Creating a family financial plan is a crucial stride towards attaining your financial objectives and securing the financial stability of your family. This plan aids in navigating the path to success while minimizing the need for significant sacrifices. However, developing a comprehensive financial plan can be intricate, as numerous factors demand consideration. Furthermore, it is essential to regularly review and adjust your plan as your family’s requirements and life circumstances evolve.
According to Jordan Mangaliman, the CEO of Goldline Financial Services in Fullerton, California, “Constructing a family financial plan is a significant undertaking that paves the way for achieving financial goals and safeguarding the financial well-being of your family.”
To assist you in this process, here are the steps to create a family financial plan and key aspects to be mindful of.
How to build a family financial plan
An effective financial plan enables your family to optimize its sources of income, strike a balance with present necessities, and anticipate future requirements. It should not only assist in accomplishing short-term goals but also prepare you to achieve long-term objectives.
1. Start with your family’s goals
The foundation of a family financial plan lies in understanding and defining your goals. It’s crucial to have a clear understanding of what you want to achieve:
- Are you aiming for early retirement and selective engagement in projects that inspire you?
- Is your focus on building long-term wealth?
- Do you aspire to provide a comfortable life for your spouse and children?
- Are you working towards purchasing your dream home?
Once you identify your goal, you can structure your financial plan around it and determine the timeline for its attainment.
Every individual has a unique perspective on financial success, which influences the goals they set for themselves. A recent survey conducted by Bankrate revealed various definitions of financial success among Americans:
- 56 percent prioritize comfort.
- 44 percent emphasize financial preparedness for the future.
- 41 percent seek a worry-free, debt-free lifestyle.
Others associate success with the ability to retire, becoming a millionaire, or owning a business. Regardless of how you envision your “I’ve finally made it” moment, a robust financial plan is essential to transform your vision into reality.
2. Build a budget to reach those goals
The core elements of a family financial plan revolve around understanding your sources of income and expenses. According to a recent Bankrate survey, 26 percent of Americans who don’t consider themselves financially successful believe that adhering to a budget is necessary to achieve their goals.
A well-structured monthly budget serves as a valuable tool to balance your immediate spending priorities while ensuring that you save for the future. It forms the foundation for making sound financial decisions.
An effective budget helps you prioritize your expenses, preventing unexpected costs from catching you off guard. It ensures that your wants do not overshadow your needs and that you have financial resources available when necessary. Moreover, a budget helps you avoid unplanned debt, which can hinder the achievement of your financial goals.
Your budget takes into account your regular income and expenditure, enabling you to identify areas where you can focus your attention. By tracking your spending patterns and understanding where your money goes each month, you can make adjustments and reduce spending in specific areas to align with your financial goals.
As new priorities arise, such as saving for retirement, funding a child’s education, or purchasing a home, it is crucial to adjust your budget to accommodate these objectives. Failing to do so may lead to accumulating high-cost debt. Your budget serves as a financial roadmap where you reconcile these competing priorities into a cohesive plan.
Here’s a guide on how to create a monthly budget, along with resources to help you organize it. Additionally, you may consider utilizing a zero-based budget model, which ensures that every dollar has a purpose and is allocated towards saving, investing, or essential expenses.
3. Build that emergency fund
In the midst of balancing your income and expenses, it’s common to overlook the importance of having an emergency fund. However, this fund plays a crucial role in safeguarding yourself and maintaining progress towards your long-term goals, as it prevents the need for drastic measures.
According to Mangaliman, “Establishing an emergency fund enables your family to cover unforeseen expenses such as medical emergencies or car repairs. Aim to save at least six months’ worth of living expenses in a readily accessible and liquid account.”
Including the emergency fund as a dedicated line item in your budget is essential until you have accumulated the desired amount. This money acts as a protective barrier for your family’s financial goals, ensuring that unexpected short-term challenges do not derail your long-term plans.
Now is an opportune moment to consider establishing a high-yield savings account specifically designated for your emergency fund. This type of account can offer competitive interest rates, maximizing the growth potential of your savings while maintaining easy accessibility when needed.
4. Invest for the future
It’s common for near-term expenses to take precedence and overshadow long-term investing. However, it’s crucial to ensure that you are actively building a solid financial future. Here are some key points to consider:
- Retirement accounts: It’s easy to overlook retirement accounts, especially when you’re young. However, starting early is essential due to the advantage of time. Many employers offer retirement plans like 401(k) or 403(b) with tax benefits. Some employers even provide matching contributions. Additionally, individuals with earned income can access Individual Retirement Accounts (IRAs) that offer tax advantages for retirement savings.
- 529 accounts: If you have children or plan to have them, it’s important to consider how you’ll fund their college education. A 529 plan can be a valuable tool in this regard. It allows you to invest with tax advantages specifically for education expenses, including student loans.
