathis Wealth Management, we work with all generations of the family, including those who are just starting out. By building individualized financial plans based on our clients’ most important goals and values, we can provide roadmaps that help clients reach the most important milestones in their journey toward financial success.
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