Financial advice I would give my younger self – plans for a young family

As a planning expert, often during the lecture tour, I am often asked, “What else do we need to know?” I always look at the younger spectators and think: if only I had known this then. That’s the motivation behind this expert series on planning advice I would give my younger self. Last month I wrote the first of four articles and started with the topic of education finance planning. This month I will follow my younger self, past college and my first job, and into the next “typical” stage in life – getting married and starting a family.

When you meet the love of your life and talk about marriage, it’s often hard to think beyond the immediate excitement of the engagement, wedding, and honeymoon. Still, it’s critical to discuss your financial philosophy with your future spouse. After all, you enter into a contract to live your life together and therefore make decisions together, until death do you part.

Consider a prenup

Here’s the dreaded “P” word: prenup. With people who tend to marry later in life, one is more likely to enter into a marriage with some assets already in place, which should be protected in the event of divorce, possibly with a prenuptial agreement. Marriage laws differ in each state. For example, common property states, such as California, Washington, and Texas, follow the general rule and presumption that assets are divided 50-50 with divorcing spouses. Meanwhile, equitably distributed states, such as New York, Connecticut, and Florida, use several factors to determine what is “fair and equitable.”

One must not only understand the marriage regime that governs their union, one must also understand the nuances. For example, in New York, while assets brought into a marriage are generally considered separate assets that are not part of the division of the marital assets, income and appreciation from such separate assets may be a spousal property subject to division .

What happens if you merge assets with your spouse and open a joint account? What happens if your spouse contributes to the mortgage, but the ownership of the home is already in your name? There are many such questions that prospective newlyweds with existing assets should think about and agree on so that there are no surprises if the marriage doesn’t work out.

I can fully understand and appreciate how difficult the marital conversation can be. I always tell my clients – these are two consenting adults making a lifelong choice together. You want to understand the terms of everything else you do in life, however temporary and temporary, a job offer, buying a car or a house, why not do the same for what is the equivalent of a lifetime contract?

Align with financial goals and philosophy

Have you had a conversation with your loved one about your financial goals, expenses, and savings philosophy? If not, you absolutely must, as it is the foundation of the life you will build together.

Here are some sample topics to get you started:

  • Do you plan to make a joint budget, and if so, who will contribute to what?
  • Is there an agreed spending limit where the other spouse must be consulted?
  • Are you both on the same page when it comes to risk tolerance in investments and comfort level with debt?

Start by talking broadly with a long-term horizon in mind:

  • When do you realistically want to retire?
  • Are there any financial milestones you would like to achieve at a certain stage of life?
  • Are there current or future financial obligations that the other person needs to be aware of (e.gcare for elderly parents, alimony)?

Once you have an agreed-upon financial goal, move to the next five years with those long-term goals in mind:

  • Is your combined income sufficient to support your combined lifestyle? If so, what do you do with the deductible?
  • Are you going to spend, save, invest or maybe a combination?
  • If the income is insufficient, what can you stop and for how long?
  • Are you going to buy or rent a house? How much can you afford and do you have an agreed plan to save for the down payment?
  • Are you going to rename your accounts jointly or keep them separate?

While there are no right or wrong answers, the process of going through these questions and having that discussion is very important.

Be prepared when you expand your family

Once you’re married, and especially if you have a child on the way, it’s important to get your estate plan in order. Everyone needs at least a will, power of attorney, power of attorney, and living will (the latter two often combined in one document).

A will is the legal document that specifies who will inherit your assets after your death. Without a valid will, your estate would be subject to your state’s intestacy laws, which outline your next of kin for inheritance purposes. Each state’s intestacy laws usually follow family lines – spouse, children, parents, siblings, etc. While many people find that acceptable, what many people don’t think about is how their loved ones will receive those assets. If your beneficiary is too young or unable to make financial decisions yet, should the assets be put in safekeeping for your beneficiary’s benefit instead? If you have a minor child, who is the guardian of your child if both parents are deceased? To me, the single most important reason for a young parent to make a will is to appoint a guardian of their choice for your minor child(ren).

Another common mistake is not updating your beneficiary designation on your retirement plans and insurance policies. These are called “non-hereditary” assets that are not subject to the terms of your will. Instead, the inheritance of these assets is arranged by the beneficiary you named on the individual plan or policy. For a newly married couple, state law or often retirement plan policy itself would automatically designate your spouse if you leave the beneficiary blank. However, such standard rules usually do not apply when it comes to children.

Here’s a mistake I made when I was young: When I had my first child, I updated my beneficiary designation to have my husband as my primary beneficiary and my son as the secondary. When my daughter was born, it took me years to realize that I never added her to the list. I accidentally disinherited my daughter simply because I was too busy with work and being a mother of two young children. Lessons learned that estate planning isn’t a one-time thing – you need to constantly review and update it, especially if you’ve just experienced a life event.

Protect from an unthinkable disaster

Now that you have a family and dependents, it’s important to think about risk mitigation and protection. Do you have good life insurance if something were to happen to you? At the very least, I believe that everyone should have a term policy in place to help the surviving spouse with immediate cash flow needs and any ongoing fixed costs.

I often get the question: How much insurance is enough? That depends a lot on what your needs are, and the best way to quantify that need is to have a financial plan with a focus on survivors’ needs. Common factors to consider in such an analysis include having sufficient coverage to pay fixed costs such as a mortgage or to transport dependents to a certain point in life, such as graduation.

For many couples where a spouse chooses to stay at home to care for young children, the immediate response may be that only the money-making spouse needs to be insured. That could be a mistake. If something were to happen to the stay-at-home parent, you would probably have to hire someone to provide childcare and other services at home, all of which cost money. Alternatively, consider taking a less demanding job so that you can be more at home with the kids in that situation. All of this means extra expenses that need to be covered, and having life insurance can help you with those cash flow needs.

I hope this has been helpful, and stay tuned for next month’s column: Financial Advice I’d Give My Younger Self: Planning for Retirement and Having Enough of a Litter to Get Through It.

Wilmington Trust is a registered service mark used in connection with various fiduciary and non-fiduciary services offered by certain subsidiaries of M&T Bank Corporation.
Keep in mind that tax, wealth planning, investment and financial strategies require consideration of the suitability of the individual, company or investor, and there is no guarantee that any strategy will be successful. Wilmington Trust is not authorized and does not provide legal, accounting or tax advice. Our advice and recommendations provided to you are illustrative only and subject to the opinions and advice of your own attorney, tax adviser or other professional adviser. Investing involves risks and you can make a profit or a loss. There is no guarantee that an investment strategy will be successful.

Chief Wealth Strategist, Wilmington Trust

Alvina Lo is responsible for family office and strategic wealth planning at Wilmington Trust, part of M&T Bank. Alvina previously worked at Citi Private Bank, Credit Suisse Private Wealth and a practicing attorney at Milbank, Tweed, Hadley & McCloy, LLC. She has a BS in Civil Engineering from the University of Virginia and a JD from the University of Pennsylvania. She is a published author, lecturer regularly and has been quoted in major newspapers such as ‘The New York Times’.

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