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Why saving for your retirement isn’t a solo climb
Why saving for your retirement isn’t a solo climb Sep 24, 2024 11:11:26 AM And the summit is smaller than you think Figuring out how much you need to retire can feel like an exercise in futility, primarily because of two reasons: It’s a moving target. Our needs and, by extension, our spending changes as we age. It’s a Very Big Number. And Very Big Numbers can seem so far out of reach. So let’s simplify things for a second. We’ll share a way to quickly crunch your retirement savings number, how to make it seem less scary, then demonstrate how we do things in the Betterment app. Revising the 25x rule This popular shorthand says to multiply your annual expenses in retirement by 25 to land on your number. It’s the inverse of the 4% rule, another quick calculation for how much of your investments you can sustainably spend each year. They're both ballpark numbers, and if you’re in the early or even middle stages of your financial journey, they can be helpful. But the 25x rule has a hitch, and it’s the challenge of knowing exactly how much we’ll spend in retirement. Luckily for us, we can approximate these shifts by looking at our fellow Americans’ average spending levels by age. When we do that, we see that our spending tends to peak in middle age and declines as we approach the traditional retirement age of 65. In short, you’ll likely spend less in retirement than you do now. And that’s good news! It means you probably need less than you think to retire. So take your current spending—that’s pre-tax income, minus taxes, minus retirement saving—and adjust depending on when you want to retire before multiplying by 25. That’s your age-adjusted retirement savings number, roughly speaking. Now let’s make it seem less like Mount Everest. Because we’ll let you in on a little secret: (You don’t need to save the entire amount) As an example, we’ll make your Very Big Number a Nice Round Number, too. Say you need roughly $2,000,000 for retirement. Using the 4% rule, that’s $80,000 of spending each year. Seeing that many zeros in a savings goal can be demoralizing. But what if we said you weren’t on the hook for all of it? That a generous friend was more than willing to help. And not only help, but shoulder the majority of the load. They just work slowly, so you’ll need to be patient. Your friend, as you may have guessed, is compound growth. And you may be shocked by their share of your retirement savings. Assuming you reach your goal in 30 years, saving $2,500 a month and earning a 5% inflation-adjusted annual return, here’s how much you would have directly saved, compared with how much your “pal” chipped in. You read that right. In this scenario, compound growth is responsible for more than half of your retirement saving. Sticking with our Mount Everest metaphor, that’s like a sherpa giving you a piggy-back ride not long after leaving base camp. Now, don’t get us wrong—$900k is not nothing. But it certainly sounds more doable than $2 million, doesn’t it? And that $2,500 saved a month? That just so happens to be 2024’s combined maximum contribution for a 401(k) and IRA. Either way, it’s best to not dwell on a Very Big Number for too long. Back-of-the-napkin exercises such as these serve a purpose, to a point. So our retirement planning advice, along with adding way more nuance to your calculations, encourages you to focus simply on your desired annual spending in retirement. We help you chart a course to get there and automate your approach, all so you can forget about finances for a second. Because compound growth grows the fastest when you’re not looking. -
Should you pack up and roll over your old accounts?
