Being a parent brings with it a whole host of changes and challenges, and those go beyond rocking a newborn at night and navigating the social landscape of the teen years. You may also have to rethink your approach to finances.
There are added expenses with children but also added responsibilities. For instance, you not only need to manage your own money properly, but you should be teaching your kids to be financially savvy as well.
Here are 10 money mistakes parents often make:
— Failing to communicate.
— Splurging on children’s activities.
— Setting a poor example.
— Neglecting to make a budget.
— Spoiling kids.
— Needing to keep up with the Joneses.
— Prioritizing college over retirement.
— Using basic savings accounts for kids.
— Misunderstanding life insurance needs.
— Supporting children indefinitely.
Failing to Communicate
The biggest mistake parents can make is failing to communicate — both with each other and with their kids, according to Michael Foguth, president and founder of advisory firm Foguth Financial Group in Brighton, Michigan. Parents need to be on the same page when it comes to how they manage their money and respond to their children’s spending requests.
Likewise, parents have an obligation to teach their children how to be financially savvy. For Foguth, that means explaining to them that money needs to be balanced among three areas: spending, saving and giving. Doing that can be as easy as talking through budgeting decisions with kids.
“If they know what you’re doing and why you’re doing it, sometimes that’s enough,” Foguth says.
[SEE: 10 Best Budget Apps.]
Splurging on Children’s Activities
Parents are often thrilled when their children find an activity that they both love and excel in. However, don’t make the mistake of letting your child’s newfound interest turn into your personal identity. While you may relish the role of hockey dad or dance mom, don’t put yourself on financially unstable ground to support your child’s endeavors.
“It’s one thing to spend thousands of dollars on your kids’ activities, but when you make a late credit card payment because of it or you carry a balance, you can be hit with additional thousands of dollars in interest,” says Michael Policar, a fiduciary financial planner with NGP Financial Planning in Sammamish, Washington.
Rather than pour money into travel teams and far-flung competitions, consider whether there are less expensive local options that will allow your child to pursue their interests.
Setting a Poor Example
One mistake parents make is not realizing their current actions could dictate their child’s future financial success.
“My dad has a saying: Your actions speak so loud I can’t hear your words,” says Joe Conroy, a certified financial planner and owner of Hartford Retirement Planners in Bel Air, Maryland.
Kids who see mom and dad living paycheck to paycheck and buying whatever they want on a credit card may be destined for a lifetime of repeating the same pitfalls. Instead, let youngsters watch you create a budget, save for a purchase and wait to score the best prices.
Neglecting to Make a Budget
A financial plan is important for everyone, but parents in particular can benefit from having a written budget. New clothes, gifts for parties and sports equipment can eat a hole in a budget unless parents plan carefully.
Michelle Griffith, a senior wealth advisor with Citi, says parents need to take into account the unforeseen, as well. “COVID came out of nowhere,” she notes. Families need to have a written plan for how they will handle unexpected circumstances such as a job loss, disability or premature death. That includes drafting an end-of-life plan with a will or trust.
Create a budget that can comfortably cover essential expenses while also setting aside money for emergencies and future costs such as college and retirement.
[READ: 10 Simple and Free Budgeting Tools.]
Spoiling Kids
Everyone wants the very best for their kids, but indulging their every wish can be a recipe for financial disaster. Delayed gratification is also an important lesson for children to learn if they are to be financially self-sufficient as adults.
Don’t simply say no without providing some context though. “Parents who don’t involve their children in financial discussions may be missing an opportunity to teach valuable lessons about money management and responsible financial behavior,” says Sean Burke, investment advisor and vice president of Kirsner Wealth Management in Coconut Creek, Florida.
You don’t need to get into the nitty gritty of your finances with your children, but explaining your financial philosophy or spending priorities — and why their request doesn’t fit in — can help kids begin to think critically about how to spend money.
Needing to Keep Up With the Joneses
Parents may feel as though they need to maintain a certain lifestyle so their children don’t feel out of place with their peers. But creating spending priorities based on what other parents are doing is bound to backfire.
“Parents who overspend on non-essential items such as luxury vacations, expensive cars or designer clothing can jeopardize their long-term financial security,” according to Burke. “It’s important to prioritize spending on essentials and saving for the future.”
Not only could trying to match your peers’ lifestyle result in spending on things your family doesn’t value, it could overextend a budget and lead to credit card debt or even bankruptcy.
Prioritizing College Over Retirement
Saving for college before setting aside money in retirement accounts is another common money mistake parents make.
“You can take out loans for college,” says Shanna Tingom, financial advisor and co-founder of Heritage Financial Strategies in Gilbert, Arizona. “You can’t take out a loan for retirement.”
Parents should be putting money into a 401(k) or IRA plan before saving for a child’s college fund. While students can use scholarships, loans or a job to pay for college, there will be nothing to fund a parent’s retirement if they haven’t saved enough themselves.
In the same vein, don’t wipe out retirement savings to fund a child’s entrepreneurial aspirations. “Parents always want to believe little Johnny’s business venture is going to work,” Tingom says. The reality, though, is that many businesses are doomed to fail.
[Related:14 Easy Ways to Pay Off Debt]
Using a Basic Savings Account for Kids
It’s a rite of passage in many families: heading to the bank to open a savings account for a child. While the concept is sound, many savings accounts offer lackluster interest rates which means the child’s money will not grow significantly.
“What they really should be doing is opening an investment account,” Conroy says. That doesn’t need to be anything fancy; a basic, diversified investment account will do.
Then, when grandparents and other relatives provide cash gifts throughout the years, that money can be added to the account. “It’s a really cool teaching tool,” according to Conroy. It helps children see how gains compound over time and demonstrates that even relatively small amounts invested over a long period can grow into a significant balance.
Misunderstanding Life Insurance Needs
When it comes to life insurance, parents may make two different mistakes. The first is underinsuring themselves.
“The studies show that 50% of Americans have life insurance and that means 50% don’t,” Griffith says. “That’s a problem.”
Working parents may think the life insurance benefits they receive through their employer are sufficient. However, these may only pay one to three times a person’s salary. For many families, a policy with a death benefit equal to 10 times someone’s annual salary may be needed to replace income, pay off debt and fund a college education for kids.
The other mistake parents make is trying to use life insurance for purposes other than insurance. For instance, parents may buy life insurance for their child believing it will grow in cash value to pay for college. However, these plans can come with higher fees and smaller returns than other investment options.
Supporting Children Indefinitely
Some parents make the mistake of “not allowing kids to launch,” Tingom says. They may continue to pay for their adult children’s rent, cellphones and advanced degrees with no end in sight.
“The biggest (mistake) I see is putting their children’s financial well-being ahead of their own,” she explains. As a result, parents drain their finances and prevent their child from becoming financially independent.
There is no right or wrong time to stop supporting an adult child, but it’s vital for parents to agree on how this will happen well in advance, preferably before a child reaches adulthood. What’s more, parents who are paying for college tuition or living expenses for an adult child shouldn’t hesitate to attach strings to their support, such as a minimum GPA or ongoing employment.
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10 Money Mistakes Parents Make originally appeared on usnews.com
Update 05/23/23: This story was published at an earlier date and has been updated with new information.
