7 Steps To Set Up Your Family For Success
Life has changed. You went from being responsible only for yourself to being responsible for others. Now, it’s all about giving your loved ones the very best you can. You want to provide them with things you never had and allow them to experience things you only dreamed of. The problem is, you’re not sure how to do it. Where do you even start?
It’s extremely common for good parents to want the best for their family but not understand how to achieve that financially. Managing your finances was hard enough when you were on your own. Juggling work, a home, and the never-ending activities that kids decide to join means life is not only more complex, but also much busier. Let’s face it, you don’t have tons of excess time for financial strategizing. Here is an in-depth resource to help you set up your family for success.
Create a Budget
I know I emphasize this a lot, but budgeting is crucial to financial success, no matter what stage of life you're in. Think of it this way: do you know of any successful business that just goes with the flow and doesn’t track revenue and expenses? Of course not! It would never work, and it probably won’t for you either. To be successful, you need to understand the inflows and outflows of money in your household.
2. Get Insured
Now that you have people in your life that you are responsible for, you need insurance to protect them. Life insurance pays out a lump sum in the event of death. There are a few things to consider when evaluating what the right amount of insurance is for your family: income replacement, debt repayment, education savings, donations, etc.
You also need to consider getting disability income protection insurance. Income Protection insurance helps protect your income in the case that you are unable to work due to injury or illness. Often times disability insurance is neglected, but the truth of the matter is that you are significantly more likely to be injured or get sick and unable to work than you are to die early.
3. Build an Emergency Fund
An emergency fund is very important to protect against the inevitable ‘what ifs’ in life. You never really know what can happen. Also, it should help you sleep better at night knowing that you won’t have to turn to debt if something drastic happens.
The general rule of thumb is to have 3-6 months of expenses saved in an emergency fund, but that doesn’t work for everyone. COVID-19 showed us that crazy things can happen no matter how safe and secure you feel. If you have two working parents, I suggest a minimum of 3 months of expenses saved. But, if either of the two incomes vary month to month, then shoot for closer to 6 months saved. If only one parent works, then save 6 months of expenses just in case anything happens where that income is no longer there.
Consider having your emergency fund in a high-yield savings account , as they typically give the best interest rate while remaining liquid.
4. Pay Off Any Remaining High-Interest Debt
If you have any high-interest debt like credit card debt, pay this off right away. Having debt like this makes life stressful and takes away your freedom. Once this is gone, focus on not adding any more high-interest debt in the future. It is totally fine to use a credit card to build your credit and earn rewards, but make sure you are only spending what you can afford.
5. Save for Retirement
Coordinate with your advisor the right mix between KiwiSaver and managed investment funds. Your income, tax situation, company options, etc. all make a huge difference in what makes the most sense for you and your family. If you have a KiwiSaver account, at least contribute enough to maximize your employer and the government contributions each year.
The key here is to start early and not neglect your retirement. Playing catchup is never fun. Get invested, diversify your investments, continually contribute, and trust the process. Time is on your side.
6. Put a Will in Place
Getting a Will done is one of the most important things you can do for you family. A will allows you to choose who would care for your children, where all your prized possessions would go, and saves your loved one’s stress and costs.
7. Start a Managed Investment Fund
To prepare for mid-term and long-term goals (think deposit on a house, new cars, university, etc), start a manged investment fund. The farther out your goal is, the more important it is to invest to plan for it. Inflation can eat away at your dollars if they just sit in cash. However, you might want to leave it in cash if the time horizon for the goal is less than 3 years out. The risk is not worth it to invest with such a short time frame.
At the end of the day, there are countless steps you could take to set up your family for success. Just as there is no perfect way to be a parent, there is no perfect way to establish your family's financial plan. Each of these seven steps involves deeper dialogue to determine what is right for you. This post is designed to help facilitate meaningful conversations to ensure you have all your bases covered. Your goals, income, and financial situation all play a significant role in determining what is best for your family. What's most important is that you start planning early and stick with it! Your family will thank you later.
