Investing for Young Families
Financial Advisor Kristina Strickland discusses how investing for young families differs from investing when you’re over 40 and provides a few tips for managing your financial goals.
TRANSCRIPT
Hi, I’m Kristina Strickland with Infinitas and we're going to spend a little bit of time today talking about investing for young families and what that looks like.
You actually have to take a step back and before we talk about investing for young families the most important thing that I can think of that has to be done first is emergency savings.
I meet a lot of young folks who will say, “Hey I've got disposable income…a couple hundred bucks every month that I'd really like to do something with.” My first question is always going to be…okay that's phenomenal but if something happened (if you had an emergency or you lost your job heaven forbid) how long could you live off of just what you currently have saved? If that answer is not at least three to six months then we really need to take care of that first. So before we get into what does investing look, like we need to first look at having three to six months of savings in your savings account or in your checking account easily accessible that you could get to 24/7.
Once the emergency fund is set up then the next thing is what are the goals that you're saving for? With older folks we know we're typically talking about retirement, but with people under the age of 40 the goals are different. They might be saving up to buy a bigger home, maybe investing in saving because we want to buy a new car, or maybe investing and saving for our children to go to college and we want to be able to pay for that. Whatever the goal is, it can be anything and we're certainly not offering judgment on what the goal is. But the reason we need to know the goal from an investment perspective is because that will determine which action or which investment channel makes the most sense for you.
For example: if I'm saving to buy a larger house then I might not as an investor choose to take a lot of risk with that particular account because it's money that I know in the next five to six years or even less I'd like to use these assets. So for us as advisors we'll want to talk about what risk level is appropriate. Maybe you want to be conservative or moderate and probably not take a whole lot of risk again because your time horizon is not the same. People talk about saving for retirement and being aggressive with that. Well that makes sense because that's something that's 20 plus years down the road. When the investment goal is I want to use this money in five or six years, that's a totally different conversation.
Let's say the goal is that we want to save up to buy a new car or to make a large purchase… maybe you want to go on a vacation or something like that. Then the conversation becomes okay how much are you willing to dedicate every month towards this goal? When do you plan to use these assets? And what growth are you trying to achieve? So again we might have a conversation about investing aggressively. That might not make sense because this is more of a short-term goal. Maybe conservative or moderate makes more sense for you. Things I would question especially when young families talk about investing for short-term goals things like for example if you're investing to buy a car, well I can certainly save up and get good good return. Maybe maybe hypothetically speaking I'm gonna get five to six percent of your growth. Okay, but if the car is offered at a zero percent interest rate you could argue (and this is something that I think a lot of young families need to have an internal conversation about) do I want this zero percent loan where I'm not paying any interest to anyone or do I want to use these assets that have grown? There's really not a right or wrong answer to that because it's up to your family and what you feel best about. Some people love the zero percent interest rate if they have the good enough credit to get that that's phenomenal but some people just cannot stand the thought of having a debt so you have to kind of figure out when you're making these investment decisions. You have to also think about how that impacts the rest of your financial world.
The third thing that we typically see families invest for are their children. With investing for your children the two most popular options are a 529 college savings plan in which you're setting money aside specifically for the purposes of education (so college, technical school, trade school, art…things like that) that are still qualified education expenses. A very very popular option is a 529 plan where depending upon which state you live in you may qualify for a state tax deduction for making contributions to those accounts. 529 college savings accounts are managed by the owner. So I have three children. I am the owner on all three of their 529 plans, therefore decide when the money comes out, where it goes, and what they can use it for. So I still maintain control. I'm also the one that gets the state tax deduction from making those contributions. So that's one way to save for young children.
Another popular way and I would argue maybe a better option for my personal experience is called a UTMA. So a UTMA is a minor account that is mine to own and control until my minor child becomes an adult. So in Missouri, for example, that happens at age 21. In the interim between birth and 21, as the adult I can choose what that money gets spent on as long as it's for the benefit of my child. For example, my eight-year-old is most likely going to need braces. I can use that UTMA account to help pay for her braces. It has more flexibility than the college account which is why I like it because I can use it for braces, medical expenses, ballet camp if they want…you know, whatever your child wants to do, you can use UTMA funds for that. However the the downside is there's no state tax deduction for making that contribution. I can be saving for my kids and I get the flexibility, but I don't quite have the same tax advantage and so a lot of families will do a little bit of both.
I’m a pretty big football fan and I feel like when I watch games and we talk about the more plays you can run, the more likely you are to score that goal, and the more likely you are to get that touchdown because you have flexibility. The same thing is true for investing. The more plays you have or the more flexibility you have, the more likely you are to achieve your goals.