For many parents, providing the best possible life for their children embodies their main goal in life. After all, every parent’s dream is for their child to grow up and become successful adults. For many families, too much money is spent at the expense of the parent’s future in an effort to give the best possible to their children.
From buying an unaffordable house zoned to the best schools to paying for experiences that you many never have gotten at their age is a selfless way many parents show their love and desire for success for their children.
However, in an effort to show their love and desire for their children’s success, many parents make a mountain of crucial money mistakes that could end up harming their own future. At the end of the day, your children will eventually be grown with a family of their own to provide. Not having the financial means to take care of your own household in retirement could end up backfiring and result in financial hardship in your own family.
1. Not saving for your own future
One of the biggest and most costly mistakes in the long run that many parents make relates to irrationally increasing their lifestyle expenses just in an effort to give their children the “best life possible.” While this may seem like an admirable and selfless act, the truth is this behavior is irresponsible if your own future is not secure.
There is nothing wrong with attempting to provide the best education and childhood experiences that you can reasonably afford. However, many parents stretch themselves beyond what is reasonable for their own financial situation and have nothing left to save and invest for their own future expenses down the road or in retirement.
Do Not Use Children as an Excuse for Lifestyle Inflation
In an effort to give their children greater opportunities they may not have been privileged to experience, many parents that may make a great income live paycheck to paycheck in order to afford unnecessary or costly expenses due to societal or perceived pressures to “be a good parent.”
For many parents, having children is an excuse to buy a house they cannot comfortably afford that is in a particular neighborhood zoned to “the best” school district or around many of their friends, families, or social groups. Perhaps, parents elect to enroll their children in private schools that are comparable to the cost of college tuition for supposedly better academics and unique programs.
Maybe a newborn child and a concern for their safety on the highways provides an excuse to upgrade your vehicle to a brand new, $50,000 Tahoe marketed with the latest and greatest safety features. While all of these expenses could be worth the added cost if it represents a small portion of your overall net worth and income, for most families these pitfalls could set you back decades if you do not have the financial means to afford these particular luxuries and save for your own future needs.
As a parent, there are obviously responsibilities that come along with adulthood and having a family. No one is arguing that providing for a child’s basic needs and any luxuries that will give them the best experience possible should be considered. However, most of the time, the experiences that shape the adult your child becomes is not predicated upon how much money you spent on them but rather the character you demonstrated and the lessons taught during their earlier years. After all, do you thinking buying them a brand-new car at 16 or teaching the value of a dollar through working and earning money during their teenage years will contribute to lifelong lessons?
Pay Yourself First
One of the best lessons to instill in your children is to implement financial discipline in your family’s lifestyle by paying yourself first with any income before you do anything else. The best way to demonstrate this behavior is by saving for your own retirement. Depending upon your personal needs and age, generally, you should be saving and investing 10%-20% of your gross income for retirement. Obviously, your own needs are dependent upon your current age, nest egg, and lifestyle needs in retirement.
Even if you think you will work and earn an income your whole life, having a job or the health to work is not guaranteed due to the possibility of economic downturn, health issues and disabilities, or circumstances that are beyond your control. If for some reason you are unable to work or you get fired due to a corporate layoff, who do you think will be stuck taking care of you? Hint: It will not be Uncle Sam, so likely, your own children will be forced to put their own financial future or their children’s financial future in jeopardy in order to clean up your financial irresponsibility.
In order to ensure your own financial independence in retirement and to have the ability to provide for future generations, parents should always save and invest for their own future by setting aside a portion of their income each month.
2. Not advocating for higher education and investing for their child’s future education expenses
We have all been told by someone we love that we could be “whatever we wanted” when we grow up. The whole premise behind this statement that parents tell their children when they are younger is to get them dreaming and thinking about the bigger picture in what they want out of life. However, unless actionable steps are taken to accomplish your child’s goal, this dream is just a wish with little chance of coming to fruition. While your child may love singing or sports, chances are they simply do not have the talent or the athletic ability to play professional sports.
The harsh truth is that unless your child is the very best at whatever their dream relates, they probably will not be able to be “whatever they want” and will need to settle for a career in a field that they enjoy and that will provide for a great life outside of work.
For this reason, responsible parents should always support their children’s dream but also instill the value in having a backup plan to support their basic needs, lifestyle, and maybe even fund their passions.
Be an Advocate for Your Child’s Education
In today’s economic environment, the job market highly favors potential employees with a college degree. Studies have shown the individuals with a 4-year college degree will earn on average $1 million more in their lifetimes compared to their peers with just a high school diploma.
For many potential employers, a college degree represents dedication and the ability to comprehend complex subjects that can be valuable in the marketplace. While obtaining a college degree will not guarantee career success, education in an applicable field of study or a technical field that is in demand will provide an opportunity to earn more money and have a better overall lifestyle.
While a college degree is obviously valuable, college at any cost is ludicrous. Unfortunately, many young adults rarely consider the costs when they sign the dotted line for six figure student loans. Just because you may be able to borrow thousands of dollars to go to college, that does not mean you should saddle yourself or your children with such a debt burden. Instead, responsible parents should show that they value their child’s future education by saving and investing from the time they are born.
