This show will cover nine strategies to protect your family with strong financial safety nets, so you feel in control and can manage whatever the future brings.
Not sure if you're doing everything the best way to keep your existing or future family safe? Laura covers nine strategies to be prepared for the unexpected, avoid risks, and build wealth for yourself and your loved ones.
Money Girl is hosted by Laura Adams. A transcript is available at Simplecast.
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Dianne K. says, "My partner and I are considering starting a family. We can afford our expenses on just one salary. But I'm wondering what other financial issues a stay-at-home mom should consider, such as retirement, disability insurance, and preparing for potential divorce or death of a working spouse?"
Thanks so much for your question, Dianne! You're thinking about critical issues ahead of starting your family. This show will cover nine strategies to protect your family with strong financial safety nets, so you feel in control and can manage whatever the future brings.
Hello, friends, and thanks for joining me this week! My name is Laura Adams, and I'm a personal finance expert who's been hosting the Money Girl Podcast since 2008. I'm also the author of several books, including my most recent title, which was a No. 1 Amazon New Release, called Money-Smart Solopreneur–A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers. If you're building a business or want to earn more income, I hope you'll grab a copy of the paperback, ebook, or audiobook today!
And if you're on the socials, be sure to connect with me on Twitter @lauraadams or Instagram @lauradadams. And LauraDAdams.com is my personal site where you can use my contact page and learn more about my work, books, and money courses.
My mission is to help you get the knowledge and motivation to prioritize your finances, build wealth, and have more security and less stress. If you're enjoying Money Girl, take a moment to let us know you're getting value from each weekly episode by rating and reviewing the show in your podcast app!
While I'm not a parent, I've given lots of money advice to families and couples who want to ensure they're doing everything possible to build wealth and security for themselves and their kids. So, if you're not a parent, stay with me because the strategies we'll cover today likely apply to you, too!
9 Strategies to Protect Your Family Finances
Protecting your individual or family finances is about anticipating potential expenses and crises, avoiding risks, and reducing money stress. Just like a smart acrobat would never cross a high wire without a balancing stick and a big, strong net stretched out below, you and your family should never go without financial safety nets.
The first strategy to protect your family is to create emergency documents.
Every adult should have emergency documents—but it's critical when you're a parent or have other dependents. They make sure you're as prepared as possible for the most terrible "what ifs" of life, including if both parents die at the same time or are incapacitated and can't make medical decisions for yourselves.
As awful as it is to think about these situations, it can be even more difficult for your family or friends if they don't know what you'd want them to do. So it's essential to clearly state your wishes in case there's a point when you can't make them for yourself.
Here are 4 critical legal documents that single or coupled parents should have:
A last will and testament explains your wishes after you die, such as who gets your assets, whether you want your ashes sprinkled in the Gulf Stream, and the guardian for any minor children or pets. Many people mistakenly believe a will is just for old or rich people. Again, every adult should have a will, no matter their age.
If you die without a will, the courts decide what happens to your possessions—not your family. Your will should be updated periodically as your life changes, such as moving, getting married, having a child, getting divorced, and becoming a widow or widower.
A power of attorney (POA) gives someone you trust, called an agent, the ability to make decisions and transactions for you while you're alive. You can always change it or appoint more than one agent.
There are different kinds of POAs, but a durable power of attorney is the most common type. It can be used any time you're incapable of doing routine things, like paying your bills, selling real estate, signing contracts, making insurance claims, filing taxes, or making financial decisions. That's how the financial end of your life can continue if you become incapacitated or are unavailable when something important needs to get done.
A healthcare proxy is also called a healthcare surrogate and healthcare power of attorney. It allows you to designate someone to make medical decisions for you when you can't. Imagine that you're in a severe accident and become mentally incapacitated. A healthcare proxy would allow your agent to admit you into a healthcare facility or to apply for public benefits on your behalf.
A living will is similar to a healthcare proxy but applies when facing death, so you must have both. A living will specifies what you'd want to happen regarding end-of-life care if you were in a vegetative state or the final stages of a terminal condition. It tells your family and doctor whether you'd want to extend your life artificially by various means or to die naturally, for instance.
Sometimes married people don't think they need emergency documents because they have a spouse to make crucial decisions for them if something terrible happens. The problem is that jointly-owned assets, such as a house or a car, generally can't be sold without consent from both of you.
Let's say your spouse has had a bad accident and is in a coma. You can't sell assets you own together if you need money to pay your bills. Nor could you sell a stock, for instance, that your spouse owns in just their name. Married couples and domestic partners should generally give each other durable power of attorney to avoid having these kinds of financial restrictions during a crisis.
If both parents die at the same time or if one dies and the other is incapacitated, it's critical to name a guardian in your will, so the court doesn't appoint one for them that wouldn't be your choice. Your emergency documents ensure that you and your children's future is protected no matter what happens.
After a tragedy occurs, it may be too late to make crucial decisions. So, do yourself and your family a favor by getting all your emergency documents created as soon as possible. It's much easier to prepare for a potential disaster than to recover from one that blind-sides you.
