For young couples, it is often hard for them to make sense of the various financial challenges they face and to set priorities. While each person is different, below are my Top 5 Priorities for Young Couples!
- Improve Emergency Cash Situation
- A typical rule of thumb is to take your monthly income and multiply that number by six. For example, if you typically spend $5,000/month you should have $30,000 in emergency cash. The purpose of this money is to cover unforeseen life events such as vehicle breakdowns, health issues, home maintenance, etc.
- Avoid and Pay Down Variable Rate Debt (Credit Cards, Home Equity Lines, Mortgages, etc.)
- With interest rates on the rise it is important to avoid the variable rate debt associated with credit cards and home equity lines of credit (HELOCs). Establish a budget and accomplish #1 above to avoid using variable rate debt to cover expenses. Look at all variable rate debt and pay down the highest rate first and move your way down.
- Save More in Retirement Accounts
- Not only does saving more in retirement accounts help accomplish the long-term goal of retirement, it can also save you money on taxes in the short term. For example, if you are in the 24% tax bracket, every dollar you save in a 401k and/or retirement plan guarantees a 24% rate of return on your money due to tax savings. No investment strategy in the world can guarantee those types of returns! If you find yourself in a lower tax bracket (Below the 22% marginal tax bracket), look to a Roth IRA as a good savings vehicle. Contributions made to Roth IRAs are after tax contributions, but they grow tax free, and are not taxed when distributed from the account when beyond the age of 59.5.
- Execute Wills, Powers of Attorney, and Healthcare Directives (This may be #1 when minor children are involved)
- Wills: For young couples with minor children, making sure guardians and conservators are designated is typically the greatest concern. For those with significant wealth, avoiding taxes and making sure assets pass to the next generation in the most appropriate way may take precedence.
- Powers of Attorney: This document ensures someone able to act on your behalf from a financial perspective if you become injured, ill, etc.
- Healthcare Directive: This document directs end of life care if you are in a vegetative state.
- Save for College
We all want what is best for our children, particularly as education is concerned. Despite this desire, I recommend taking care of your own retirement first, and then tackle college savings. If retirement savings are not an issue, Alabama’s CollegeCounts 529 Plan (https://www.collegecounts529.com/) is a great place to start saving for college. Savings in a 529 plan offer a small state income tax deduction, the money grows tax free, and is not taxed when distributed if used for qualified education expenses.