Financial planning may seem like something that you only need to do if you’re older and wealthy. But even if you haven’t acquired much in the way of assets yet, approaching major life events with a financial plan is essential.
Preparing for big changes can be overwhelming, though. Here are five milestone life events and a financial checklist for each of these exciting (but also nerve-racking) turning points.
1. Buying a home
Homeownership is perhaps the best way to build wealth for middle-class people. But in many housing markets, buying a first home remains extraordinarily difficult. A home purchase requires a lot of financial discipline, both in terms of saving money and exercising restraint.
Here are some steps to take:
- Aim for a credit score of 740 or higher. It’s possible to qualify for a mortgage with a credit score in the 600s (or even the high 500s in some cases), but you’ll get the best rates if your score is 740 or higher. If you’re not quite there, focus on making on-time payments and paying down debt.
- Build an emergency fund. Having a three- to six-month emergency fund becomes extra important when you buy a home so that you can cover a major repair or pay your mortgage if you lose your job.
- Budget for the full cost of homeownership. Make sure you consider your mortgage payment, as well as property taxes, insurance, homeowners association fees, and maintenance and repairs in setting your budget.
2. Getting married
Your choice of a life partner will affect your finances in every way you can imagine. But often, couples put off having essential money conversations and setting financial goals. It’s essential to have an honest dialogue about money before you walk down the aisle. Here are some points to consider:
- Make sure you’ve each disclosed your full financial picture. You need to know how much your soon-to-be-spouse earns, whether they have debt, and how much they have saved.
- Get in the habit of budgeting together. You’ll need to decide on how you’ll split expenses. Set goals for saving money and paying off debt, if applicable. Try setting aside one day each month for reviewing finances together so you can revisit your spending, as well as your financial goals.
- Plan for the worst. No one likes to think about divorce or death when planning their nuptials, but it’s vital to have a plan should the unexpected occur. If you’re in drastically different financial positions, you may want to consider a prenuptial agreement. If one spouse’s death would cause financial hardship, buying life insurance is a must. Also, consider disability insurance if either of you doesn’t already have coverage.
3. Having kids
The Brookings Institute estimated in 2022 that a typical middle-income family with two children can expect to spend around $310,000 to raise a child until age 17. And that doesn’t include college expenses. Due to the exorbitant costs of raising children, it’s important to plan as soon as possible — and take these steps:
- Buying life insurance is a must. If you haven’t purchased life insurance, don’t delay any longer if you’re welcoming a new addition. For most people, a 20- or 30-year term life policy is sufficient. Few people need permanent life insurance, which is far more expensive.
- Update your estate planning documents. When you become a parent, you need to update your last will and testament to name a guardian for your child in case you and their other parent die. Consult with an attorney about whether you need additional estate planning documents.
- Open a 529 plan. Investing in a 529 plan is a smart way to save for your child’s education. You won’t get a tax break on contributions, but withdrawals made for IRS-approved education expenses are tax- and penalty-free.
4. Changing jobs
Switching careers can help you land a better salary and benefits, and it can also help you find better job satisfaction. But there are a few pitfalls to be aware of. Keep these steps in mind:
- Negotiate beyond your salary. When you apply for a new job, your top goal is probably to earn a better salary. However, be sure you’ve considered the total picture, including retirement benefits, health insurance, and fringe perks. If you don’t have much wiggle room in terms of salary, see if you can negotiate for things like remote work or a flexible schedule, which may save money on things like commuting and child care.
- Read the terms of your employment agreement carefully. Make sure you know whether your contract includes a noncompete clause or a similar agreement, which could make it harder to switch to another job. The Federal Trade Commission (FTC) estimates that noncompetes cost workers nearly $300 billion a year in wages.
- Don’t forget about your 401(k). When you change jobs, you’ll need to decide what to do with the money in your old employer’s 401(k). You can leave it where it is if your old employer allows it, roll it over to your new employer’s plan, or do an IRA rollover.
Retirement is perhaps the biggest financial milestone of all. After decades of working and saving, you finally get to call it quits. Here’s what to do in the years leading up to your target retirement date:
- Plan your income strategy. Decide how much income you’ll need to retire and what your income sources will be. It’s worth working with a financial planner to determine how much you can safely withdraw from retirement accounts and how to time Social Security.
- Aim for at least two years’ worth of cash savings. A stock market crash or recession is especially tough on retirees, who often depend on investment income. When you withdraw investments that have just tanked, your nest egg never gets to recover. That’s why allocating some of your investment portfolio to cash is especially important if retirement is near. Aim to allocate at least two years’ worth of expenses to cash and cash equivalents.
- Take advantage of catch-up contributions. The IRS allows you to save extra money in most retirement accounts starting at age 50. If you suspect that your retirement savings are lacking, consider whether you can afford to make catch-up contributions to give your nest egg the boost it needs.