Should you pack up and roll over your old accounts? Sep 16, 2024 11:38:39 AM From rollovers to transfers, deciding whether to make a move boils down to a few factors. 401(k)s, IRAs, and taxable accounts have a habit of piling up over the years. People change jobs. They dabble in new investments. They try out different advisors. So every now and then, it’s good practice to weigh the pros and cons of consolidation, including access to tax-smart tools, low fees, and automated investing. We break down a few considerations below to help guide your thinking, compare options, and make the right call for your specific situation. Three considerations for making a move Performance Personalization Goal alignment Special considerations for tax-advantaged accounts Special considerations for taxable accounts A sneak peek of how we make moving easier I. Three considerations for making a move Performance It all comes down to this, doesn’t it? Will Advisor B outperform Advisor A? Will they help my investing generate more gains? We couldn’t agree more, albeit with a big clarification: Returns are a major part of performance, but they're only one piece of the pie. Taxes and fees can take a bigger bite out of your investments than you may realize. So before we help you compare returns, let’s first look at these two other pieces. Taxes To maximize your returns, minimize your taxes. And tax-savvy advisors like us take advantage of three strategies to do just that. If your old investments can’t access these benefits, it may be time for a change of address. The first strategy is called asset location, or slotting investments into different account types depending on those accounts’ tax treatments. It’s specific to retirement accounts, and it becomes much easier to do (and do well) when those accounts are consolidated with one provider. Our Tax Coordination feature takes asset location to the next level. The second strategy is specific to taxable accounts: tax loss harvesting. Tax loss harvesting can take a portion of your taxable investing and turn it into tax-advantaged investing. It’s become a tax strategy for the masses thanks to technology like ours and the low-cost trading of exchange-traded funds (ETFs). Speaking of ETFs, they’re considerably more tax-efficient than most mutual funds. All of our stock and bond portfolios are built with ETFs, whereas some legacy 401(k) providers’ technology can’t even support them. If you find yourself with old investments in the form of mutual funds, consider taking a hard look at their potential tax drags and, just as importantly, their costs. Fees Investing fees fall into two main buckets. There’s the advisor fee, which goes to whoever manages your investments on your behalf (like us!). Then there are fund fees, also known as “expense ratios” or “fund operating expenses.” These are charged by the investment funds themselves that make up your portfolio. So what’s a reasonable amount to pay for each? The average advisor charges roughly 1% of the assets they manage for you. Our annual fee for investing comes in well below that average. A 401(k) with even a modest fee may cost you tens of thousands of dollars over time. The savings from rolling into a Betterment IRA of low-cost ETFs, meanwhile, can add up to a more comfortable retirement. On the fund front, the average cost of an ETF is 0.16%, about one-fourth of the cost of the average mutual fund. The biggest ETF in our Core portfolio, for example, charges 0.02%. We make it easy to see the fund fees for each investment at Betterment. Simply navigate to the Holdings tab of any goal, where you can toggle between the “Fund fees per year” expressed as a percentage of your assets or a dollar amount. Some advisors are less than forthcoming about the fees tied to their services or the investments they choose. So ask questions, and consider it a red flag if they don’t make it easy to understand your all-in costs. Returns Here’s where things get tricky, because comparing apples-to-apples returns between different providers and their various portfolios can be difficult. Some may be selling apples, while others may be selling a low-cost, globally-diversified assortment of fruit. But you can level-set somewhat by comparing portfolios with 1) similar allocations of stocks and bonds and 2) similar levels of diversification. U.S. equities have outperformed international markets since the Great Recession, but those tables were turned for extended stretches in the 80s, 90s, and 2000s, and they very well could turn again. Personalization For many investors, it’s important to know what they’re investing in—and to feel excited about it. So if your old 401(k)’s “2050 Target Date Fund” doesn’t exactly set your heart aflutter, try scoping out alternatives. It’s why we build easy-to-understand portfolios appealing to a wide range of interests from socially responsible investing to innovative technology. Each one can be customized to your specific target date and easily updated when life happens and circumstances change. Goal alignment Consolidating more of your retirement accounts under the same roof unlocks several benefits. Asset location, as previously covered, is one. Asset allocation, or the ratio of different asset types like stocks and bonds, is another. It’s best when accounts serving the same goal add up to your preferred asset allocation, and that can be hard to accomplish when they’re spread across multiple advisors. At Betterment, you can nest multiple accounts under the same goal and easily set one asset allocation for all of them. II. Special considerations for tax-advantaged accounts If you’re considering moving tax-advantaged accounts like 401(k)s, 403(b)s, and IRAs, keep a few more things in mind. Account compatibility – Deciding what kind of account to move to can make for a dizzying decision, but in a nutshell: Roth accounts must be moved to a fellow Roth account. Traditional IRAs typically move into traditional IRAs. Exceptions include some cases of backdoor Roth conversions. 