Growing a family is an exciting step in life that leads to a number of changes around the house. We get enveloped with tasks like furnishing the baby’s room or purchasing toys and clothes in preparation for when the little one arrives. Additionally, the newly-found joy and awesome responsibility associated with bringing a life into this world also requires a fresh look at the household finances.
As my wife Kimberly and I prepare for our new addition, we created a checklist of important financial topics to discuss and act upon. Each family’s situation will be unique and require specific recommendations, so a general overview by nature couldn’t possibly address all the nuances from family to family. However, some commonalities persist across the board and should be addressed by most, if not all, couples. Let’s review three topics that should help provide some financial protection and security for your family now and into the future.
Many of us have been told over the years, “it is wise to save for a rainy day.” It becomes even more important when you have one or more young dependent children. The typical recommendation is to have six months of non-discretionary expenses saved if one spouse is earning most of the household income. Three months of non-discretionary expenses saved could suffice if both spouses provide a reasonably comparable level of income.
What’s non-discretionary? It’s your mortgage, car payment, even food; in other words, things that you couldn’t do without. Let’s look at an example of why the emergency fund is so important and what its specific role might be in your financial picture. Let’s pretend you get into an automobile accident and are out of work for 2 months.
On top of a savings account, extra back stops like a Flexible Spending Account, FSA, or a Health Savings Account, HSA, are great vehicles to fund for use towards medical expenses and health-related emergencies. Depending on whether or not you have an FSA or HSA you may need more in your emergency fund to cover your medical deductible and other related expenses. Moreover, even if you do have these medical savings resources they may not have enough money yet in them to cover all expenses. Your emergency fund can help soften the impact that medical-related bills could have on your family’s financial well being.
Disruption to income
For most of us, if we don’t work then we don’t get paid. Short-term and long-term disability coverage through your employer may help in the event an unforeseen incident impacts your ability to work. If you do not have short or long term disability coverage through work, you may want to beef up your emergency fund. If your employer does not offer disability as a benefit, you could look into getting short- or long-term disability insurance through the open marketplace. The need for coverage will vary depending on the type of work and level of income you stand to lose should you be indisposed for an extended period of time. Clearly, the more hazardous the work or the more financially impacted you would be from a loss of income, the greater the need for coverage. If you do not have coverage through your employer and/or are premium-sensitive, do yourself a favor and have sufficient funds saved up to protect your family from financial disruptions.
This is just a surface level view of the potential impact that an unforeseen accident may have on your family’s finances. The bottom line is you should do what you can to save for the unexpected.
Life insurance is not exactly the most interesting or pleasant topic to discuss, especially when you and your family are dreaming about all the wonderful joys the future holds. However, should something terrible unexpectedly occur, you will want to make sure your family has protection. There are several ways to go about calculating the level of coverage you may want to consider. A general rule of thumb pulled straight from the financial planning textbook is 12-16 times your gross pay. Please bear in mind this is very generic, and a more in-depth analysis of your personal situation is not only recommended—but required—to uncover your family’s true need.