Personal Finance Basics All Families Must Know
Personal Finance Lessons | Personal Finance Plan
There are some personal finance basics that will not change regardless of whether you are single, a couple or a couple with children. However once you grow your family with the first child there are some basics of personal finance that are unique to families.
Whether you have children or thinking of having one (or several
), you should consider the following personal finance lessons for your particular situation.
Personal Finance Planning for Families:
- Personal Finance Basics #1: Children – when, where and how many. This one is tough, having children, in my opinion, is one of the most valuable and fulfilling experiences in life, however they don’t come cheap. Which is one of the things that makes this a tough category because it is an emotional topic but you cannot deny the family finance aspect of it.
There are numerous calculators you can use to get an idea of the costs involved with children but you should take those only as a starting point. Many expenses can vary wildly, for example, if you breast feed instead of giving formula you can save hundreds per month (and provide better nutrition). If you are Ok with sending them to public school over private you can save thousands (that is not an exaggeration) and so on.
More importantly than honing down money needed for a child is taking a long term view of how do you want to provide for your children: Are you going to pay for college or are they going to pay for it? Would both of you work or is one parent going to stay with them? Are you ok with your children wearing “hand me down” clothing or do you have to buy everything new?
By asking these questions you can then decide when would be an appropriate time to have children, where do you want to live when you do and possibly how many children not only do you want but can afford.
- Personal Finance Basics #2: To become a stay at home parent or not? Of all the personal finance basics for families you should consider, perhaps this is the most controversial. It is a fact that newborns need their mothers, specially those first six months (sorry dads but this is true). But most importantly is answering the question on whether or not you want to be a full time parent and what are you willing to give up if you do.
Some families truly will not be able to afford to live on one income. Others don’t want to give up or put on hold a career or don’t want to give up the things/status that comes with that second income. What you need to figure out is do you really NEED that income or do you WANT that income?
When you can honestly answer this question you should then be able to make the decision to stay at home or not. If you do decide to stay at home then from experience I can tell you, you will have to adjust your financial life. Start with putting together a budget with your new projected income and expenses. Figure out what you can keep and what you can cut and what other adjustments you will need to make.
- Personal Finance Basics #3: Should you buy a house? It is almost a given in our society that if you have a family you must buy a house. But for many buying a house is not always the best option and then for some renting might be a waste of a wealth building opportunity. Real estate has many benefits whether it be as investment, security, happiness or just plain financial sense.
When trying to make this decision you can start by using a rent vs. buy calculator so you have a starting point to consider the financial aspect of this. Then go ahead and consider your unique factors such as:
- What size/type of a home do you NEED vs the one you WANT?
- Maintenance. This is often way overlooked in the decision to buy a home. Many of the foreclosure properties I have purchased for investing have seen years of neglect by homeowners that could barely afford the mortgage and much less a repair on a roof, replacing a furnace, fixing damaged siding, broken gutters and much more. Bottom line: not only consider the cost of purchase but also the cost of ownership
- Can you afford the payments now? … Can you afford them in an emergency? A good guideline is for payments (rent or mortgage) to be no more than 25% of your income (after taxes). However if you own a home you also need a cushion for maintenance and emergencies. On the other hand if you rent and have an emergency where you cannot make the rent, it is much easier to move to a cheaper rent than it is to sell a house and move.
- Other factors: schools, recreation opportunities, commuting to work, how long will you live in the house, neighborhood quality, career/employment changes, crime, etc.
Finally, do not make the mistake that many real estate agents and mortgage brokers will push you into: choosing a home based on the highest loan amount you can be approved for. This could be an expensive personal finance lesson, instead consider the 25% guideline mentioned above and go down from there.
- Personal Finance Basics #4: Saving for College. College expenses in the US are becoming ludicrous. It is a sad thing to see a new college graduate start life with tens or hundreds of thousands of dollars of debt from college loans. As a parent you will make the choice of whether or not you want to help them with paying for college if they choose to go. If you do here are a couple of suggestions:
- Maximize your IRA first! A lot of people do not realize you can use an IRA to pay for college. The reason you want to max out your IRA contributions first instead of a college savings plan is because your retirement is up to you but money for college can come from different places.
You are better off maxing your IRA every year and then if you have the money, contribute to a college savings plan. Why? Because if the kid does not go to college or they get a scholarship, then the money in the IRA is for you while if you had put money in a college account instead, you would not have taken full advantage of the IRA.
- Use a 529 plan for college savings. These plans are state sponsored and there are tax advantages if you use the plan that is sponsored by the state you live in.. The contribution to these plans can be used in two forms: prepaid or savings. Prepaid plans allow one to purchase tuition credits, at today's rates, to be used in the future. Therefore, performance is based upon tuition inflation. Savings plans are different in that all growth is based upon market performance of the underlying investments, which typically consist of mutual funds that invest in the stock market.
When it comes time to use the money to pay for college, the distributions are tax exempt. If the money is not used for college then you can either take it back or give it to your child but you will have to pay taxes and a penalty on the distributions.
If you consider these personal finance basics and you work them into your personal finance plan you will have a clearer vision of where you are and where you want to be. Remember, these personal finance basics and personal finance planning is not easy but it is essential if building wealth
is important to you.
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