Smart Family Financial Planning: Do’s and Don’ts

For some, starting to plan financially for their family can be daunting. It can seem like an insurmountable mountain that they’re afraid to start climbing because they don’t know where to take the first steps. Good news: AAA is here to help you on your journey to meet your financial goals.

This article takes your through some smart financial planning do’s and don’ts so you feel empowered to take control of your financial future. And don’t worry, you’re not alone in being nervous about starting down the path of success.

A recent study by financial planning company Empower found that over 62% of Americans don’t talk about money. But talking about money can help people make smarter financial decisions, so people need to start talking about it.

Do start your retirement planning early.

You’ve probably heard it before, but it is beneficial to start planning for your retirement way before you think you need to. When building a career in your 20s and 30s, it’s easy to believe in the short term that you need money now more than you need to put it away for retirement.

But that’s the wrong way to think about saving money for your future. The way to think about saving money is that if you start putting $6,500 a year into a retirement account like a Roth individual retirement account (IRA) when you’re 25, then with compounding interest you could have more than $1 million when you retire at 67 years old.

Here are some of the ways to save for your retirement:

Custodial Roth IRA

A custodial Roth IRA is a tax-advantaged retirement account that is owned by a minor but controlled by an adult custodian until the minor reaches 18 or 21 years of age (legal adulthood varies by state). The major plus of custodial Roth IRAs is that contributions can be withdrawn tax- and penalty-free at any time.

There is no age limit for contributing to a custodial Roth IRA, but the child must have earned income (even gigs like babysitting and dog walking count as income). Parents can contribute to their child’s custodial Roth IRA. Also, Roth IRAs allow you to pay taxes on the money going into the account and then all future withdrawals are tax-free.

A custodial Roth IRA is an excellent tool for helping your kids or grandkids start on the right financial path at a young age—try incentivizing them to save their earnings by matching them dollar for dollar. The total yearly contribution limit is the same as it is for a regular Roth IRA ($7,000 in 2024).

Traditional IRA

A traditional IRA is a way to save for retirement with some tax advantages. Depending on your filing status (single or married) and income, contributions made to a traditional IRA are fully or partially deductible. Earnings and gains in your IRA are not taxed until you make a withdrawal from the account (also known as a distribution).

401(k)

When securing your first job, a major perk is participating in your company’s 401(k) plan. You’ll typically hear that you can contribute a certain amount of your income to your 401(k), and, if you’re lucky, your employer may match a percentage.

But what is a 401(k)? The term 401(k) is just a name for a retirement savings and investment plan that employers offer. Contributions are automatically withdrawn from an employee’s paycheck, and the employee gets a tax break on the money contributed.

The IRS sets a maximum contribution amount each year, so consult their website to find out the current limits.

Other ways to save for retirement

While these are three of the most common ways to save for retirement, according to the IRS, there are several more types of retirement plans. Work with a certified financial planner (CFP), who can help you select the retirement plan that works best for your financial goals.

Do set up an emergency fund.

 An emergency fund is a bank account with money saved to pay for large, unexpected expenses like unemployment, major home and car repairs, and unforeseen medical expenses. Think of an emergency fund as a buffer that helps keep you financially sound in a time of need and that helps you avoid having to rely on high-interest credit cards or loans.

Most people are confused about how much they should keep in an emergency fund. But the truth is that it depends on your own unique financial circumstances. If you’re an empty nester, your emergency fund could perhaps be smaller than that of a family with three children.

A good rule of thumb is to have three to six months’ worth of living expenses in your emergency fund. Remember to revise your emergency fund as your financial circumstances change.

What’s the best type of account for an emergency fund? You’re looking for a savings account with no penalties for withdrawals and that allows quick access to your money. A high-yield savings account is good for an emergency fund as it’s federally insured up to $250,000 per depositor.

Do segment your financials for big milestones.

When thinking about savings goals, it’s easy to get overwhelmed by the large amounts you’re working toward saving. That’s why we recommend segmenting your financial goals to make them more tangible and achievable.

