Some words to the wise from a financial planning veteran: pay yourself first.
The following was produced working with our friends at TD Ameritrade, who for 40 years have provided retirement resources, trading tools, and more to help parents pursue their financial goals while giving them more time to focus on what really matters in life.
Parents save photographs. Parents save art projects. Parents have even been known to save the day. One of the most important things parents can also save is often one of the most stressful: money.
The American Psychology Association found money to be the number one thing parents worry about. Now, money doesn’t solve all problems, but by building and sticking to a financial plan, parents may find some financial stability, and hopefully some peace of mind, too. The end goal, financial security, is well worth the effort, as it allows parents to enjoy more stress-free moments with the ones they love every day.
It’s certainly no easy task, and making the math work can seem impossible. A family unit has many needs and wants all competing for the same pool of financial resources. For instance, parents often want to prioritize saving for children’s college, even though it may make more sense to invest for your retirement. It may seem far off, but by starting now you may also be helping everyone down the road.
This is where planning comes in. Going beyond figuring out the cost savings from cutting back on, say, ordering out, and moving the dialogue towards defining their goals. Whether it’s preschool, college costs, the desire to relocate, refurbish, or restore, these questions force parents to think about the life they want their family to lead, and confront what they’ll have to do to afford it.
For TD Ameritrade Chief Market Strategist and Managing Director JJ Kinahan, this complicated terrain is familiar territory. As a father of three aged 20 to 25 and a veteran of the financial industry, Kinahan knows how time can get away from parents. Before you know it, the years have passed, and the kids are grown and off making their own way in the world. This is why he’s long advocated for parents to jump-start the financial planning process.
Before getting started, some foundational best practices include avoiding credit card debt and setting up an emergency fund. “You’ll be surprised by how much confidence you’ll get from establishing an emergency fund— three-to-six months’ worth of expenses if, God forbid, anything happens”, JJ says. From here, you can begin financial planning, looking years and years ahead.
Pay Yourself First
Kinahan acknowledges that for Millennials and other young parents dealing with student loan debt, it may be increasingly difficult to think about retirement savings. But he also knows that money invested early — between age 21 and 40 — can grow more over time thanks to compound interest.
“Investing in your retirement should be the number one priority, even over student loans,” Kinahan says. “People don’t like being in debt, but what they need to understand is that by keeping the focus on investing early on, they have more time to grow their retirement nest egg.”
TD Ameritrade and other brokerages offer IRAs with various virtues, but many experts say you simply can’t argue with the return on investment of an employer matched 401k. The matched funds are essentially free money. If your company has one, you should consider contributing the max from your first day on the job. Then when your budget allows, work towards contributing to your IRA. This will help round out your retirement savings and get you on track to achieving your goals.
“Investing in your retirement should be the number one priority, even over student loans.”
“Very few people pay themselves first. You can do that for yourself through retirement investing,” Kinahan says. “Build a budget, earmark money for retirement, and stick with your plan. You’ll be surprised how much you can put away for your future, and still have what you need for short-term, day-to-day living.”
Then Comes the Debt
After an emergency fund and retirement savings, young parents can be better prepared to face down student loan debt. In a sense, that’s a more complicated process, but it’s also a more practical process of budgeting and hard work. The main rule of thumb: Spend less and pay down debt as quickly as possible.
Student debt, which has swelled to encompass $1.3 trillion in unpaid American loans, now forces 20- and 30-somethings into a crash course on budgeting. Younger parents especially have to get very good at balancing pressing needs (and wants) with longer term goals. Across-the-board moderation, not austerity, is the best approach.
Then Comes Big-Ticket Items
Outside of investing for retirement, you can begin to invest in other longer-term, big-ticket items (think: your kid’s college tuition or vacations). The goal is to put money away without feeling stung by that process or, better yet, without feeling a significant effect on your quality of life. Kinahan feels consistency is the key.
“People beat themselves up over month-to-month contributions,” he says, “but it’s really about establishing good habits.”
Consider setting aside an agreed-upon amount of money on an agreed-upon basis, and be sure to add this as a line item on your budget. The amount might vary based on how much a family pulls in, but there are specific thresholds that seem to make sense across income brackets.
“Three to five percent per month, or per paycheck, is not enough to change your lifestyle — but you’ll be building toward your goal,” he says. “And over time, you’ll find you’ve saved a significant amount with minimal effort. That’s what ‘within your means’ actually means.”
“Three to five percent per month, or per paycheck, is not enough to change your lifestyle — but you’ll be building toward your goal.”
On that last point, Kinahan suggests trying to avoid “either/or” thinking in favor of considering how to splurge affordably, which might sound a bit oxymoronic, but isn’t.
“You can treat yourself and go on an expensive safari, or spend a few thousand dollars less on another adventure-filled vacation and still have a great experience,” he quips. It all depends on what you value, and what you’re willing to pay for the experience.
Pass It On
“It” doesn’t have to be money. “It” can be hard-earned wisdom. The reality faced by an increasing number of parents is that one of their major costs late in life is helping a child get or stay on his or her feet. While there’s nothing that family financial planning can do about what happens with employment or market trends, there’s plenty that parents can do to teach their children to have healthy relationships with money. Having those conversations early and often is important and Kinahan knows firsthand how critical that sort of education can be.
“My oldest child is 25 and all three have started making small investments in retirement accounts,” he says proudly. “I’ve stressed the 401k message and it’s clearly gotten through.”
At the end of the day, building and investing in a financial plan is investing in your future. With a solid plan, you’ll be able to focus and enjoy more quality time with family. Parents can usually only afford that when they know they’ve done right by both their children and themselves. It’s a lot, but ultimately it’s doable and profoundly worth it.
TD Ameritrade, Inc., member FINRA/SIPC
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