Q: My daughter is 30, married with two children and has a good job. What financial advice would you give her?
A: There are so many things to discuss here. But we can mention a few “most important” considerations for her.
Young people have lots of human capital (the potential to make money over a lifetime) but rarely much real capital (money). So, they should share the risk of losing their human capital by way of illness or accidents early in life. This means disability insurance and life insurance.
Disability can be more expensive than death. If one is unable to work or help with the family, they still have expenses and must pay for someone else to do what they used to do. Having insurance to help with this is crucial, but often not present in young families. If the disabled person is the main income earner, then the disability income must cover much of the lost income but also must be enough to save some for when the benefits end (usually at age 65). How much coverage she should have is a complicated question and depends also on her spouse’s work situation.
Death is an uncomfortable topic for young people, but the loss of a parent is both devastating and costly. Life insurance for young people is relatively inexpensive and is also a must-do. How much insurance is again partially a function of the spouse’s work situation.
Liability insurance is important as your daughter’s family accumulates real capital. An auto accident could threaten retirement savings and other possessions. An umbrella liability policy $1 million or more is inexpensive and highly recommended. There are other asset protection things to be done that are beyond the scope of this article.
More: Risk tolerance: What is it when it comes to finances, and why does it matter?
Accumulating capital towards retirement is crucial to long-term success. Whatever the family makes, they must save “enough.” This will be a function of both life situations and the amount of income received. Since retirement savings are very long term and can be eroded by inflation, they should be invested in prudent, low cost and disciplined manner.
Having some well-done estate planning when you have children is extremely important. It is primarily needed if both parents die or become severely disabled early in life. Who takes over parenting the children? What happens to all the money left to pay for the family’s expenses (remember they have life insurance as discussed above). When children are present, we usually recommend a formal visit with an estate planning attorney to develop a Trust to handle the money for the benefit of the remaining family. Trusts offer both control of the money left to heirs as well as protection for it.