401(k)s can flow into either a 401(k) or IRA. Here’s a simplified version of the IRS’s infamous rollover chart to help: Roll to Roth IRA Trad. IRA Trad. 401(k) Roth 401(k) Roll from Roth IRA ✓ X X X Trad. IRA ✓ ✓ ✓ X Trad. 401(k) ✓ ✓ ✓ ✓ Roth 401(k) ✓ X X ✓ Some important qualifiers depend on your exact move, so we suggest studying the full chart carefully. A big one to call out is that any traditional (i.e. pre-tax) funds moved to a Roth (i.e. after-tax) account must be included in your taxable income for that year and taxed accordingly. It’s one reason why we highly recommend working with a tax advisor, especially if your specific case isn’t so cut and dry. Access – After you leave a job, your 401(k) from that job is still yours, and you can still change its investments, but you can no longer contribute to that specific 401(k) account. Avoiding taxes – In most cases, you can move tax-advantaged accounts to a new provider and pay zero dollars in taxes, but if you simply cash them out and pocket the money before the age of 59 ½, those funds are subject to a 10% early withdrawal tax on top of ordinary income tax, with few exceptions. III. Special considerations for taxable accounts Moving taxable accounts potentially comes with (surprise, surprise) tax implications. The first thing to do is suss out which of your old assets can be moved “in-kind” to a new provider. This means the new provider is able to accept the new assets, either slotting them into your new portfolio as-is or selling them on your behalf and reinvesting the proceeds. Some assets first need to be sold before you can transfer the funds. In these cases, you can first work with a new provider (like us!) and a tax advisor to estimate the potential tax hit. Then, if you decide to move ahead, you’d work with your old provider to liquidate those assets before transferring the funds. IV. A sneak peek of how we make moving easier The process of actually packing up and making a move can be complicated. It doesn’t help that it takes two advisors to tango, and your old provider may not make things easy. But we do everything possible on our end to help streamline the process. That includes letting you quickly initiate a transfer or rollover in the Betterment app. Some transfers can be serviced entirely online, whereas other transfers and most rollovers require some paperwork. If you’re considering moving $20k or more, our Licensed Concierge team is available at no cost to walk you through all the considerations above, size up whether a move is in your best interest, and should you decide to switch, help move your old assets to Betterment. Because whether moving to a new house or a new advisor, it never hurts to have a little help. -
5 financial tips: What to do when rates fall
5 financial tips: What to do when rates fall Sep 10, 2024 2:54:29 PM Interest rates are falling but that doesn’t mean the sky is falling when it comes to your finances. Here are 5 tips to help you weather a falling-rate environment. Table of contents: Why does the Federal Reserve cut rates? What happens to cash, stocks, and bonds when rates drop? 5 financial tips to consider when the Fed cuts rates What should you do with your money when rates fall? It can be hard to know what to do with your money when the Federal Reserve (aka the Fed) cuts interest rates. But we’ve got you covered. In this article, we’ll explore why the Fed cuts rates, what happens when they do, and most importantly, what you can do to keep your finances on track. Why does the Federal Reserve cut rates? The Fed cuts interest rates for various reasons related to stimulating economic growth and addressing concerns about the economy's performance. As we look into the future, some of the specific reasons why the Fed might decide to cut interest rates include: Curb an economic slowdown: If the economy is showing signs of slowing down, such as a decline in GDP growth or an increase in the unemployment rate, the Fed may cut interest rates to encourage borrowing and spending to boost economic activity. Manage inflation: When inflation is stabilized or falling, the Fed might cut interest rates to stimulate demand and help achieve its target inflation rate. Lower interest rates make borrowing cheaper, which can lead to increased consumer spending and business investments. Stabilize financial markets: In times of market volatility, the Fed may cut interest rates to calm investors and restore confidence in the economy. Lower interest rates can reduce