Most of our clients are parents. This of course means they’re dead-dog tired most of the time. Parenting is hard. And awesome. We sympathize and empathize with parents, so in an attempt to make things a wee bit easier we offer some [mostly] financial advice across what we believe are the four primary stages of parenting.
STAGE 1: NURTURE AND PROTECT (AGES NEWBORN-5)
Our first instinct for our young children is to protect them. To that end, we encourage new parents to make sure they’re appropriately addressing potential near- and long-term contingencies with insurance and savings. We would also begin to weave in some age-appropriate financial education.
Get an appropriate amount of term life insurance for the parents. There’s no perfect rule of thumb, but we generally recommend about 25x the income you’d like to replace plus additional amounts for specific future expenses like college tuition. We also recommend a term that covers the parents until the kids are out of college or financially independent. If you want to replace $50,000 in lost income from the death of a spouse, a 20-year, $1.25 mil. policy might make sense. You might also consider a smaller policy for a stay-at-home spouse to cover childcare costs.
Start a 529 college savings plan. If your state offers a tax deduction in its 529 plan, you will likely want to use that plan. If there isn’t a state tax deduction, you can use another state’s 529 plan. New York has an especially low-fee 529 plan. We typically recommend the age-based investment options, which adjust and become less risky as the kids get older.
Update your will and retirement account beneficiaries. A will lets loved ones know what you want to happen when you’re gone; you should include information on who will be the guardian of your children if both spouses die. You may want to name the guardian or a trustee as the secondary beneficiary of your retirement accounts.
Don’t forget the more mundane aspects of modern estate planning. Keep a record of all your passwords for cell phones, banks, investment accounts, mortgages, student loans, etc. Put all your important "stuff" in a binder and tell your loved ones where it is. The binder should include your passwords as well as important documents like your will, insurance policies, home and vehicle ownership information, and investment and banking statements.
Build up an emergency fund that can cover at least three to six months of expenses and continue to save 10%-40% of your gross pay into a 401(k) and/or other retirement plan(s). Financial wellness reduces parents’ stress and helps children feel more secure.
Teach your children the value of delayed gratification and the importance of saving. You might start with simple chores for which they receive a small allowance that accumulates in a piggy bank until it reaches an amount that can be used for a trip to the toy store or candy shop.
STAGE 2: INSTILL CORE VALUES (AGES 5-12)
When the kids are a little bit older, make sure you are instilling your family’s core values through role modeling, activities and stories. We recommend starting an allowance, if you haven’t already, and introducing more meaningful chores. Your family can decide whether the allowance is payment for the chores, or the two are separate concepts. One set of chores might simply meet a minimum family obligation while another set generates an allowance.
We encourage parents to enrich their children’s lives through travel and experiences. This doesn’t have to be expensive, long-distance trips. Your kids will appreciate a week of day-trips to see local monuments and attractions. Kids at this age see wonder in small thing.
One specific summer activity we recommend is spending a few minutes each day learning about one state and one country, including finding it on the map. In a similar vein, you can make a make a game of learning elected officials and supreme court justices. And a summer playing blackjack can be a great math lesson, right? Right?
Mostly we would tell parents to enjoy this period of tranquility before your kids hit the teenage fog.
STAGE 3: TEACH THEM HOW TO ACT (AGES 13-18)
Parenting is physically challenging with newborns and toddlers, but mentally and emotionally challenging with teenagers. We hope and pray that the core values we’ve instilled when they’re younger will provide some guidance as the teenagers begin to assert their independence. The kids might start to work outside the home. When they earn real taxable income—and an allowance doesn’t count—they can start saving into a Roth IRA, which would be a very smart move given the power of long-term compounding. Just $1,000 saved at age 15 could grow to $32,000 at age 65!
This is a great time to bring kids into the discussion on college savings. Explain how much you’ve saved, how much money you will allow them to borrow and how scholarships and work might factor into the equation. Make economic reality a part of the college selection process.
The teen years are also a great time to introduce adulting skills. This might include basic survival skills, like doing laundry, changing a tire or sewing on a button. It could also encompass financial literacy and include discussions on household budgeting, credit cards, health insurance, tithing and other charitable giving. We’ve used a checklist to encourage [force] teenagers to practice adulting skills during the summer.
Sample Adulting Checklist
- Plan a meal, buy groceries and cook dinner.
- Do a load of laundry.
- Load the dishwasher.
- Use proper manners throughout an entire dinner.
- Practice proper posture.
- Practice making personal introductions.
- Pray out loud.
- Review budgeting basics.
- Learn about health insurance.
- Learn about college tuition.
- Learn and practice CPR.
- Learn how to call 911.
- Read an article(s) in the newspaper and be able to discuss.
- Know your political representatives…mayor, state rep, state senator, U.S. rep., U.S. senators, governor, president.
- Fill car with gas.
- Organize a free activity with a group of friends (e.g., meet at park to play soccer or kick ball).
- Sew on a button.
- Pay a bill.
- Engage in small talk.
- Learn how to ask someone on a date and be able to respond to a request for a date.
- Plan a daily exercise routine and stick with it.
- Use an iron.
- Earn money.
- Give money.
- Volunteer.
STAGE 4: SUPPORT THEIR INDEPENDENCE (AGES 18+)
As the kids start college and jobs, it’s time to pull back a little. Become the wise owl they can always consult but let them solve their own problems. Teach them study skills but let them suffer through all-nighters. Teach them to network but don’t find them a job. Help get them get started in their life, but don’t provide open-ended financial support. Importantly, parents need to start focusing on themselves, which might include more detailed retirement planning