There are some things you just can’t fully understand until you’ve experienced them yourself. Appreciating the effort, energy and resources needed to raise a child is one of them.
You might think you know what it’s like, but really…you have no idea!
Kids are Expensive
Professionals estimate it costs nearly $250,000–a quarter of a million dollars–to raise a child from birth until they leave the nest at 18. But that estimate comes with some stipulations.
That number doesn’t include trips to the emergency room.
It doesn’t include the cost of karate lessons or Girl Scouts.
College tuition isn’t added in.
And that is assuming your kid actually leaves once he becomes an “adult.”
No matter how many baby showers your friends host in your honor or scholarships your high school grad earns, you’ll never be able to make ends meet if you don’t execute sound financial practices.
If you want to fiscally responsible, you have to avoid these common financial mistakes.
1. Underestimating Disability Insurance
Disability insurance is one of the most overlooked forms of protection. Sure, it makes sense to have disability insurance if you work in a dangerous profession. But people who work in an office job don’t need to worry, right?
Wrong. Accidents can happen anywhere. And the very nature of an accident means you weren’t anticipating it. Who plans on having a ceiling tile fall on their head during an earthquake, causing them to lose much-needed income?
Even if you do have disability insurance, you probably just blindly accepted whatever your employer was offering. If you read the fine print, those plans usually only provide 60% of your current paycheck. Could you cut your current salary in half and still survive?
Financial experts advise most people to consider buying additional coverage. This is especially true if you make more than $100,000
Look at your current budget. How much do you need to pay your bills and still live comfortably? If it’s more than 60% (or whatever your employer provides) of your current income, consider additional disability insurance.
2. Skimping or Splurging on Life Insurance
Life insurance is intended to pay off the deceased’s estate (pay for the funeral, pay off credit cards, etc.) and provide for the beneficiaries. Taking that into account, there are two mistakes new parents often make.
The first problem is new parents don’t have enough life insurance for themselves. Your life insurance policy needs to provide for your children—at least until they turn 18. And, we’ve already looked at how expensive that task can be.
Experts encourage young parents to have at least $500,000 in coverage. When choosing a plan, remember that life insurance policies offered by an employer might be a contingency of employment. If you lose your job, you lose your coverage.
Plans for young adults—especially healthy ones—aren’t too expensive. Shop around and find a term plan that will last at least until your kids’ 18th birthday.
The second mistake parents make is buying expensive plans for their children. Children don’t need to provide for anyone after their passing. And buying an expensive plan just to cover the cost of a funeral is silly; put that money in a savings account instead. Then, when your perfectly healthy child doesn’t die, you can use it for college!
3. Putting Your Kids’ Needs First
Parents are constantly being bombarded with facts about the cost of a college education. And those stats are true—college is expensive. And, you should save for it. But we’ll get to that in a minute.
The real mistake is saving for college before saving for retirement. Your future is just as important as your kids’.
Make saving for retirement a priority over saving for college—or at least put them on the same playing field. Check your budget. How much can you save? Put the maximum amount into your 401(k). Then, get an Individual Retirement Account (IRA).
4. Waiting Until it’s Too Late
As we just mentioned, college is expensive. And it is impossible to start a savings account too soon. If you wait until your kids are in high school, you’ve waited too long.
Get your own savings account squared away. Make sure you have an emergency stash (at least three months’ income). Get your retirement accounts in order. And then turn your attention to college.
There are several educational savings account options available. These come with tax incentives and can be distributed to your kids when the time is right. There are specific types of estimators for taxes that can elaborate this a bit further. The most popular are the Coverdell Education Savings Accounts and 529 plan (or Qualified Tuition Plans).
5. Setting a Bad Example
Perhaps more importantly than creating a financial nest egg is to consider the lessons you’re teaching the next generation.
Kids learn by example. What does your financial mindset teach them? If you are acting irresponsibly, your kids will notice.
In recent years, there has been a rise in “friendly fraud.” Consumers aren’t being responsible with their credit card purchases. Then, they try to rectify the mistake with a chargeback.
For those who don’t know, a chargeback is a form of consumer protection. It was originally invented to protect victims of fraud. If someone made an unauthorized purchase with your card, you could get your money back. You wouldn’t be the one to suffer the loss.
But there is a loss—and someone will feel the effects of it. Any time a consumer files a chargeback, the merchant who facilitated the transaction is out the money and left footing the bill for a very high administrative fee.
Many shoppers are tempted to file a chargeback in instances of buyer’s remorse, if a product wasn’t delivered on time, or if they don’t want to go through the formal process of getting a return.
But chargebacks are hugely detrimental to the merchant. In fact, many businesses close because of chargebacks. Do you want your favorite vendor to shut down because of your irresponsible behavior?
If you aren’t worried about how your children will view your actions (and trust us, they’ll know), you had better be aware of the effects friendly fraud will have on your finances. If you file too many chargebacks, your bank will take notice.
And since friendly fraud is all too prevalent these days, the banks are taking action against those who cry wolf. It is entirely possible the bank will just close your account.
Create Financial Stability Now
Being a parent comes with lots of responsibilities. Creating a financially stable environment for your children is just one of those necessary tasks.
Get started today!