Financial Basics: Life Changes that Require Financial Planning

Financial planning is not something that can be avoided or put off. Absolutely everyone needs to do financial planning at some point in their lives: to create a budget, buy a car, get a mortgage for a house, start a family, save for retirement, and more. Failing to properly plan for any of these life events could put you in dire financial straits, which are often difficult and time-consuming to fix.

The following are four life changes that require you to take a second (or third) look at your finances. As you move through these stages in life, you’ll need to make sure that you have financial strategies in place that work for you.

Getting Married?

Most people dislike talking about money, and even fewer enjoy discussing it with their soon-to-be spouse. Nothing can kill the romance of an impending wedding quite so much as a conversation about money. Nonetheless, it’s necessary if you want to stay happily married. Knowing where you and your future spouse stand on financial issues can help you avoid, or at least decide how to handle, potential disagreements.

What you should do:

• Talk about specifics. Create a budget for your married life. Discuss any debt that you and your partner have and how you’d like to go about paying it. Compare your goals for saving and investing to see whether or not they line up.
• Determine how you and your spouse will combine your finances. Are you going to maintain separate checking accounts, or do you want to put everything in one basket? Talk about how you’ll allocate spending and how much each spouse can spend of your “joint” money without needing to ask the other.
• Update your accounts and beneficiary designations to include your spouse’s name. Is your spouse allowed to access your financial accounts? Is your spouse named as the beneficiary of your life insurance policy? When you get married, don’t forget to make these important changes.

Starting a Family? 

Those who already have children know how expensive starting a family can be. If you fail to adapt your finances to a new baby, there can be long-term financial consequences.

What you should do:

• Begin saving for your child’s education. Immediately start saving for college for your child. The costs of education, including tuition, room and board, textbooks, and more, have been steadily rising in recent years in the U.S.
• Write a will. Without a will, the laws of the state will determine where your property, the contents of your bank accounts, and other assets go. This may or may not be what you would have chosen for your family. Because the state will also name a guardian for your children if you die without a will, it is particularly important that your will include your directions for who should take care of your children.
• Take a second look at your financial goals. Now that your familial situation has changed, it is likely that your financial situation will need to be updated as well. You may need to add college saving to your goals, or you may decide to move into a bigger house.
• Look into purchasing life and disability insurance. If you become disabled or pass away, your family will need money to cover your long-term care or funeral costs. Find an insurance policy that makes sense for you and your family. 

Purchasing a House?

Quite a bit of financial planning goes (or should go) into buying a house. Unlike many smaller purchases made over the course of your life, buying a house is not something you should do spontaneously, without carefully weighing how it will affect your finances. Too many people, unfortunately, buy houses with mortgages that they really can’t afford.

What you should do:

• Determine how much you can afford. Look at your total income, debt, and expenses. A general guideline for housing costs is that they should not go over 28% of your gross income each month. Your debt in total, including the mortgage on your home, credit cards, and student loans, should generally stay at or below 36%. If the house you are considering would increase your costs above these numbers, you may have to purchase a less expensive house or wait until you can afford your dream home.
• Look at your future goals. Consider how having a house and a 30-year mortgage will impact your future goals. Depending on how much flexibility you want—to move, travel, etc.—having a fixed, long-term payment may or may not work well for you.
• Monitor your credit. Any errors or omissions on your credit report may delay your application for a mortgage, derailing your plans and creating a monumental hassle. Before applying for a mortgage, check your credit report from Experian, Equifax, and TransUnion (https://annualcreditreport.com) to ensure that it is correct. Each of these credit-reporting firms allows you one free credit check per year.

Retiring?

• Determine your retirement lifestyle. What will you be doing during retirement? Whether you decide to stay at home or travel the globe will impact your retirement finances and plans.
• Determine your income and expenses. You will need to know your sources of income, how much income you will have, and how long it will last you. To determine this, you will need to make a detailed list. Underestimating your financial needs now can be devastating when you go to retire and find that you don’t have enough to support you.
• Create a plan for withdrawing income. The order in which you take out your retirement income can actually affect you much income you’ll get. Develop a strategy to take out income in an order that will minimize taxes.
• Plan for Social Security. Like withdrawing income, the key to maximizing Social Security benefits is when they are claimed. This is especially true for couples.
• Allow for the costs of long-term care. Though no one likes to consider needing long-term due to incapacitation, it is a possibility that you should take into account. Consider purchasing long-term care insurance or investing in index annuities that also offer a long-term care benefit.
• Talk to a financial planner. Retirement planning is one of the most difficult elements of financial planning for most people to handle on their own. It is also one of the most risky; the closer that you get to retirement, the less you can handle blows to your retirement portfolio since you lack the time to make up that income. Discuss your options with a qualified financial advisor to ensure that your retirement plan is working for you.

Sal Salvo is a financial author and consultant. Mr. Salvo can be reached at (973)-285-3580.

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Sal Salvo, of the Salvo Wealth Group offers securities and investment advisory services through Summit Equities, Inc., Member of FINRA/SIPC, and financial planning services through Summit Equities Inc.’s affiliate Summit Financial Resources, Inc. 4 Campus Drive, Parsippany, NJ 07054. Tel 973-285-3600 Fax. 973-285-3666. Summit Financial Resources does not give tax, accounting or legal advice to their clients. The effectiveness of any strategy described will depend on your individual situation and on a number of complex factors. Any discussion in this article relating to tax, accounting, investments, regulatory, or legal matters is based on our understanding as of the date of this article. Rules in these areas are constantly changing and are open to varying interpretations.

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