Investing can be such a confusing, scary proposition sometimes. You’re never really sure if the information you find is exactly right for you (in the case of some online publications), if the data is relevant (in certain financial studies) or if the advice is credible (such as when you receive a stock tip from your Uncle Fred because “he knows a guy”).
Although I can’t help you avoid a bad recommendation from a relative, I can at least provide you with some steps to take that are a bit more tailored to you. As part two in our series, “A Wealth Building Plan for You,” I’ll address the needs of the young professional. If you’re a little younger, you may find some good information in part one, or the recent college grad edition, or if you have a bit more experience, be sure to look for the next two parts of this series for later life stages, which are coming soon.
Young professional. You’re old enough to know you need to take responsibility for your financial future, but young enough that your income may be stretched pretty thin. With the cost of a newborn, a new home and even a new outlook on protecting your family and your future, a lot may have changed since you were in your 20s. With that said, here are a few things to consider for some of the more common financial questions you and your growing family will face.
Finish funding your cash reserves. Hopefully you’ve started to save toward a cash reserve, or emergency fund, which can protect you in the event of job loss, larger-than-expected medical bills, or a broken water heater. If you haven’t finished saving enough for three to six months of expenses, now is the time to complete that task. And if you haven’t started at all, you may want to focus on this first, and make absolutely sure you have one to two months’ worth put away, at minimum.
Child expenses. Although there is great joy in a newborn, it doesn’t take away from the fact that you’ll have additional expenses. The good news is you can receive a tax credit for your child, as well as potentially be eligible for a tax credit on your total day care expenses. There are many components to qualifying for this tax credit, so be sure to check with your tax professional.
Be sure that you’re prepared for the cost of daycare, however. According to an April 2014 report from The Pew Charitable Trusts, “After Decades of Decline, A Rise in Stay-at-Home Mothers,” the cost of child care can vary widely, based on the age of your child and your location, and range from about $6,000 to as much as $16,000. Be sure to set up a plan with your spouse on how these additional expenses will impact your family budget.
Transitioning from a rental to home ownership. How much to allocate for a down payment on your home is a big question to answer. Waiting a few more years to save could be very beneficial, as it can reduce the amount of interest you’ll pay overall. For example, let’s say you’re looking at a home that’s valued at $300,000. If you put down $25,000, at 4 percent interest, you’ll end up paying about $198,000 in interest over the life of the loan. If you can hold off and make a down payment of $50,000, you’ll pay about $180,000 in interest. So, by delaying our purchase, and saving an additional $25,000 toward your down payment, you can save $18,000 in interest.
Also, shop around for mortgage rates. Not all lenders are the same, and rates can and do change based on many factors, such as the type of loan (fixed, adjustable, FHA), term (30-year, 15-year) and fluctuation of the rates themselves. Due diligence is key here.
529 plan for college savings. While your child may still be in diapers, it’s never too early to consider saving for college. One of the best vehicles to consider for this need is a 529 college savings plan. The benefit of this plan is it saves you from paying federal taxes when you withdraw the money, if that money is used for educational expenses. Additionally, some states even allow for certain tax deductions on your contributions to these plans.
There is also some flexibility in how you set up these plans, which includes something known as an “age-based” approach. This method will generally shift your investment mix from more aggressive to more conservative as your child gets closer to actually attending college. Be sure to consult your tax advisor for specific information on deductions though, as plans vary widely from state to state.
Insurance options. Insurance is certainly not a one-size-fits-all product, and sorting out coverage options can be a bit confusing. Although this isn’t an exhaustive list, here are a few products to start the conversation with your insurance professional:
— Term life. At the very least, having a term policy can protect you and your family at the current time. These policies are generally inexpensive and carry a larger amount of coverage when compared dollar to dollar against a whole or universal policy. The reason is because the policy will expire after a given “term,” forcing you to eventually get another policy. These are good to have, however, if you have outstanding debt that will need to be covered, or you would like to provide some additional security for your family should something unforeseen happen to you.
— Universal life. Unlike term life, where 100 percent of your premium goes toward insurance, universal life insurance includes a cash component. This feature causes universal life to be more expensive than term. However, it adds the ability to earn interest, which can be withdrawn at a later date, and may allow you to skip payments, or even increase the policy’s benefit. It’s important, however, to consult with your tax advisor on how this interest earned impacts your tax situation.
— Whole life. Aptly named, whole life allows an individual to be insured for his or her entire life. This policy is like universal in the fact that it comes with a cash component. However, the difference is that here, everything is fixed: the premiums, interest earned and death benefit. Remember though, whole life can be, in many cases, more expensive than term or universal, and does not offer the same level of flexibility.
Since no two situations are the same, be sure to discuss your needs with your insurance and tax professional when choosing a life insurance policy. At times, making real financial decisions can be unnerving. But with a little planning and the right mindset, these steps can hopefully help you get control of those new financial challenges, allowing you to focus on the new things in your life that matter most.
Securities offered through SII Investments, Inc. (SII), Member FINRA, SIPC. Advisory Services offered through Scarborough Capital Management (SCM), a Registered Investment Advisor. SII & SCM are separate companies. Neither SII nor SCM provide tax or legal advice. Opinions, estimates, forecasts and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice.
This material is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance does not guarantee future results.
Greg Ostrowski is a certified financial planner practitioner at Scarborough Capital Management, who helps clients with financial planning and investment management strategies. He says that helping investors stick to their plan and making adjustments based on long-term goals rather than reacting to the market, will result in stronger portfolios. Ostrowski lives in Annapolis, Maryland.
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A Wealth Building Plan for You: Young Professional Edition originally appeared on usnews.com
