Money matters | Young families should start building a financial safety net

Susan and David were radiant. In their early 30s, they were expecting their first child. They were also about to close on their first home. “It’s a whole new stage of life,” said Susan. “We want to be prepared financially in case … well, you know.” David nodded. “We’re looking for a financial safety net.” He glanced at Susan. I complimented them on being proactive. Risks challenge families every day.

Typically, a safety net starts with a will or trust. These documents reflect your wishes as to who would inherit your assets. A safety net also includes an advanced medical directive and durable powers of attorney for health and finances. Someone you designate can make critical decisions if you become incapacitated. Insurance — life, disability and health — also is important. So is an emergency fund to provide you with ready cash for three to six months while you get back on your feet from loss of a job. Put another way, a safety net is just another component of a sound financial plan, enabling you to reach your financial goals and secure the future.

“We couldn’t agree more,” said Susan. “But life is going to get hectic in a few more months.” David added: “It’s hectic now.”

 Time is precious for families with young children. I’ve been there. While financial concerns are always present, day-to-day concerns can push them off your radar. My advice to Susan and David: “Just like you’ll take the time to change diapers, pick up the children from daycare, arrange play dates, visit with grandparents and attend the kids’ sports and other activities, you need to put time and effort into building your financial safety net.”

 I could see that their initial enthusiasm was starting to wane. “But it doesn’t have to be difficult,” I said. “It’s a step-by-step process, and we’ll do it together.”

Step 1: Draw up a will or trust. You can do it yourself if your financial situation is simple. Go online and review a California Statutory Will. See if it meets your needs. At the most basic, you need to designate a guardian for your children and a custodian for your assets. This can be the same person.

 “But who?” David asked. Most people, I answered, choose a family member close to them in age and outlook — someone who shares their values. Of course, you need to ask first and discuss what you’d like them to do. You’re asking them to take on big responsibilities. A tip: A life insurance policy with your child as beneficiary makes it easier for another family to provide for your child.

If you own significant assets or have complicated finances, consider a trust-based estate plan. A will-based plan has to pass through probate. This adds costs, produces a time lag and creates a public record, which you may not want. Trusts also can control the flow of interest, dividends and principle to avoid trustees abusing the funds involved. A comprehensive trust-based estate plan in the Bay Area isn’t cheap. It can cost $2,000 to $5,000. But a trust can save you money in the long run while smoothing the path for your children at a difficult time.

Step 2: Build your emergency fund. It might be as little as three months’ cash if your job is secure or both spouses work and you can live on one income if necessary. Extend it to six months’ cash if you face a reasonable degree of uncertainty about one or both of your employment situations. Another tip: Jobs and life can turn on a dime. You can never accumulate enough savings.

Step 3: Purchase life insurance. Generally, I recommend a 20-year level premium term. At a minimum, this will get your children to adulthood. What’s “level” about it? You pay the same premium each year for the term even as you get older. As your income rises, the premium becomes a smaller part of your budget. And remember, life insurance proceeds are income-tax free.

“We know life can be uncertain,” said Susan. David took her hand. “But I really believe we can be prepared. I think we’ll both sleep better tonight understanding how.”

When it comes to building a safety net for a young family, the time to get started is now.

This is the same time adult children should start building a safety net for their parents — before their parents become too old to care for themselves. I’ll discuss this issue next column.

Ira Fateman is a certified financial planner at SAS in San Francisco who conducts free personal finance workshops for Hebrew Free Loan (www.hflasf.org/financialfitness). Reach him  at fatei50@yahoo.com.

Ira Fateman

Ira Fateman is a certified financial planner at SAS Financial Advisors in San Francisco. He can be reached at (415) 277-5955 or ira@sasadvisors.com.