Becoming a parent is one of the most exciting times of your life. You are now responsible for more than just yourself and your spouse. With that responsibility, there naturally comes a want to do the best for your family and put them above yourself.
Parents ask me all the time if they are prepared to bring a child into the world, and to be honest, I don’t think anyone is ever truly ready. You just do it. You learn on the fly, make mistakes, learn from those and keep going. Just like everything else in life.
However, I have to admit, there are some big mistakes I see parents make financially that should be avoided. So here are the 11 biggest one’s I see:
“If I die, my spouse will eventually remarry and be okay. I don’t want them better off cause I am dead.” This is a morbid thought I know, but I have heard it said so many times.
You need to remember that you married your spouse and had children because you love them. You do not want your spouse to have to worry about finances if they ever were to lose you. You’d want them to keep the house, pay for your kids college, pay for childcare, etc. if you were gone. Life insurance is the way to ensure that happens if one spouse were to pass away. Term insurance is very affordable and something worth looking into to protect your family against this risk. Life insurance is a gift to your family and should be seen as protection.
Additionally, having other insurances in place like disability, health, etc. are all so important. They protect you from some of the biggest risks you face.
We’ve found a firm in town called BC Brokerage, who works with fee-only advisors to make sure our clients insurance needs are executed properly.
I get it, estate planning is also not something fun to think about or have to do, but now that you have a child, estate planning is very important. Estate planning protects your children, helps organize your finances, can limit the tax burden, and lastly can help eliminate the family mess.
We use heliosplans for our clients who want to get estate planning done virtually.
Many times parents keep pushing off saving for education thinking they will start next year. Well, that excuse ends up being made every year and then you find yourself far behind.
It is best to start to save for college the year your child is born, if possible. College is expensive, you will need plenty of years of saving to have enough to pay for college. Check out my article on how to fund college to learn more.
I know this sounds like the opposite of the one above, but focusing too much on college and not enough on retirement can also be a problem.
Many parents find themselves in a position where they are behind for retirement and convince themselves they can never catch up so they might as well just focus on saving more for their kids because they are a lost cause already.
This is not true! It is never too late to start saving for retirement. Any amount will help. You kids can get loans, or you can get loans to help them with school. There are no retirement loans.
Check out my article on 8 steps to set up your family for success!
Helping build your kids credit is a great idea. You can add them as an authorized user of your credit card at an early age to build up their credit profile. This enables them to have a credit account that will be old by the time they graduate college. Only do this if you are a responsible spender, you don’t want to show bad credits for them.
If you thought unexpected expenses happened before you had kids, just wait till you have a family. Unexpected expenses, healthcare costs, etc. happen so much more making an emergency fund very important. You need to have a minimum of 3 months of expenses sitting in cash somewhere that you can use once life throws some curveballs at you. Do not neglect this. You will end up having to sell investments or incur debt if you don’t have an emergency fund.
In finance, there is way too much focus on reducing your small expenses like your morning coffee — but at the end of the day, cutting back $50 on coffee a month doesn’t make a huge impact. Going from $2,500 a month on housing to $1,700 a month does though, and the same goes for cars. Having 2 car payments that total $1,000 takes away a lot of surplus compared to have 1 car payment at $400 a month. Focus on the big ticket items and see if you can lower your expenses there. Hitting your financial goals is all about having surplus and allocating it to the right places.
HSA’s are such powerful accounts due to the triple tax advantage that comes with it. Many parents fail to contribute yearly even though it is one of the best accounts at your disposal.
Here’s the trick, if you can afford monthly healthcare costs out of pocket, do it. Let the HSA get invested, grow tax free, and then use it in the future for healthcare costs.
Child care is one of the largest expenses you are going to pay over the next few years if you have dual working parents. Taking advantage of tax credits and benefits is huge as well as evaluating all your options around childcare.
For 2021, there is a Child and Dependent Care Tax Credit that gives a maximum credit of 50% of childcare expenses of up to $8,000 for one child and $16,000 for two or more for children up to the age of 13. The percentages are determined by your income. Note: This is different from the child tax credits you get where you receive:
Keeping up the Jones’ is something I talk about a lot and something that makes a huge impact on your future financial success. Too often young parents want the nicest clothes, nicest cars, nicest house, etc. — but wanting all that comes at a price. You can’t always get everything you want while also preparing for retirement, saving for your kids education, and going on trips every year. You need to take a step back and figure out what you value most. If it’s time with family on vacations and providing for your kids education, then focus on that and maybe don’t buy a new car every few years. There is give and take that is needed when it comes to finance.
You only have a certain amount of years together with your family, making it so important to maximize them. Picking vacations and experiences over material things is a great way to bring your family closer and to give your kids some amazing experiences they won’t forget. All too often I see families not take vacations, but they easily could if they started a savings account only for travel and saved there every month. Prioritize the important things first! It’s way easier to find room in the budget when it’s saving for something you truly value.
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Disclaimer: Nothing on this blog should be considered advice, or recommendations. If you have questions pertaining to your individual situation you should consult your financial advisor. For all of the disclaimers, please see my disclaimers page.
Financial Advisor