Finding out that you’re going to be parents is exciting — and terrifying. Are you really prepared to raise a child? Can you manage the sleep deprivation? Can you actually afford to have a baby?
While most people find that the actual parenting aspect of having a baby works itself out, many new parents make financial mistakes that have lasting repercussions. Most of the time, these mistakes stem from the best of intentions: Parents want their children to have every advantage and opportunity, and “more” than they did growing up.
But that mindset often diverts money away from other financial priorities, hindering your ability to successfully build and sustain wealth. Consider whether you have made, or are about to make, these five parental money mistakes:
Mistake #1: Spending Too Much on the Baby
When you’re having a baby, it’s tempting to go overboard when buying gear and supplies for your newborn. The thing is most infants don’t need a lot of “stuff,” especially a $5,000 crib or a $1,000 stroller. A wardrobe of frilly dresses or designer onesies might be adorable, but since the baby is likely to outgrow the outfit before the end of the day — meanwhile staining it with various bodily fluids — there’s no need for a closet full of outfits. Stick to the basics when shopping for baby, and don’t be afraid of used or hand-me-down items. Consignment stores carry baby items that are gently used or even brand new, usually for a fraction of the cost of new from the baby store. Focus on the baby’s real needs and look for bargains to have everything without draining your checking account.
Mistake #2: Buying Life Insurance for a Child
Many new parents are tempted to purchase life insurance for their children: For just a few dollars a month, you can purchase a policy worth tens of thousands of dollars per month.
Sounds like a great deal, right? Except that life insurance is meant to help surviving family members cover expenses when one of the family’s income earners dies. If a child passes, it’s tragic, but there isn’t likely to be any major financial impact on the family. Not to mention, the chances of a child dying before the policy expires are very small, meaning that the money paid toward premiums is wasted. Instead, put that money into a college fund, or even a simple savings account, where it can actually be used later in life.
Mistake #3: Not Starting a College Fund
College is expensive. The average tuition at a private institution today is about $30,000 per year, not including room and board. The cost for a state school for a resident is about $9,000, with out-of-state students paying close to $23,000 per year. Scholarships and grants can cover some of those costs, but many students have to take out substantial loans to pay for school, leaving them with significant debt after graduation.
Contributing to a college fund not only helps your child defray some education costs, it can also have significant tax benefits for parents. While contributions to plans like 529 college savings plans are not tax deductible, the earnings on these plans are not subject to tax, nor are the withdrawals made for educational expenses.
Mistake #4: Overinvesting in College Funds
While not having a college fund is a mistake, so is putting too much money toward your kids’ college expenses. It’s admirable to want to foot the entire bill for your kids’ education, but you should not do so at the expense of your own retirement. There are options besides college savings plans to pay for school, but without a retirement fund, you won’t have any income if you choose to stop working. Contribute as much as possible to your 401(k) or IRA plan first, then contribute to the college fund.
Mistake #5: Not Teaching Young Children About Money
Many parents shy away from having conversations about money with their children, thinking they are shielding them from the “real world” and allowing them to be kids. The idea is nice, but then children grow up with an unrealistic view of how to earn, manage and grow their money. Even children as young as three can learn about money, by earning an allowance for chores, working with their parents to set budgets and saving for the things they want instead of having everything handed to them. They will grow up better prepared for life outside of mom and dad’s house and better appreciate the value of money.