Avoid Loans by Proper Planning
Unfortunately, the total student loan crisis of $1.5 trillion is evidence that many families simply do not adequately prepare or think strategically when it comes to choosing the right college.
Other families have simply ruled out the need to pay for their children to go to college since it is expensive and will not necessarily guarantee a high salary. Generally, this end of the spectrum on college value is just as wrong as having an unlimited budget for college and believing college at any cost is worth the investment.
Responsible parents should spend time advocating that higher education either through a technical school or traditional college atmosphere is extremely valuable and worth pursuing. Constantly discussing your child’s future college and career plans and nearly brainwashing them to attend will set them up for success in the marketplace.
In addition to advocating the merits of college, parents should also include their child in the discussion of how much college costs and how much you can reasonably afford while also accomplishing your other financial goals. Hopefully, the majority of college tuition will be covered by scholarships and grants, but if not, electing to attend a cheaper school such as junior college for two years could be a great way to drastically cut down on the cost of higher education.
No matter how many scholarships you hope your child is awarded or how much you predict you will be earning in 18 years, there is no way to predict how intelligent or athletic they will be as they mature, so the reality is you cannot bank on scholarships for their college future. For this reason, responsible parent should plan to fully fund their child’s college expenses by beginning to save the day they are born or as soon as possible.
Open a 529 College Savings Plan
One of the best ways to save and pay for your child’s college is through a 529 plan. The savings plan allows you to invest in index or target-date funds and grow your money in the market. In addition to certain state tax benefits, opening up a 529 Plans allow the money you invest to grow tax-free and withdrawals for qualified education expenses are tax-free as well. If the money is spent on qualified uses which includes tuition and associated fees, books and supplies, computers along with internet access, as well as room and boarding costs, there are no taxes or penalties.
If your child does end up getting scholarships, you can withdraw the amount that is earned in scholarships from the 529 Plan tax and penalty free. For example, if you have $50,000 in the 529 Plan and your child gets an academic scholarship covering $25,000, you could pull out $25,000 from the account without tax or penalty. If the child ends up not needing the remaining balance, whatever is left could be transferred to another child or qualified family member which includes the beneficiary’s siblings, parents, children, nieces or nephews.
Due to the rising cost of already inflated college costs, not saving and investing for a child’s future expenses is another mistake that could leave you and your children burdened with a mountain of student loans.
3. Living a lifestyle that emulates success
As we get older, many of us have this innate desire for others to look at us as successful.
Part of this is dictated by our perception of what is normal in society. For instance, most people would not judge a 22-year old living in their parent’s basement to the extent that they would a 40-year old still supported by mom and dad. By the time we reach our 40s and 50s, we are generally expected to have reached our peak earning years and have accumulated some measure of wealth over the decades of working. At this point in most people’s career, they begin reflecting on their successes relative to others in their same circle, mentoring and coaching others, and enjoying the fruits of their labor.
Live Within Your Means
While increasing our lifestyle expenses and enjoying our hard-earned money is important and totally acceptable if done responsibly, many people simply live beyond what is reasonable without understanding the consequences of frivolous spending in order to impress people they do not really care about.
Whether the lifestyle increases are buying expensive clothing, driving exotic or expensive vehicles, joining a country club, or spending a fortune on vacations or dining out, lifestyle creep manifests itself in many ways as we get older.
At the end of the day, the success of your career and how much you are respected should not be judged based on the material possessions that you have or the money in your bank account. Instead, continue to show restraint by living frugally and responsibly based on a budget. In the end, leaving a legacy of being able to pay for your grandchildren’s college will be much more impactful than what kind of car you drove or the watch brand on your wrist.
Because everyone’s situation is different, the definition of frugality in your lifestyle is relative to your overall income and net worth. For instance, if you are making $1 million per year, a $100,000 car could be considered well within the realms of what is affordable in your particular world. In fact, this purchase would be equivalent to buying a $5,000 car if you made $50,000 per year.
However, if you are making $150,000 per year and spending $145,000, you are essentially living paycheck to paycheck and your lifestyle has gotten out of control since you have no cushion in your budget if you were to lose an income due to sickness or layoffs.
Use Percentages or a Budget
In order to keep your lifestyle in check and proportional to your everchanging financial situation, consider using a percentage of your after-tax income to guide how much you should be spending. A good rule-of-thumb is to save 20%, spend 30% on your necessary housing expenses, and feel free enjoy whatever is remaining from the 50% after food and other required expenses.
Setting up a budget can be immensely helpful to keep you on track.
As your overall income increases, the total amount of saving and miscellaneous spending will also increase. A good aspect of this budget is that your housing expenses will remain consistent as your mortgage payments would not increase all while you continue to earn pay increases. Hopefully, by the time you are in your 50s, your home will be paid off and you can enjoy that extra money free and clear to invest, save, and leave a legacy for your family.
4. Not working together with your spouse
Another huge financial pitfall that many parents make is not working together as a cohesive unit on their finances.
