FIFF Planning for Early Parenthood
In recent decades, a financial movement known as FIRE (Financial Independence, Retire Early) has gained popularity and a cult-like following among a subset of young professionals. The basic ethos and strategy of its followers can be boiled down to aggressive earning, expense reduction, and high savings rates early in one’s career to accumulate sufficient assets to retire far earlier than a traditional retirement age. Much has been written about the methods to implement a FIRE lifestyle – from intensively frugal grocery budgets to remote workers relocating to lower-cost cities, boosting savings rates beyond standard retirement plan contributions, and acquiring sources of passive income.
As the FIRE movement gained notoriety, some families adapted these concepts to create a “Family FIRE” approach– focusing less on early retirement and more on achieving financial flexibility while raising children. The goal is often to create greater freedom, reduce financial stress, and spend more time with family.
While the concepts of Family Fire are appealing and worthy of consideration, a more specific and important financial planning opportunity is often overlooked: preparing for the first five years of parenthood. We believe that future parents should consider adopting what we’re calling a FIFF (Financial Independence for the First Five) approach to financial planning.
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Everyone knows kids are expensive, but what often receives less attention is how particularly expensive and challenging the earliest years of parenthood can be. These years can be among the most financially demanding and emotionally taxing periods of adulthood. Childcare expenses alone can exceed mortgage payments (the average cost of daycare is [ ]). Simultaneously, parents often encounter insufficient work flexibility, interrupted careers ([number of parents who drop out of a career during parenthood]), and/or increased healthcare expenses all while juggling growing family responsibilities and ongoing financial obligations. For many households, the years before a child enters kindergarten represent an intensely demanding – but temporary – financial period. However, much of financial planning literature encourages families to maintain or increase their retirement savings during these most demanding years, even when doing so would place additional strain on the household budget (or guilt for failing to do so).
Instead, consider taking the values and methods of saving for retirement and apply them to pre-funding the first years of parenthood. For example, a couple in their late twenties or thirties may have several years of relatively high earning potential and comparatively low household expenses before having children. Those years offer an opportunity to strengthen the family balance sheet by: (1) building a larger emergency fund; (2) eliminating high-interest debt; (3) maximizing retirement-plan contributions; (4) accumulating taxable investments and cash reserves (beyond an emergency fund); (5) paying down student loans; and (6) establishing effective spending habits. While traditional FIRE followers sacrifice consumption today for freedom in future decades, FIFF aims to create freedom during an earlier life stage. What constitutes “freedom” will, of course, be different for every family. It could mean reducing work hours, affording quality childcare, changing careers, or allowing one parent to stay home, to name a few. Nearly all parents discover that early childhood rarely unfolds as planned. Children get sick – often. Childcare arrangements fall through. Career opportunities present themselves at inconvenient times. Other family members need assistance. The more financial flexibility a family has during these early years of parenthood, though, the easier it is to weather the storms.
It’s Okay to Save Less for a While
It may sound odd coming from a financial planning firm, but sometimes it’s okay to slow your retirement savings. And the first few years of parenthood is one such time. This is not an abandonment of long-term goals; it is a recognition that financial planning looks different at different stages of your life. A family that emphasizes saving in the pre-family years can remain fully on track for their retirement goals despite their savings rate dipping, or even ceasing, for a few years. That’s because the high costs and stress that come with children are concentrated in those first few years. As children enter school, childcare expenses often ease significantly, careers can advance, and cashflow can improve. This, then, allows for pre-child savings rates to resume – or even increase beyond original levels.
Retirement planning is always beneficial, but deliberate saving and planning before having children can create financial flexibility when families may need it most.