the risk of defaults on loans. Support job growth: The Fed aims to keep the labor market healthy by promoting job creation and wage growth. By cutting interest rates, the central bank makes it easier for businesses to hire workers and invest in their employees' future. What happens to cash, stocks, and bonds when rates drop? In a rate-cut environment, the performance of high-yield cash accounts, stocks, and bonds can be affected in various ways: Cash account returns: When interest rates fall, high-yield cash accounts may experience lower returns as the annual percentage yield on their investments decreases. However, cash accounts can still provide liquidity and safety during periods of market volatility. And high-yield cash accounts, like Betterment’s Cash Reserve, still offer a competitive variable yield for your excess cash. Stock prices: Rate cuts can potentially boost stock prices as lower interest rates can stimulate economic activity and encourage borrowing by companies. This can lead to a positive sentiment among investors and push stock prices higher. However, if the economy continues to weaken or is volatile, or if inflation rises, stocks may decline due to increased uncertainty. Bond prices: As interest rates decrease, current bond prices tend to rise because there is less demand for new bonds that now have lower yields. This inverse relationship between bond yields and prices means that existing bonds with higher yields become more attractive to investors seeking income. 5 financial tips to consider when the Fed cuts rates Depending on your financial situation, as interest rates fall, consider how you can apply these five tips to help keep your financial goals on track. Tip 1: Keep enough money in cash for short-term goals In a falling-rate environment, having a cash cushion can provide peace of mind and flexibility for unexpected expenses or opportunities. Make sure to allocate some funds for short-term goals, like upcoming bills or home improvements. Make sure you have an emergency fund: An emergency fund acts as a safety net during turbulent times. Aim to save 3–6 months' worth of living expenses in a high-yield savings account or money market fund. Keep enough cash for purchases you are planning to make in the next 12 months: Whether it's a new car, home renovation, or vacation, having cash on hand can help you take advantage of sales and discounts without worrying about interest rates. Tip 2: Consider moving excess cash to investments With interest rates falling, yield on cash accounts generally falls too, so consider investing your extra cash into assets with potentially higher returns. This could include stocks or bonds. Why bonds? When rates drop, bond prices tend to rise. They are also generally less risky than stocks, making them a solid addition to a diversified portfolio. Why stocks? Rate cuts can stimulate economic growth, potentially boosting stock prices. While investing in individual stocks carries risk, diversifying your portfolio across sectors and industries can help mitigate potential losses during market volatility. And if you have a long-term time horizon, staying invested can pay off over the years. While investing involves more risk than keeping your money in cash, stocks have had greater long-term gains historically than leaving your cash in savings. Bonus tip: Two ways to invest when rates fall. Lump sum investment: This simply means that you take all, or a large portion, of your cash and invest it in one sum. It’s easy, and it gets your cash invested in the market quickly. Dollar-cost averaging: You can automate your investments at Betterment using recurring transfers and deposits for dollar-cost averaging. It’s a great method to invest a little bit of each paycheck. Start investing at Betterment today. Tip 3: Diversify your investments Falling interest rates can have unforeseen effects on various asset classes. To hedge against these fluctuations, make sure to maintain a diversified investment strategy that includes a mix of stocks, bonds, and other assets. By investing in many types of assets, if one falls in value, your overall portfolio is less impacted. Diversification is your friend because we can’t predict the future. Tip 4: Understand how falling rates impact the housing market As interest rates decrease, mortgage rates for buyers may become more favorable. However, this could lead to increased demand and potentially higher home prices. If you're planning to buy or sell a property, be prepared for these shifts in the market, and work with a trusted real estate professional to understand what’s happening in your local housing market. Depending on housing prices and interest rates, you may want to weigh the benefits of buying, renting, or — if you already own a home — refinancing. Tip 5: Refinance high-interest debt Take advantage of lower rates by refinancing high-interest debt. This can include mortgages, auto loans, personal loans, and even credit card debt. For example, if you purchased your home when mortgage rates were at recent highs, refinancing to a lower rate could save you thousands of dollars in interest payments over the course of your loan. Another strategy to consider if you have multiple sources of debt is a loan consolidation. You