Yahoo Finance A Wealth Building Plan for You: Growing Family Edition
Investing can be such a confusing, scary proposition sometimes. You're never really sure if the information you find is exactly right for you (in the case of some online publications), if the data is relevant (in certain financial studies) or if the advice is credible (such as when you receive a stock tip from your Uncle Fred because "he knows a guy").
Although I can't help you avoid a bad recommendation from a relative, I can at least provide you with some steps to take that are a bit more tailored to you. As part two in our series, "A Wealth Building Plan for You," I'll address the needs of a growing family.
Growing family. This is the stage of big-ticket items. And we're not even talking about that Jet Ski or motorcycle you'd like to buy. College tuition, retirement and caring for a parent head the list of things you need to set money aside for.
But it can also be a very exciting time, as you watch your children grow up and start to plan and dream about your retirement goals. With that, here are some considerations on how to thrive in this highly demanding stage of your life.
Maximize your 401(k). If your employer offers a 401(k) match, be sure to take advantage of it. Although nothing is technically "free," this is a great benefit to have included in your compensation package, as your retirement contribution is essentially doubling. You may also want to consider increasing your contribution over the match if you can.
Depending on your age, you may be able to contribute up to $17,500, which is money that is going in tax-deferred. Paying taxes on the money, when it's withdrawn, could be much more beneficial than paying taxes on it now, since you could currently be in the highest tax bracket of your life.
Look into a traditional or Roth IRA. An individual retirement account, or IRA, is a great way to save for retirement if you are either self-employed, or want to simply bolster your savings. Here are some differences between a traditional and a Roth IRA:
Traditional IRA: With a traditional IRA, you contribute pretax dollars, then pay taxes when you withdraw the money later, like a traditional 401(k). Any interest you earn on your money in an IRA won't be taxed until you withdraw those funds either. Contributions are also tax-deductible given certain criteria. However, you should be sure to check with your tax professional on whether you qualify, given your income range and specific situation.
Roth IRA: A Roth IRA is slightly different. You contribute post-tax dollars now, then withdraw tax-free later. If you're in a lower tax bracket now than you believe you would be in the future, this would make sense. But keep in mind, these contributions would not be eligible for any type of tax deduction.
Also, unlike a traditional IRA, a Roth IRA is only available to some people, based on annual adjusted gross income. This year it's $183,000 to $193,000 for married couples and $116,000 to $131,000 for individuals. Lastly, there's no date that you have to begin withdrawing these funds, such as the 70 ½ year mark that a traditional IRA sets.
Monitor the 529 plan or other college savings plans of your children. Pretty soon, your children are going to be packing up and heading off to college. Knowing ahead of time how much money you already have set aside will not only help with narrowing down what schools you may be able to cover outright and which you'll need to take out additional loans for, but it will be a benefit through the actual financial aid process as well.
Also, keep in mind that the cost of college can vary widely, and ways to save at any given school are not always made clear.
For example, you have two children who are going to go to schools of about the same cost. You know that in between three and five years, each will be graduating, and you want to have $40,000 set aside. Why would you set aside $40,000? Well, according to a 2013 study by Sallie Mae and Ipsos, that was about the average per child parents wanted to put away.
Now, according to a report from the College Board, the average cost of college for 2014-2015 for one school year at a four-year institution could range anywhere from $19,000 to $42,000. Let's take the average of these totals and fast forward a few years. At an average cost in the low $30,000 range per year, each child is looking at a total tuition bill of about $130,000 over four years. That means that $90,000 will still need to be covered for each.
Student loans could be taken out, sure, but don't forget to check with the school's financial aid office. Many times, there are various grants and scholarships available that students are unaware of, which may enable your child to go to a school that was once considered out of reach financially.
Caring for a parent. The time may also come when you need to begin caring for a parent. Aside from help with transportation to and from doctor's appointments, grocery shopping and any other daily tasks, the need for a place to live may also come up. If your home is already cramped for space, building an extension may be required. In this case, taking out a home equity loan may be the answer. Benefits to this are that interest rates can be low and you can get all of the money you need to take on this project all at once.
The downside, however, is that fees and any closing costs associated with taking out the loan could be expensive. Be sure to do your due diligence and talk with a financial professional to see if this could work for your situation.
Make yourself marketable. We talk a lot about saving money and paying off debt, but sometimes the best way to achieve our financial goals is to focus on increasing revenue instead of trying to cut expenses. That's why it's important to keep your professional self in the best shape possible. Continuous training and learning in your field of expertise will help sharpen your skills, and becoming better known through speaking engagements, publications or simply face-to-face conversations with folks in your industry can help get you recognized. Do the work now, and be ready when you get that call for a promotion or other opportunity.
During this stage of your life, there are a lot of big financial decisions to make, as you're trying to get kids to practice and put dinner on the table. But there are many tools out there to help you save enough that one day you may be able to buy that big-ticket item with peace of mind that the rest is already covered.
Securities offered through SII Investments, Inc. (SII), Member FINRA, SIPC. Advisory Services offered through Scarborough Capital Management (SCM), a Registered Investment Advisor. SII & SCM are separate companies. Neither SII nor SCM provide tax or legal advice.
Opinions, estimates, forecasts and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice.
This material is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance does not guarantee future results.
Greg Ostrowski is a certified financial planner practitioner at Scarborough Capital Management , who helps clients with financial planning and investment management strategies. He says that helping investors stick to their plan and making adjustments based on long-term goals rather than reacting to the market, will result in stronger portfolios. Ostrowski lives in Annapolis, Maryland.
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