- Taxable accounts: In addition to specialized accounts, you can also save money in general taxable accounts such as brokerage accounts. These accounts offer the flexibility to invest in assets with potential high returns, such as stocks and stock funds. Some brokerage accounts also provide attractive returns on your cash reserves.
It’s crucial to factor future investments into your budget to ensure that the necessary funds are available when needed. Investing for the future can be complex, so seeking guidance from a financial expert can be beneficial in building this aspect of your financial plan.
Remember, investing for the future requires a long-term perspective and discipline. By incorporating these investment avenues into your financial plan and regularly reviewing and adjusting your contributions, you can steadily build a strong financial foundation for your future goals.
5. Protect yourself with insurance
Life insurance is a vital component that can help your family maintain financial stability even in the event of a family member’s passing. Similar to the emergency fund, life insurance provides a safety net, preventing the need to resort to extreme measures such as accumulating high-cost debt.
Stuart Boxenbaum, CFP, president of Statewide Financial Group in Jupiter, Florida, emphasizes the importance of life insurance, particularly when there are dependents involved, such as children or a spouse.
However, many families often fall short when it comes to obtaining adequate coverage.
A general guideline to follow is to multiply the breadwinner’s total income by a minimum of five years (and up to ten years) to determine the appropriate death benefit. Boxenbaum suggests that if the annual earnings are $100,000, the minimum death benefit should be $500,000, with the possibility of going up to $1 million.
By obtaining the right amount of life insurance coverage, you can ensure that your family’s financial goals and well-being are protected in the unfortunate event of your passing. It provides financial support to cover expenses, replace lost income, pay off debts, and secure a stable future for your loved ones. Consulting with a financial advisor or insurance professional can help you determine the appropriate coverage based on your specific circumstances.
6. Revise your plan
It’s common to create a financial plan but neglect to follow up and make necessary adjustments as life circumstances evolve. Change is inevitable—some goals will be achieved, new additions like children will come into your life, and others may depart. These changes require you to adapt your family’s financial plan accordingly.
“When you successfully achieve your goals, such as paying off debt, you can redirect the cash flow towards your next financial objective,” advises Mangaliman. “Parents may also need to reconsider their living situation and downsize when their children move out, thus necessitating an update to the family’s financial plan.”
“However, unforeseen events like major health issues or a decrease in income can delay the attainment of certain objectives, requiring adjustments to the family financial plan,” he adds.
Conducting an annual or semi-annual review of your financial plan is crucial, as suggested by Boxenbaum. Even if the review reveals no immediate changes, it keeps you engaged and proactive in assessing your financial plan and considering potential adjustments over time.
Regularly reviewing and updating your financial plan ensures that it remains aligned with your current circumstances, goals, and priorities. It allows you to make informed decisions and adapt to any unforeseen situations that may impact your financial well-being.
Where family financial plans go wrong
Crafting a comprehensive family financial plan can be challenging due to the numerous variables involved. Here are some common pitfalls to avoid:
- Lack of flexibility: Incorporate flexibility into your financial plan, particularly within your budget. Account for unexpected expenses like higher winter heating bills or unforeseen repairs. It’s better to save more than necessary rather than overspending.
- Infrequent plan reviews: Regularly review your financial plan to ensure it reflects the most up-to-date information regarding your income and expenses. Adjust your budget accordingly for life changes such as the arrival of a new child and future education expenses.
- Failure to seek professional advice: Building an effective financial plan can be complex. Engaging a financial advisor experienced in working with families can provide valuable assistance and accurate calculations.
- High-cost debt maintenance: High-interest debt can hinder your financial well-being and worsen over time if left unaddressed. Prioritize paying off such debts intentionally to accelerate your family’s financial success.
- Neglecting insurance reviews: As your life circumstances change, your insurance needs may also evolve. Regularly review your coverage to ensure it aligns with your current requirements and avoid paying for unnecessary coverage.
- Relying on unqualified advisors: Be cautious about seeking financial advice from unqualified individuals on social media platforms. Seek guidance from trusted and qualified professionals who follow best practices.
Remember, seeking guidance from financial planners can provide personalized support and guidance tailored to your family’s specific goals. Look for professionals who offer comprehensive strategies rather than solely promoting a single product or service. Utilizing resources like Bankrate’s financial advisor matching tool can help you find advisors who can assist you in creating a customized financial plan for your family.
In Conclusion
Constructing a financial plan requires effort, but it serves as a valuable tool in achieving your family’s financial objectives. Begin by focusing on your family’s budget and expand from there, seeking assistance from experts as needed to make informed decisions and maintain progress on your financial journey.