may be able to secure better terms by consolidating your debts into one loan for easier management. What should you do with your money when rates fall? As we said in our five tips, we recommend considering moving excess cash to stocks and bonds to diversify your overall investing strategy. But what does that look like? It’s a balance of risk and reward to support your goals. Ask yourself: What are my financial goals? Are they short- or long-term? And how much risk am I willing to take? If you are willing to take on a bit more risk and have longer-term goals, then moving more money into stocks and bonds may be a wise approach to grow your money over time. Just make sure you have enough cash on hand for emergencies and short-term goals. At Betterment, we have accounts to support your goals. From growing your savings to building long-term wealth, you can be invested with your preferred balance of risk and return. Consider Cash Reserve: With our high-yield cash account, earn interest on your savings with no market risk and access your money whenever you need it. Goldman Sachs Tax-Smart Bonds: A 100% bond portfolio that gives higher-income individuals a personalized option to target additional after-tax yield. BlackRock Target Income: With this 100% bond portfolio, aim for higher yields while limiting stock market volatility with one of four levels of risk to choose from. Investing portfolios: Build wealth over time with one of our diversified portfolios of stocks and bonds. Ready to be invested? -
Make Your Money Hustle: Bond Investing
Make Your Money Hustle: Bond Investing Sep 9, 2024 8:00:00 AM Explore how bonds can diversify your investments, filling the gap between cash and stocks. Bonds can be confusing, but we’re here to simplify them. Here’s the TL;DR: Bonds are loans you give to companies or governments who pay you back with interest. Bonds generally earn more return than high-yield savings accounts while taking on less risk than stocks. Bonds can be bought through several sources, including a broker, the U.S. government, or a diversified ETF like the multiple bond portfolios offered by Betterment. Congrats—you made it past the TL;DR. Next, we’ll dive deeper into how bonds may be able to bring balance to your investments, filling the gap between cash and stocks. In just a few minutes, you’ll walk away knowing: The basics of bonds The benefits of investing in bonds An easy way to buy bonds As interest rates begin to drop, bonds may be a good way to earn extra yield. The basics of bonds No need to read a book about bonds—here are three Q&As that give you the basics. Question 1: What is a bond? Answer: A bond is basically a loan that you provide to an entity such as a business or government that wants to raise money. You can buy and hold a bond directly from the issuer (e.g. buying US Treasury bonds from TreasuryDirect) or choose to buy and sell bonds on the secondary market (e.g. an online broker). Question 2: How does a bond work? Answer: After you “loan” your money to the entity issuing the bond, they agree to: Pay back your principal: The issuer promises to pay your initial money back, aka your principal, by a specified date called the bond’s maturity. Pay you interest: You’ll receive periodic interest payments based on the annual interest rate paid on a bond, called the coupon rate. These interest payments are either distributed to you or reinvested into your investment on a consistent schedule. Question 3: Are there risks to bond investing? Answer: Generally, bonds are less risky than stocks, but that doesn't mean they are without risk. Examples of these risks include: Credit risk: There’s a chance that a bond issuer won’t pay you back. Interest rate risk: There is a chance that the value of the bond will go down as interest rates go up. Long-term bonds have greater interest rate risk than short-term bonds. Most bonds are rated based on the bond issuer's financial strength and ability to pay a bond's principal and interest. Like stock investments, bonds with less risk offer less potential for return (aka lower yields). Less risky bonds include higher-quality bonds (more likely to be paid on time) or bonds with shorter maturities (length until full repayment). The benefits of investing in bonds For investors looking to put some of their cash to work but not wanting to go all-in on the stock market, here are three benefits that bonds can offer, making them complementary to cash and stock. 1) Bonds can help you avoid market volatility Unlike stocks, bonds don’t represent a share of ownership in a company. Because of this, you won’t see the value of a bond increase as much as a stock when a company grows, but you generally also won’t see it decrease as much as a stock when a company struggles. 