You can use online legal sites for templates; however, having an estate attorney create them is worthwhile. Yes, it may cost several hundred or even over a thousand dollars. But once your documents exist and get signed, the work is done. Many attorneys will make necessary small changes for free or a minimal charge down the road.
Keep your original signed legal documents in a safe place, like a bank safe deposit box or your attorney's office. But it's also wise to keep copies of everything at home in case you need them at night or on the weekend. You can also scan and upload them to a free online storage site, such as Dropbox, so they live in the cloud.
The second strategy to protect your family is building a cash reserve, known as an emergency fund.
If you don't have a financial cushion to fall back on for a considerable unexpected expense or a sudden cut in income, it could take years or decades to recover from a crisis. A car breakdown, medical bills, or loss of income are part of life. You can manage those hardships more easily and without debt when you have healthy cash savings.
I recommend keeping three to six months' worth of living expenses in FDIC-insured bank savings. Even though you won't earn much interest, the purpose is to keep emergency money safe and liquid. Investing your cash reserve is not wise because the value could plummet when you need it most.
To determine how much emergency savings you need, add up your monthly living expenses, including housing, utilities, insurance, groceries, loan payments, and transportation. Then multiply it by how many months you could need it.
Having enough money for emergencies should never be considered a luxury. Building up a reserve should be a top priority, so you're never backed into a corner. Not only does having a savings safety net protect your finances, but it also gives your family incredible peace of mind and eliminates money stress.
I know it can seem daunting if you haven't started saving emergency money yet. Don't worry; just get started by taking small steps every month. Make a goal to accumulate $100, then $500, and $1,000 as quickly as possible. Keeping your emergency funds in a separate account, such as high-yield savings, allows you to earn more interest than a regular checking.
The third strategy to safeguard your family finances is having the right health insurance.
In addition to having emergency money in the bank, various insurance products are designed to be financial safety nets for individuals and families. Health insurance is essential for maintaining your physical and financial health, even if you're young and healthy. Even a quick trip to the emergency room for an illness or a broken bone could leave you with a substantial medical bill.
Depending on your income and family size, you may be eligible for government assistance to reduce the cost of health insurance. If you or your spouse or partner don't have a job with health insurance or are self-employed, visit Healthcare.gov to learn more about getting coverage, no matter your health history or financial situation.
Once your child is born or adopted, you have 60 days to add them to your health plan. If you miss the deadline, you'll have to wait until the next open enrollment to insure your child. So, contact your or your spouse's employer's benefits administrator to find out what paperwork to complete.
One way to save money on health insurance is by getting a high-deductible health plan. They reduce your premiums and make you eligible for a tax-advantaged health savings account (HSA). However, as the name implies, they have higher-than-normal deductibles, requiring you to pay more out-of-pocket before benefits begin. So, they may not be the best choice for new parents who are likely to have lots of doctor visits and unexpected medical expenses.
If you have health insurance through your employer but plan to leave the workforce after becoming a parent, another option is getting temporary continuation coverage, known as COBRA. It gives you the same medical, dental, and vision benefits for up to 18 months if you pay the total premiums. Many people are unaware that if you have HSA funds, you can use them to pay COBRA premiums if you wish.
Enrolling in COBRA is likely a more expensive option than shopping for new coverage through the healthcare marketplace because your employer won't subsidize it. So, I recommend shopping and comparing both options.
The fourth strategy for family financial protection is buying life insurance.
If your death would create a financial hardship for anyone you leave behind, such as a child, spouse, or partner, you need life insurance. It pays one or more beneficiaries a set amount after a policyholder dies.
If you're single or no one depends on your income, you either need a minimal policy for funeral expenses or none at all. But you need life coverage if you're a working parent or a stay-at-home parent. Don't make the mistake of not getting coverage for a parent with no income. Consider how you'd pay for future childcare costs without a life insurance policy if they died.
There are two basic kinds of life insurance: term and permanent. Term provides a benefit if the policy owner dies during a period, such as 10 or 20 years. It's an inexpensive option that might only cost a couple of hundred dollars a year for half a million dollars of coverage. For instance, if you're in your 30s or 40s with relatively good health, you can get a 20-year term life policy that pays $500,000 for about $30 per month or $360 per year.
Permanent life has various options, but most provide a death benefit no matter when you die and include an investment that accrues value in the same product. It's a great option if you have a beneficiary who might need future financial help, but it is more expensive than term insurance.
With all life policies, your health history, credit, and lifestyle significantly affect the cost, so don't wait to get coverage if you need it. A rule of thumb is to purchase a life policy that pays at least ten times your income. For instance, if you make $100,000, you might need the policy to pay your beneficiary $1 million.
However, factors such as the number of children you have, future education expenses, mortgage payments, and the lifetime income needs of a surviving partner or spouse should come into play. If you have life insurance through work, but it isn't enough, you can always buy additional policies to ensure your family is fully protected.
