Avoid the money mistakes new parents commonly make by planning, communicating, and adapting to your family’s evolving financial needs.
New parents often find themselves overwhelmed by a sense of falling short in different aspects of parenthood. As if their plate isn’t full enough, parents might also be committing significant financial blunders.
Rafael Rubio, a partner at financial firm Oray King Wealth Advisors in Troy, Michigan, notes that there are mistakes commonly made by parents with children of varying ages. He emphasises that while the mistakes may be universal, the window for rectification dwindles as children grow older. Bearing this in mind, there are prevalent pitfalls to steer clear of, ranging from neglecting retirement savings to splurging excessively on holiday gifts.
Being a Bad Influence
One common mistake new parents commit is overlooking the potential impact of their present behaviours on their child’s future financial well-being by being a bad influence.
Mark Henry, CEO of financial firm Alloy Wealth Management and host of Living Large Radio, remarks, “Children often emulate their parents’ actions.” If children observe their parents living from one paycheck to another and indulging in unchecked spending with credit cards, they might be on track to replicate these patterns throughout their lives. Instead, it’s necessary to allow youngsters to witness responsible financial habits, such as budgeting, saving for purchases, and waiting for opportune time to make purchases.
Failing to Create a Budget
Creating a financial plan is important for everyone, especially new parents who can leverage from having a budget. Without careful planning, expenses like new clothing, party gifts, and sports gear can quickly deplete a budget.
Dan Routh, a certified financial planner, often observes parents wasting extra income simply because it wasn’t allocated in their budget. “It’s common to see bonuses being spent on gifts and trips, instead of being allocated towards retirement, emergency funds, or other significant financial objectives,” he says.
Do Not Prioritise Saving
Due to financial constraints and the constant stream of children’s wants, new parents often do not prioritise saving. Nevertheless, it is significant for parents to establish an emergency fund, given the unpredictable nature of children and their many requirements.
Henry emphasises that unforeseen challenges can arise for everyone, making it a mistake for parents without a financial reserve to cover unexpected medical costs, school excursions, or repairs for the family car.
Indulging the Kids
John B. Burke, CEO of advisory firm Burke Financial Strategies understands the inclination of parents to shower their children with clothes, gadgets, and toys. “We all desire the best for our kids,” he observes. Burke rejects the notion that today’s parents are uniquely prone to spoiling their children, suggesting that previous generations would likely have done the same if they had the same level of wealth as many families today.
While parents may wish to be generous, it’s unwise to fulfil every whim. Teaching children the value of delayed gratification is important for their future financial independence.
Keeping Up With the Joneses
Feeling pressured to match the lifestyles of others, new parents might believe they must sustain a particular standard to ensure their children fit in with their peers. “Their aim is to ensure their kids’ satisfaction,” Rubio says, which might prompt them to opt for extravagant vacations or enrol their children in pricey travelling sports teams instead of more affordable community leagues.
Setting spending preferences according to others’ actions is likely to have negative consequences. It may lead to purchases of items a family doesn’t truly need and could strain the budget, potentially resulting in credit card debt or even bankruptcy.
Favouring College Funds over Retirement Savings
Opting to save for college funds instead of retirement savings is a prevalent financial oversight among new parents.
It’s advisable for parents to allocate funds towards a 401(k) or IRA plan before focusing on a child’s college fund. Insufficient retirement savings could leave parents with no financial support for their retirement years, whereas, students have options like scholarships, loans, or employment to finance their education.
Considering a 529 Plan as Optimal
When thinking of college funds, a 529 plan often emerges as the favoured choice. Funds invested in these plans enjoy tax-free growth and can be withdrawn penalty-free for qualified educational expenses. Many states provide a deduction for state income tax on contributions.
Nevertheless, there are alternative strategies for a college fund. Burke suggests diversifying investments across several accounts. Apart from a 529 plan, it might be better to allocate funds to a custodial account permitted by the Uniform Gifts to Minors Act. While parents may enjoy tax benefits with these accounts, there’s a potential downside. Burke says, “Once (children) reach the age of majority, they have unrestricted access to the funds, and you can’t intervene.”
Consulting a financial expert can aid in determining the suitability of a custodial account for your situation.
Misconceptions on Future Life Insurance Requirements
With life insurance, new parents often commit two distinct mistakes.
Firstly, they may underestimate their coverage needs. Many working parents rely solely on the life insurance provided by their employers, assuming it to be adequate. However, such coverage often amounts to only one to three times an individual’s salary. For many households, a policy with a death benefit equivalent to 10 times the annual income of a breadwinner might be necessary to adequately replace lost income, settle debts, and finance their children’s education.
The second mistake involves misusing life insurance for purposes beyond its intended scope. Routh’s firm encounters many instances of parents purchasing life insurance for their children with the belief that it will accumulate cash value to cover college expenses. However, Routh emphasises that they have yet to come across a scenario where this strategy has proven effective. He notes, “The fees associated with these permanent insurance policies gradually erode any potential growth.”
Providing Assistance to Children Endlessly
One common mistake new parents often commit, according to Burke, is failing to establish a clear plan for when to stop providing assistance to their children. “It’s a frequent occurrence where parents continue footing the bill for expenses like cell phone plans, car insurance, and rent,” he says.
Consequently, this practice not only depletes parental finances but also hinders the child’s path to self-sufficiency. Burke emphasises that there’s no definitive timing for ending support to an adult child, but it’s necessary for parents to reach a mutual agreement well in advance, preferably before the child reaches adulthood. Furthermore, parents who are financially assisting with college tuition or living costs should not hesitate to impose conditions, such as maintaining a minimum GPA or securing ongoing employment.
New parents can face a plethora of financial challenges as they navigate the responsibilities of raising a child. Avoiding these mistakes requires careful planning, communication, and a willingness to adapt to the changing financial needs of a growing family.
DISCLAIMER: This article is for informational purposes only and does not constitute official advice.