2) Bonds can help you preserve wealth Bonds, especially short-maturity bonds, can be a good choice to help preserve your money while potentially earning more return than cash in a traditional savings account, money market account, or CD. 3) Bonds can help you generate income Because the entity issuing a bond typically pays the bondholder interest on some regular schedule, they can help generate consistent income with less risk than stock investing. An easy way to buy bonds Most bonds don't trade directly on centralized markets like stocks, making it more challenging to invest in individual bonds. You can buy individual bonds from a broker or directly from the US government, but both of those options require DIY knowledge and time to build a diversified portfolio. An easy way to invest in a diversified portfolio of bonds is to invest in a bond ETF. A bond ETF, or exchange-traded fund, trades on stock exchanges, like a stock ETF. In one purchase, a bond ETF offers investors a way to gain exposure to a diversified portfolio of bonds, which can include government, municipal, corporate, and international bonds. Bond ETFs aim to provide regular income through interest payments from the underlying bonds and offer the flexibility of buying and selling shares on an exchange throughout the trading day. Make your money hustle with a Betterment bond portfolio We’ve created two types of bond portfolios with different needs in mind: BlackRock Target Income portfolios What is it? The portfolios include a diverse set of bond ETFs with a range of risk levels, helping to mitigate exposure to volatility in the stock market, aiming to preserve wealth, while seeking to generate income. Who is it for? These portfolios may be better suited for investors looking for lower risk compared to stocks, with the option to choose one of four portfolio strategies targeting increasingly higher yields. The portfolio strategy should be selected based on your risk tolerance. Keep in mind, getting more income from a specific target portfolio also means taking on more risk. Goldman Sachs Tax-Smart Bonds portfolio What is it? This portfolio is built by Goldman Sachs using 100% short-term bond ETFs. Betterment then personalizes the portfolio based on your tax situation with the aim of generating after-tax yield. Who is it for? The portfolio is designed for higher-income individuals, especially in the 32% or greater federal tax bracket, looking for a potentially higher after-tax yield than a cash account with less risk than a traditional stock-and-bond investing portfolio. In both portfolios, all interest payments, also called dividends, are automatically reinvested to help grow the portfolio’s value. Ready to be invested? We make it simple to invest in a bond portfolio with three options: Make a one-time deposit. Set up recurring deposits from Betterment Checking or an external account. Schedule recurring transfers from your Betterment Cash Reserve account. -
How we help move your old accounts to Betterment
How we help move your old accounts to Betterment Aug 29, 2024 7:00:00 AM Moving investment accounts from one provider to another can be tedious and complicated. We help smooth out the process. Moving investment accounts from one provider to another can be complicated. You may be in the early days of mulling over a move. Or maybe you’re ready to make a switch and simply need a little help making it happen. Wherever you are in the process, we’re here to help. And once you’re ready to act, you can easily start the ball rolling in the Betterment app. The steps vary slightly different depending on your situation and how willing your old provider is to play ball: ACATS — Most taxable accounts, and even some retirement accounts, can be transferred automatically by simply connecting your old provider’s account to Betterment. You stay invested, and the entire process often takes less than a week. Direct rollover/transfer — Some retirement account providers, meanwhile, require a check be mailed to either you or your new provider. In these cases, we provide step-by-step instructions for reaching out to your old provider to initiate the process, which often takes 3-4 weeks. And for those considering moves of $20k or more, our Licensed Concierge team can help you size up the decision before helping shepherd your old assets to Betterment, all at no cost. Here’s how. The Betterment Licensed Concierge experience Whether you’re already sold on a switch or need help weighing the pros and cons, our Concierge team uses a three-step process to help guide your thinking. Step 1: Assess where you are, and where you want to be We start every Concierge conversation by gathering as much information as possible. What are your financial goals? How well do your old accounts align with those goals? How much risk are you exposed to? How much are you currently paying in fees? We sift through statements on your behalf to decode your old provider’s fees. We analyze your old portfolios’ asset allocations. And we help assess whether Betterment’s goal-based platform could help meet your needs. All of this information gives us and you the context and confidence needed to take the next step. Step 2: You make a call, then we chart a course forward While retirement accounts can be rolled over without creating a taxable event, that’s not always the case with taxable accounts. So in those scenarios, we provide a personalized tax-impact and break-even analysis. This shows you how much in capital gains taxes, if any, a move may trigger, and how long it might take to recoup those costs. We always recommend you work with a tax advisor, but our estimate can serve as a great first step in sizing up any tax implications. Should you choose to bring your old