Between Christmas and New Year’s, we’re taking a look at five common New Year’s resolutions that people often adopt for their finances, evaluate some of the traps that people fall into with regards to that resolution, and come up with some real actions that can turn a challenging New Year’s resolution into a success.
We grow up. Many of us get married. Some of us have children. And when that happens, everything changes. You realize that you’re responsible for the positive upbringing of a child, and you can’t simply wing it any more. You have to plan for the future now, because your child can’t simply make it on his or her own if you can no longer provide.
I went through this very process myself as a young adult. When I was single, I didn’t really worry about the future much at all – if I were to suddenly drop dead, it wouldn’t really have much of an impact on the rest of the world. When I got married, I occasionally thought about how my passing would affect my wife, but again, it was not something that ever seemed pressing.
When I had children, though, everything changed. As I held my children in my arms and witnessed how defenseless they were, I quickly began to realize that I needed to plan for their future – and protect them in the event of the unthinkable.
This is a resolution that many new parents make. Their heart is in the right place – they sense that they need to protect their kids – but actually taking the steps to ensure protection can be harder than it seems. Thus, like many resolutions, this one falls to the wayside along the road paved with good intentions.
Don’t let it happen. Here are some direct actions you can take to protect your family’s future right now.
Life insurance A simple term life insurance policy for yourself (and for your spouse) to cover your child-rearing years can go a long way towards ensuring the financial stability of your children during their childhood. For younger adults (such as those with young children), term policy rates are pretty inexpensive – don’t hesitate to shop around.
How much should I get? There is no set recipe to follow in terms of amount, but it’s probably good to have a policy worth at least enough to pay off all household debts plus provide at least a couple years’ worth of your income to the family.
Long term disability and care insurance Many people overlook these types of insurance, but much like life insurance, they’re very low cost for a young adult and they provide protection for your children against an unthinkable situation. Much like life insurance, shop around for both kinds of policies and know what they cover.
Your will This is often something that’s done in conjunction with one’s spouse. The major decision that most people have to make with regards to their children is who you wish to assign guardianship to in the event of both of you passing.
Don’t take this decision lightly. Spend some time considering the options available to you, and don’t be surprised if you come to an unexpected conclusion in the end. You may find that as you consider the situation more deeply, the factors of highest importance to you in choosing a guardian actually change, and that may actually change who you would choose to be a guardian for your child.
The actual process of creating a will is simple and only takes a brief session with a lawyer (I tend not to trust do-it-yourself will packages). Even if you’ve not considered the question above, call now and make an appointment with a lawyer you trust. That way, the date is set in stone and you’re sure to go through with it.
College education planning Another important element for parents to consider is their child’s college education. Do you intend to pay for all of it, just contribute a portion of the cost, or have the child pay for the cost? Different parents have different philosophies when it comes to this crucial decision, but if you decide to help, you should start as early as possible.
How? The most straightforward route – and one that has solid tax benefits, too – is to open up a 529 college savings plan for your child. 529 plans allow all interest earned to be tax free if it’s used for educational costs, and often the contributions are tax-deductible on one’s state income tax. Use Google to identify the plans available in your state. Most plans offer a customized investment vehicle that starts off aggressively when the child is young, then scales back to more conservative investments as the child grows older and approaches college age.
The big dilemma will be choosing how much to contribute. I recommend setting up an automatic contribution plan where you contribute a small, reasonable amount each month. This way, once you’ve set up the plan, you really don’t have to actively think about it too much – it just slowly builds up for your child over time.