November 1st, 2019 by Sara Bailey
Life gets a lot more complicated when you become a parent. Between taking care of a baby and tending to your own needs, planning for the future can fall by the wayside. Many new parents find themselves focussing all of their energy on immediate financial concerns and delaying long- term planning. But the best time to start financial planning is right now! Looking ahead and making the right financial moves will help you maximize every dollar your family earns.
Calculate Your Net Worth
According to Money Under 30, your net worth is your most important financial stat because it reveals your overall financial health. Your net worth is all of your assets—such as investments, savings, property, and vehicles—minus your liabilities, or debts. Tracking your net worth will ensure your financial health is moving in the right direction and will allow you to make changes to your spending, budgeting, and investment strategies as needed.
If you’re a homeowner, your property might be both an asset and a liability. Find out the value of your home and add this full amount to your assets as you calculate your net worth. To determine the potential value of your property, use home-value estimators on sites like Redfin. Your mortgage should be calculated separately along with all of your other debts.
Track Your Spending
Tracking your spending is the only way to determine exactly where your money is going every month. While monitoring every single purchase you make can be a bit of a pain, it’s an essential first step in identifying problem areas and developing an effective budget. It will also help you be more conscious of your spending in general. To make things easier, add a money management app on your phone or download some budgeting software for your computer.
Set a Budget
Once you've tracked your spending for a couple of months, sit down and come up with a budget. Set limits in areas where you are spending more than you would like. Some financial advisors recommend following the 50/30/20 budget rule—spending about 50% of your income on necessities, a maximum of 30% on things you want, and at least 20% on repaying debts and building up your savings.
Pay Yourself First
It's common for people to spend their paychecks as they come in and put whatever is left at the end of the month into their savings. But it can take a long time to reach your savings goals with this method. Instead, try paying yourself first. Set aside a predetermined amount of money for your savings as soon as you get paid. Choose any amount that is realistic for you—even a small amount is better than nothing! If you're having trouble paying yourself first, consider setting up automated transactions into your various savings accounts, like your emergency fund or retirement savings. Most banks will allow you to do this online.
Avoid Lifestyle Inflation
Importantly, be sure to increase the amount that you pay yourself as your income increases. This way, you'll reach your savings goals faster instead of falling victim to lifestyle inflation. Lifestyle inflation occurs when we start spending more money and taking on more debts in response to a raise or a new, high-paying job. Aim to save about 20% of your income and live beneath your means.
Secure Your Own Future
Most parents are eager to start putting money away for their children's future education. However, you must save for your own financial future first. The Huffington Post recommends securing your future now, so you can avoid becoming a burden on your children much further down the line. Establish a retirement savings and be prepared for large, unexpected expenses like medical care and long-term care. Remember, your children can always pursue scholarships and student loans if they need help paying for college.
Plan Your Estate
Estate planning is crucial for parents, even if you don't have hundreds of thousands of dollars at stake. The purpose of the process is to ensure that those you love get the money and assets that you want them to have. Further, estate planning is an opportunity to make your wants known should you become unable to communicate your care wishes at the end of your life. If you've gone through the process of calculating your current net worth, you already have most of the information you'll need to get started.
Financial planning is important for people on any budget. Even if you're not concerned about money, careful budgeting, conscious spending, and smart saving will ensure your hard-earned cash goes towards those things that matter most—like your retirement or your child's education. Develop healthy financial habits now so you can set your family up for a secure and fulfilling future.
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