To find out how much coverage you need, get free advice from a licensed life insurance agent and consider answers to the following questions:
The fifth strategy is getting disability insurance to protect your family's income.
A shocking statistic from the Council for Disability Awareness is that one in four of today's 20-year-olds will have an injury or illness that causes a long-term absence from work before they retire. You're more likely to suffer a disability than you are to die before the age of 65. And when a long-term disability occurs, the average absence from work is more than two years.
Disability insurance is an often-overlooked financial safety net. It replaces a portion of your income, such as 60% or 70%, if you cannot work due to a covered accident, illness, or injury. It allows you to keep up with your bills and meet living expenses.
Remember that health insurance only pays a portion of covered medical expenses. It doesn't pay any living expenses, such as housing, food, or debt payments if you can't work due to a health problem. That could cause a significant financial strain for you or your family members who depend on your income.
And Social Security disability benefits are only available after you've been out of work for a year and are completely disabled. So, if you don't have the option to purchase a disability policy at work (or if you do, but it's not sufficient), buy a private policy for yourself or the breadwinner in your family.
The sixth way to safeguard your financial future is by contributing to a retirement account.
In addition to having emergency documents, savings, and the proper insurance, everyone should regularly invest in a tax-advantaged retirement account. Even if you want to work up until the day you die, you may not be physically or mentally healthy enough to do it.
Whether you're a stay-at-home-spouse, run your own part-time business, or are unemployed without kids, you might qualify for a spousal IRA or Individual Retirement Account. It's an IRS rule allowing non-earning spouses to contribute to a traditional or Roth IRA–however, you must be married and file taxes jointly to qualify.
You have until your tax filing due date to fund a spousal IRA for the prior year. For instance, if you open an IRA by mid-April 2023, you can fully fund a traditional IRA or a Roth IRA (or a combination of accounts) for 2022. The IRA contribution limit for 2022 is $6,000; however, if you're over 50, you can put away up to $7,000.
If you're ready to open an account, Betterment is one of my favorite places for retirement investing because it's a streamlined and straightforward online brokerage. You can invest in a traditional IRA, Roth IRA (if your household income doesn't exceed an annual limit), or a SEP-IRA if you have self-employment income.
The seventh way to protect your family is to update your beneficiary information.
Whenever you have a life change, such as a birth, death, marriage, or divorce, review the beneficiaries on accounts, such as banks, retirement accounts, life insurance, health savings accounts, 529 college savings plans, brokerages, and cryptocurrency exchanges.
In some cases, even if your will designates beneficiaries, what's shown on a retirement account can supersede it. In other words, if you list an ex-spouse on your 401(k) at work or IRA, they may be entitled to it after your death, even if they're not in your will! So always update your retirement beneficiaries to ensure your family gets protected according to your wishes.
Most parents name their spouse as the primary beneficiary and children as secondary
beneficiaries. However, since minor children can't take ownership of assets until they reach the age of majority in your state, be sure to appoint a trusted guardian.
Another option is to set up a trust, which allows you to communicate how you want money for your heirs to get managed. I recommend getting advice from an estate attorney to understand the best way to protect your children after your death.
The eighth strategy is to automate your family's financial goals.
Automating various aspects of your financial life allows you to build safety nets, such as emergency savings and retirement, without thinking about them. You might ask an employer to split your paycheck deposits between checking and emergency savings. If you're self-employed, set up an automatic transfer from your checking into your emergency savings or retirement account each month.
If you can afford to set aside money for a child's future education expenses (without jeopardizing your retirement), start as early as possible by regularly funding a 529 college savings plan. You can use it tax-free for any college, university, vocational school, or post-secondary institution recognized by the US Department of Education.
Qualified 529 expenses include reasonable room and board, tuition, books, fees, and equipment. You can also use up to $10,000 tax-free for public or private schools for kindergarten through 12th-grade students. While 529 contributions are not tax-deductible for federal taxes, some states offer a tax deduction or credit for residents participating in an in-state 529 plan.
The idea is to treat saving and investing like mandatory bills you owe yourself and automate them when possible. Even if you can only set aside small amounts each month, you'll be surprised how quickly balances grow over time.
The ninth and final strategy I recommend is getting help from a certified financial advisor.
If you have lots of financial questions and concerns or can't seem to get ahead enough to create safety nets, you could benefit from the advice of a financial professional. They can help you create a budget, clearly understand priorities, and avoid potential risks you may be overlooking. There is a cost to getting advice, but I promise it can pay off in the long run.
Dianne, I hope these strategies give you direction for creating more financial safety nets. Don't tackle them all at once but make a goal to achieve a few slowly over time. Even putting one or two in place will give you and your family peace of mind that you're in control and can deal with just about any unexpected hardship that might come your way.
RELATED: What Are the Different Types of Financial Advisors?
If you have a money question or a topic suggestion, visit LauraDAdams.com and email me using my Contact Page–or leave a voice message at 302-364-0308. You can also visit LauraDAdams.com to learn more about my work, books, and money classes.
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That's all for now. I'll talk to you next week. Until then, here's to living a richer life.