Did your new bundle of joy just arrive, or is a little one on the way?
If you’ve got babies on the brain, you’re probably frazzled in a million different ways, with little brainpower for anything financial.
While it’s important to focus on the day-to-day, spending some time thinking about your financial future also is a good idea. We talked with Jim Karabas, a Winnetka lawyer and certified financial planner, and Brad Walker, a certified financial planner and senior vice president with Wintrust Wealth Management in Northfield to find out why these questions, and their answers, are so important.
“I look at it as a roadmap,” said Karabas, board chairman and past president of the Financial Planning Association of Illinois. “If you don’t have a roadmap, you could be travelling in the wrong direction and won’t ever get to where you want to go.”
Do I need a will now?
Even if you don’t have a lot of money at this point, a will is still a good idea. Without one, there’s no guarantee your money or kids will end up where you feel is best. In most states, if you die without a will, your spouse gets about a third to half of your estate, with the rest going to your children, he says. “Sounds fine, but without a will, in some states a state-appointed administrator, who charges fees for the service, would control your children’s money until each child turned 18. That means your spouse wouldn’t be able to access the money to help raise your children without going through a very complicated legal procedure.”
And that’s not all. If both partners die without a will, “the state courts and social services department would appoint someone to raise your children. And that person might have very different ideas about parenting than you do,” he says.
Bottom line, “Even if you think you have almost no property to leave your children, it’s worth making a will to make sure you get to choose their guardian,” he says.
What about a trust account?
Unlike a will, which only goes into effect after your death, a trust is a way to plan how your money can be spent both while you’re alive and after you die. “If I just put a savings account in my children’s names, when they become of age, they can go spend it however they want,” Karabas says. Maybe that’s OK if Junior uses the cash for med school, but what if he wants to open a video rental store? With a trust, which is not subject to estate taxes, you’ll have more control.
The most common type of trust is the Uniform Gift to Minors Act. “The money that’s put in there can only be withdrawn for the direct benefit of the minor, so things like summer camps, books, tuition,” Karabas says. “The money is taxed at the child’s tax bracket, not the parents’ tax bracket.”
Walker says a trust allows you to “get more specific in your instructions,” and that people with more significant assets or who have a more complex situation, for example second marriages with kids from the first, will have more need for a trust.
Can one of us afford to stay home with the baby, and for how long?
The number guys say it’s not just about numbers. “If you grew up with a stay-at-home mom, maybe it’s worth any cost and you want to be there with your kids,” Walker says.
American families will spend an average of almost $235,000 to raise a child born in 2011 to the age of 17, not including any savings for college. “Housing, food, clothing, health care, child care, schooling—the list of compulsory expenses goes on and on,” Karabas says. But from a strictly financial sense, expenses, particularly those for child care, will help you decide. “If one person’s income can cover all the household expenses and there’s enough in the emergency savings fund, then it’s feasible,” Karabas says. Wealth building can resume after a period of time.
“Typically when the child is ready to go back to school full-time, then that person can go back to work and start saving again,” he says. Online calculators can help guide you; Karabas likes the options at Balance.
When do I need to start saving for my child’s college education? And how much should come from me?
Walker says it’s becoming “more and more common for kids to pay at least some, since saving the necessary amount is very challenging today.” But it’s not a bad idea for parents to plan for the “worst-case scenario”—paying the entire cost yourself. “If later on circumstances change and you want to make them pay for some part of it, or grandparents chip in, then that’s great, it’s just extra money you can use for something else,” Karabas says.
Start saving for college once you have enough in your emergency fund (which should cover six months of expenses.) “The best way to do this is through automatic deductions from your paycheck into an account set up for your child,” Karabas advises. “You won’t miss the money and it forces you to put money away. It was a great piece of advice I got from my boss the day I had my first child.”
How much should I save each month for that education? In what type of account?
Walker says $500 a month invested from birth to age 21 “may cover the majority of expenses for an average out-of-state public school,” but if that’s too steep, save as much as you can afford.
Karabas agrees. “The important thing is to start saving something,” he says. “Unless you do the planning ahead of time, you’re going to come up short. Your financial planner can back into that number and he’ll be able to tell you exactly how much you need to save to meet that goal. They take into account inflation, the rising cost of college over the years and potential returns on investments.”
What is a 529? What is the best college savings plan?
Parents want to know how to swaddle a newborn, of course, but financially speaking, “This is the number one question from expectant parents,” says Deborah Esrig a prenatal educator at NorthShore University HealthSystem. “They all want to know.” A 529 plan is a way to save for college tuition, fees, books, room and board; investments are tax-free.
In Illinois, Karabas likes Bright Directions, but you can invest in any state’s plan regardless of residency. A couple of savings options exist, and a financial planner can guide you. “The quality of investments within the plan would be the determining factor,” he says.
How far apart should I have children?
Face it, “there will be huge expenses all the way through life,” Walker says. But “if you save and invest and live within your means, the timing of having children isn’t as relevant.”
The biggest expense will be college, so plan accordingly. “If you’re going to have kids one after the other each year, think about having four college payments all at once,” Karabas says. “If you space out the kids and have them maybe three years apart, then I think that’s helpful. That means you’re only having kids in college for one overlapping year.”
How do I find the right planner?
Ask friends and family for referrals. Walker says to meet at least three candidates and “ask how they are compensated, their experience, what you can expect from them on a service level and their investment philosophy,” and choose one you like both professionally and personally. It’s an important decision. “Not quite as important as choosing a spouse, but just like choosing a doctor,” Walker says.
Another resource, Karabas says, is the “find a planner” section on the Financial Planning Association’s website.
Editor’s note: Make It Better will take a look at some top questions you should ask a financial expert at different stages of life. Coming up will be articles pegged toward parents with a child headed to college, as well as to people entering their “second act” of life, whether that be imminent retirement, a career change, or a person whose life is changing due to such circumstances as divorce or death of spouse.
Do you have a college-bound child or are you embarking on a “second act?” If you’ve got a general financial question, contact us at inf[email protected] and include your name, town and daytime phone number. We may use your question in a future article!