The milestones of a single person are very different from the milestones of a couple or family. Your financial goals may include saving for the down payment on your first house or paying off your college loans.

When you get married and start planning your future, the goals for your financial future can become a little more complex. It’s important to talk to your partner about planning for your family’s future. Some things to cover are the specifics of each person’s personal finances, like any savings, debt or student loans that each person brings to the relationship. You’ll also want to discuss whether you plan to have children and if you intend to rent or buy a home. All this information will help you segment your financial goals and plan for the savings road ahead.

If you do plan to have children, there are some milestones to start saving for right away. Creating an education fund for children is a must when planning your savings because, like any account, the earlier you start contributing to college funds, the more time that money will have to grow. There are a few different types of education savings funds with positive tax implications, the most common being a 529 plan.

Other family milestones you may want to consider saving for are first cars, weddings or even a down payment on a first home. These may seem like long-term goals when your children are young, but the years go by quickly.

Don’t set a family budget you can’t afford.

When building a family budget, it’s important to keep in mind all the family’s expenses. Your mortgage or rent and groceries are common expenses to include in a budget, but also factor in other expenses, such as television subscription services and children’s dance lessons. It’s easy to overlook the small costs of everyday family living, but these are the things that will slowly erode your budget.

A family budget is constantly changing. While some expenses remain the same each month (like mortgage or rent and car insurance), there are others that vary (like utility bills). You can build your budget to have a margin that can absorb these cost fluctuations, or you can adjust your budget each month based on your anticipated spending.

Keeping track of your family budget can be as hands-off or hands-on as you want it to be. Many people build their budgets in a spreadsheet and keep track of their expenses manually, while others rely on apps like Mint or YNAB (You Need a Budget) to track spending. While there’s nothing wrong with budgeting using an old-school spreadsheet, apps and programs can help organize categories of spending to help give you a snapshot of where your money goes each month.

Don’t avoid end-of-life estate planning.

While having a conversation about your end-of-life plan may not be something you look forward to, your family members will be incredibly grateful to know your wishes while you’re still here to tell them.

The first step in end-of-life estate planning should be creating a will. A will is a legal document that coordinates the disbursement of your assets and can appoint guardians for your minor children. It’s recommended that anyone over the age of 18 or who owns property have a will so that they can communicate their last wishes clearly.

For families with children, it’s especially important to discuss who will have legal custody of the children if both you and your spouse die. This helps prevent confusion during an already difficult time.

If you have life insurance, you should identify the beneficiary or beneficiaries of your life insurance plan in your will. Life Insurance helps ensure that your spouse and children are taken care of financially if something were to happen to you. Think of a life insurance policy as a safety net for your family that can replace your income if you pass away. There are also tax benefits to a life insurance policy: Your beneficiaries can receive the full payout from a policy tax free.

Another thing to discuss with your family: your wishes regarding long-term care. There may come a time when you need assistance with routine daily activities like bathing, dressing and feeding yourself when you’re older; this is when long-term care comes into play.

Sites like this one from AARP can help you calculate and plan for the cost of long-term care in your state. If you have a family history of a chronic medical condition like Alzheimer’s disease or dementia, it may be worth it to invest in long-term care insurance. Regular health insurance and Medicare don’t cover long-term care, so your best bet may be to purchase a long-term care insurance plan.
 

Don’t do it alone! Get a financial planner.

We’ve laid out a road map to help you plan for the financial future of your family, but all these steps can seem overwhelming. A CFP or financial advisor can help you through the process of family financial and personal financial planning. They are experts in seeing the big picture of your financial goals and putting you on a savings plan to make those goals a reality.

Financial advisors are there to help you with wealth management as well as tax planning, ensuring that your money is in the right types of accounts and funds for the greatest tax benefits. Financial advisors can make financial planning simple and straightforward, taking the guesswork out of your financial future.

Next steps: Talk with a AAA family financial planner.

Ready to jump-start your bright financial future? Book a meeting with a AAA family financial planner to get on the road to success, no matter where you are in your journey. Through your AAA Membership, you have access to savings tools like special CDs and IRAs that will help you achieve your financial goals.