We all have different goals in life. Some of us want to be doctors or lawyers, while others want to explore distant lands. But no matter what we want to do or be, many of us have one goal in common: we want to raise a family.
When considering starting a family, it’s important to know the financial impact it will have on you and your significant other. Being prepared for the costs of parenthood will allow you to enjoy it more fully, without constantly worrying about how you’re going to pay the bills and buy the things your children need.
Not only do kids increase the expenses we already have, they also create new ones. Here are some of the things you can expect to spend money on:
* Diapers – One of the first surprises most new parents face is the cost of disposable diapers. By the time your child is potty trained, you can expect to have spent a couple of thousand dollars on diapers alone. You can, however, save a significant amount by using cloth diapers if you don’t mind laundering them.
* Clothing – In the first few years, children grow very quickly. It seems that no sooner than they break a new piece of clothing in, they’ve outgrown it. Even if you buy second-hand, clothing costs can take a big bite out of the budget.
* Childcare – Somebody has to take care of the kids at all times until they are old enough to stay home alone. If you do it yourself, that may mean quitting work or working fewer hours. If you pay someone else, it could run to several hundred dollars a month.
* Healthcare – Every child gets sick or injured at some point. Even if your child were in perfect health, he would still need immunizations and checkups. If you have insurance this won’t impact your budget too much, but the insurance itself isn’t cheap. When you switch from a couples’ plan to a family plan, your health insurance premiums could as much as double.
* Food – Feeding kids can get very expensive. Breastfeeding can reduce costs during the first year or so of life, but once your child begins to eat solids, the grocery bill seems to grow exponentially. Growing kids need a surprising amount of food for their size. And parents often resort to serving convenience foods to save time when their children get older, which can be even harder on the wallet.
* School and extracurricular activities – When our children start school, we incur a whole new set of expenses. They need backpacks and school supplies. They need money for field trips. There are sports, band and other expensive extracurricular activities. And let’s not forget about college!
These basic expenses are only the beginning. Kids also need books and educational toys to help their minds develop. Their rooms need furniture and décor. As they get older, they start asking for video games, cell phones and other gadgets. The list goes on and on.
Parenting is very rewarding, but it’s also expensive. Unfortunately, many parents do not consider this until they are struggling financially. If we start saving long before we plan to have a child, we can greatly reduce the impact on our finances.
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Getting a divorce is emotionally taxing. The end of a marriage is not a happy occasion in itself, and dividing property and deciding who will have custody of the kids can be a long and excruciating process. And when it comes to financial matters, divorce usually has a serious impact on both parties.
When you’re married, everything you or your spouse acquires belongs jointly to both of you. This includes real estate, automobiles, household items, income, and pretty much everything else. There are a few exceptions, but these are rare.
When a couple divorces, the assets acquired during the marriage must be divided. How they are divided depends on where you live. Some states extend the concept of each spouse owning an equal share in everything to the division of assets in divorce. These so-called “community property” states divide everything equally, without regard to each party’s situation. But most states take an equitable distribution approach, which takes into account factors such as each party’s earning capacity, how much property each brought into the marriage, tax consequences and the need for a home for the custodial parent.
The aspect of divorce that tends to have the greatest financial impact is the division of marital debts. If the parties cannot agree on how the debts should be divided, the court may divide them on an equitable basis, similar to the equitable division of assets. Debts acquired during the marriage may be divided regardless of whose name is on the debt.
Although the court may assign joint debts to one party, the other party is still responsible for them in the eyes for creditors. That means that if your spouse is assigned a joint debt but doesn’t pay it, creditors can take legal action against you. There are legal remedies for this, but such a situation can have a devastating impact on your credit rating.
After a divorce, bankruptcy also becomes more complicated. Generally, debts that are assigned by a divorce decree cannot be discharged through bankruptcy. This is intended to protect the other party from being held responsible for the debt. But if you find yourself in a position of needing to file for bankruptcy, you may be out of luck.
Although spouses are jointly responsible for debts acquired during marriage regardless of whose name is on them, if you haven’t had any credit in your name, it will be difficult to establish it after a divorce. If your name has not been on any accounts, it’s just like you have never had any credit in the eyes of potential creditors. You may have to start over from scratch, getting co-signers and paying higher interest until you establish a good credit record of your own.
Divorce is expensive in a number of ways. Attorney fees can be substantial, and one partner may have to pay alimony and/or child support. But what often takes divorcees by surprise is all of the hidden costs. A good lawyer can help you get a fair shake, but you could still experience a number of financial setbacks.
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We’ve all heard how investing can provide passive income and help us reach our long-term goals. But for those who do not have much money to invest, it may not seem worthwhile. When you consider the effects of compounding, however, it’s easy to see just how much sense investing makes.
Compounding occurs when an investment gives returns on both the original amount invested and the interest or returns previously gained. That means you can increase your money even if you do not add anything beyond the initial investment. Compounding takes time, but once you’ve left that money untouched for several years, you can experience impressive gains.
To illustrate how compounding works, consider an investment that provides a 5% annual return. If you were to invest $1,000, you would get a return of $50 after a year. With that additional $50 drawing interest as well, you would have $1,102.50 a year later. These gains may not seem like much, but after 25 years, that initial $1,000 investment will have earned you $2,481.29, for a total of $3,481.29. Basically, you’ve earned an average of about $1,000 per year for doing nothing.
Compounding is powerful when you only invest once. But just imagine the gains you could experience if you made regular contributions. This is how retirement and college savings plans work. Investors make a small contribution each week, month or year. All of the money that was previously in the account earns interest, as do the new contributions and the interest previously earned.
The key to taking full advantage of compounding is to start saving as early as possible. For college funds, that means starting when your children are young (or even before they are born). For retirement funds, it’s wise to start contributing as soon as you enter the workforce.
Most employers that provide benefits offer a 401K plan, which allows employees to make contributions through payroll deductions. The employer often matches the contribution up to a certain amount, and all of the money in the account gains interest. Over a period of 40 years, you should have plenty of money to retire on.
You can save up money for education and retirement even if you start late. But you’ll have to invest much more money to end up with the amount you would have had if you had started earlier. The key factor in compounding is time, so the sooner you start saving, the better off you’ll be.
It’s easy to get discouraged when you put your hard-earned money into an investment and do not see big returns right away. But if you give time for compounding to work its magic, you’ll find that your money grows more each year.
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