investments to Betterment, we help you with every step of that journey. The mechanics of moving accounts This includes sussing out which of your old assets can be moved “in-kind” to Betterment. We’re able to easily accept these assets, and either slot them into your shiney new Betterment portfolio as-is, or sell them on your behalf and reinvest the proceeds. If any old assets need to be liquidated before they’re transferred, we’ll help you work with your old provider to make it happen. This includes providing you with a full list of relevant assets to give your old provider. Whether transferring assets or cash, we use the ACATS method whenever possible to help your funds move and settle quicker. Step 3: Moving day! Making a move is exciting. Unpacking? Not so much. So we help set up and optimize your Betterment account to make the most of features like Tax Coordination. Need help setting up your goals? We have you covered there, too. Once everything is in order, we’ll begin implementing your transfer plan. We’ll communicate all the steps involved, the expected timeline, and handle as much of the heavy lifting as possible. We regularly check-in and, once your assets or funds arrive on our end, we’ll send you a confirmation making sure all your transfer-related questions are answered to the best of our abilities. Ready, set, switch Moving accounts to a new provider can be a hassle, so we strive to shoulder as much of the burden as possible. It starts with a simple step-by-step process in the Betterment app, and for those exploring moves of $20k or more, extends to our dedicated team of Concierge members. They’re standing ready to help give your old assets a new life at Betterment. Because whether moving to a new house or a new advisor, it never hurts to have a little help. -
Top 8 financial to-dos for new parents
Top 8 financial to-dos for new parents Aug 8, 2024 4:18:54 PM The moment we knew we had a newborn on the way, my wife and I dived into all the standard parenting research. Car seats. Strollers. Baby-led weaning. It can be overwhelming. As a CFP®, I also know that planning our baby’s future goes beyond diapers and late-night feedings. From creating a solid financial foundation to navigating the complexities of insurance and estate planning, financial decisions can seem daunting. But with a little planning—and some practical tips— you can confidently pave the way for this exciting journey. So here they are, my top 8 financial to-dos for new parents: Get life insurance: A good rule of thumb is to have 10x your gross salary saved. I generally recommend term insurance over permanent insurance. Update/Create an estate plan: This should include a will, power of attorney, updated beneficiaries, medical directive, and possibly a trust. Start saving for college: If you start when your child is born, investing approximately $500/month should be able to fund the cost of an average public university. Freeze your newborn’s credit score: This can help prevent identity theft of your newborn. You’ll want to do this for each of the three main credit bureaus, Equifax, Experian, and TransUnion. Update your health insurance: Make sure to add your newborn to your health insurance. Some parents may also wish to change to a plan with a lower deductible to help minimize risk. Research tax benefits: A quick scroll on Instagram will reveal tips for structuring your finances to accrue tax benefits with kids. You’ll want to look into some of these, among others: the Child Tax Credit and Child and Dependent Care Credit. Update your budget: A newborn baby can be a shock to your finances. Here are some common expenses to consider when updating your budget: Childcare: The average cost of daycare is $321/week. The average cost of a full-time nanny is $766/week. So it’s a good idea to call child care centers in your area to get a sense of what you’ll need—and how far out to reserve your spot. Daily newborn items: Diapers, wipes, formulas, bottles, clothes, toys, medicine, books—the list goes on. Healthcare: Depending on your health insurance, you’ll likely be paying more each paycheck. Rent or mortgage: Maybe you need more space, or are considering a renovation—or even a move to be closer to family. Discretionary spending: You may need to temporarily cut back on things like shopping, vacation, and dining out (probably not a problem with a newborn anyway) to make room for your newborn expenses. Increase your emergency fund: Once you’ve updated your budget and have a handle on your fixed monthly expenses, you will likely need to top up your emergency fund in order to still cover three to six months of expenses. There’s a lot to consider when preparing for your newborn and their short-term and long-term needs. And of course, each family is different. What type of school your kiddos attend, when you start saving, and where you live will all play a role in the decisions you make. But, as with saving for most things: Starting early can help you set your family up with a firm financial foundation that grows with your evolving needs. If you’d like some help with these steps and want to work with our team of CFP® professionals to craft a financial plan tailored to your needs, visit our Premium page to see if it’s right for you.