Financial Planning

Financial planning for the young family

By Elinor Spokes

Remember the innocent nursery rhyme from grade school that went like this: (insert your best friend’s name) and (insert their crush’s name) sitting in a tree, k-i-s-s-i-n-g, first comes love, then comes marriage, then comes baby in the baby carriage?

Remember how the sequence of life in the song made perfect sense and seemed so clear and simple? The lyrics conveyed the dream of many girls to find their true love, settle down and start a family. Perhaps if the rhyme continued, it would include such milestones as the purchase of the first home, the birth of a second child, the first tuition payment for private school or the first payment to the orthodontist for braces.

While the nursery rhyme so many of us recited as children naively spells out one’s expectation in the life cycle, real life can get in the way of that vision. In its innocence, the song neglects to reflect the financial realities of raising a young family, a critical component to envisioning a realistic plan for one’s future.

Creating a financial plan
A common mistake that young people make when it comes to financial planning is that they have a hard time envisioning what their life will be like in 30 or 40 years, Jordan Weinberg, president of Strata Financial Group in Baltimore, has observed. Consequently, “When they are doing well in their younger years, with lower expenses because either they don’t have kids or because the kids are very young and relatively inexpensive, they don’t save enough for the retirement years. Another mistake is that they feel so pressured by having to save for retirement or college that they sacrifice their lives today to the point that they don’t enjoy life (but they have money socked away),” he says.

Joshua Scheinker, senior vice president of wealth management with Scheinker Investment Partners in Pikesville, agrees, saying the number-one mistake made by young families is that they begin their financial planning too late. He recommends that as soon as a young person is employed in a job which offers a 401(k), he or she should begin saving.

Weinberg suggests having a conversation about finances even before a couple marries. “Figuring out whether a person is a spendthrift or not and/or agreeing on the same beliefs in managing money, or agreeing to find someone who can help manage their money, can make marriage easier,” he says.

As soon as a child is born, set up a college savings fund, notes Scheinker. “College is expensive now, but imagine what tuition will look like in 18 years,” he says.

Finding the right person who can assist in developing a realistic plan is an important step in the process. “Finding a financial planner with whom you are comfortable and with whom you have a rapport is critical,” adds Robert Willen, an investment manager with Wagner Capital Management in Pikesville. Weinberg and Willen recommend asking for referrals from family and friends, and checking a financial planner’s credentials: asking what they do, how they do it and how they are compensated for their services.

“In the Internet age, people think they can do a lot by themselves, seeking advice on any number of things via the Internet. As a result, we have become a do-it-yourself society. But it can never hurt to have a professional review your finances, at least periodically,” says Willen.

Willen notes that he usually begins to see clients when they have monies to invest and need help investing, because they do not have the time or the expertise to do so on their own.

This was the case for Allison and David Buchalter: It was when they had finally settled in Baltimore City after years of moving around the country for jobs, medical school, residencies and fellowships that prompted them to sit down and think about a creating a financial plan for their future. With one child and another on the way, they recognized it was time to create a plan for their next stages of life: the education of their children, retirement and the purchase of disability insurance.

“ All the other life plans to that point had been made,” says Allison Buchalter. “It was time to envision the next step and being financially responsible was very important. We knew we had to be strategic to move forward and, as we both work, we don’t have a ton of time to think about this stuff.”

They knew of Weinberg through Allison Buchalter’s job because he had worked with her public relations company on setting up employee benefits. “We chose to work with Jordan because he understood the market and it was nice to be able to work with someone in a similar life situation — someone who also has a young family,” she notes.

Weinberg sees his role in creating a financial plan for a young family as putting together a big picture, incorporating both their current situation and their dreams for the future. Critical elements of such a plan, say both Weinberg and Willen, should include disability insurance, life insurance, college savings plans, retirement plans and perhaps liability insurance.

Must haves
Disability insurance, says Weinberg, is essential. “The greatest asset is your ability to earn an income. You need to protect that asset.”

The purpose of disability insurance is to replace your earned income if something occurs which prevents you from working and earning income. “Anybody can apply and the insurance is factored by your age, your physical condition and how much you currently earn,” Weinberg says.

He also notes that many people are insured through their employers, but that often it may not be enough to fully protect their income. For that reason, the purchase of one’s own disability insurance policy to supplement what is provided at the workplace should be considered.

Life insurance is another major consideration when developing a financial plan for a young family. “Life insurance ensures that if one parent is lost, the other parent can continue to lead the life they have become accustomed to living,” notes Weinberg. He points out that many people assume that the proceeds from a life insurance policy should be used to pay down outstanding debts. Instead, he advises that the proceeds be invested, thus producing income for life.

Saving for college is another vital piece of a financial plan. “The goal is to put enough money away to make the shock of the college expense less by the time your child begins college,” says Weinberg. College savings plans, such as the 529 College Savings Plan, allow one to invest money that will grow tax-free as long as the money is used to pay for secondary school.

Finally, all three planners highly recommend taking advantage of an employer’s 401(k) retirement plan. “A lot of young people don’t take advantage of the 401(k), but you should contribute enough to get a full company match,” recommends Willen.

Don’t, however, says Scheinker, jump into an investment just because it is “hot.” He gives the example of the housing boom when many people purchased properties which were beyond their means. “If you follow the crowds, you will inevitably go wrong,” he says.

For those who are self-employed, Weinberg recommends investment funds such as Solo 401(k) and Simplified Pension Plan for saving for retirement. Recognizing that building a business can be very capital intensive, Weinberg says, putting off some savings is fine.

However, he cautions, business owners need to be cognizant that they have delayed retirement savings and they should make up for it when the business begins to produce a cash flow and profits.

“It is never too early to begin a financial plan,” says Willen, “Even if a family doesn’t have a lot to save, it is important to have a plan.”

Photo captions:
Jordan Weinberg, president of Strata Financial Group in Baltimore, says that individuals should consider having the following elements as part of their financial plan: disability insurance, life insurance, college savings plans, retirement plans and possibly liability insurance. (photo Kirsten Beckerman)

March 2011