Many instances in a relationship, one dominant figure manages the financial aspects of the family while the other spouse is passively along for the ride. Often, the role of managing the family finances rests the primary income earner – especially if they have a background in business or related field.
While having one spouse who is organized and enjoys finances lead in this area is not necessarily bad, dragging the other spouse behind in the dark is not a healthy way to manage finances together.
Ensure Both Spouses Have Input on the Family’s Finances
As financial problems and money issues represent the primary issue cited by couples who experience divorce, ensuring you are both on the same page financially should be forefront for your family’s sake.
Because where you choose to spend your money says a lot about your character, what you value, and where your hopes and dreams lie, having both spouses come together on a budget consensus for where to allocate the family’s dollars is very important – even if one spouse makes up the majority of the income.
Keep Both Spouses Informed and Develop a “Doomsday Plan”
For the financial nerd in the relationship, keeping the other spouse informed and allowing them to have an equal voice is also extremely important. Not only does it allow them to feel equal ownership in the decisions made, if something were to happen to the primary income earner or the money manager in the relationship, the remaining spouse should understand where all of the money and accounts are located, how to access the accounts, and who to turn to for guidance.
The remaining spouse should understand the ramifications of early withdrawals from retirement accounts, how to access the kids’ 529 Plan, or how to make withdrawals from their HSA for medical expenses and have all of the necessary designation, account information, and relevant passwords.
In addition to understanding the basics of where the money is located and any relevant details about specialized accounts, both spouses should also understand the family’s long-term investing game plan.
If the one spouse who made the investing decisions did not inform or teach the other spouse, the less financially involved spouse may make the irrational decision to stop investing or withdraw the money that is invested and put it in a money market fund or CD. This could have drastically negative consequences for the family who is left behind as they would not be able to rely on the investment returns for income in the future.
Therefore, developing a financial game plan together and walking through a set investment strategy together is extremely important for both spouses to have confident that they will be taken care of should something happen.
Consider a Fee-Only Financial Adviser
Coupled with having a detailed “doomsday” document outlining where the family finances are located and any relevant instructions on how the money should be used, it may be a good idea to begin working with a financial adviser who is a fiduciary.
Even if one spouse knows everything about personal finance and has a great game plan, if the other spouse does not have a desire to learn or finances are not their particular area of expertise, having a good financial adviser to guide the surviving family members along can help to maintain course in the event the primary breadwinner or financial nerd of the family is no longer around.
Having a financial game plan and an adviser to turn to during these potentially emotionally difficult times would be another great way to ensure the family is taken care of and life can go on.
5. Not having the proper insurance in place
Along the same lines of ensuring the surviving spouse is taken care of, not having the proper amount and type of life insurance in place is another crucial mistake that is made all too often.
Purchase Term Life Insurance
While nobody enjoys thinking about their own mortality, the truth is that a sudden, unexpected, or untimely death can occur to anyone. However, you can leave behind a legacy that includes taking care of your family if you are no longer around.
Depending on your desired coverage, age, and certain health factors, you could find term policies for $250,000 to $1,000,000 where premiums range from $10 to $60 if you are in your 30s and $18 – $100 if you are in your 40s.
How much life insurance will take care of your family?
Generally, the financial planning community recommends that 10 – 12 times your income is a good, general guideline. However, the amount of coverage you need really depends on your current financial situation and the lifestyle you wish to leave behind for your family.
Term Policy with Loans Outstanding
For instance, let’s say you are married 35-year-old that makes $80,000 per year. Your spouse stays at home with two young children. You have two car payments and a mortgage with a $300,000 balance.
In this case, if you had a term policy for 10 times your income, your surviving spouse would receive $800,000 to see them through this difficult time. Would $800,000 be enough? After paying off the mortgage, $500,000 would be leftover to invest that would generate income for the rest of their life.
If the $500,000 was properly invested and 6% were withdrawn each year without touching the principle, the remaining spouse would only be able to pull out $30,000 per year in order to ensure they have the nest egg for their remaining years. More than likely, this would not be nearly enough to support two children, pay for their college, service any vehicle debt, and any cover any other expenses. Even if the amount would cover basic needs, the quality of life for your surviving family would not be great, and the surviving spouse would likely need to go into the workforce or sell the home and vehicles to have a decent lifestyle.
Term Policy with No Debt
If instead, the couple had a $1 million policy and no debt other than the mortgage, there would be roughly $700,000 to invest which would generate between $40,000 and $50,000 every year for the rest of the surviving spouse’s life if properly invested. While the surviving spouse will be unable to live an extravagant lifestyle, they should be able to easily provide for the family’s basic needs and have money leftover to save for college and other life expenses. Likely, the surviving spouse could remain at home with the young children until they are older and then get a part-time job to earn extra money; however, they would likely not be required to work full-time and hire a babysitter or find alternative childcare.
However, if your personal preferences or your location is extremely expensive and would not allow for an adequate lifestyle at these amounts, an even bigger policy may be necessary – especially if you have not accumulated any other wealth outside of your retirement accounts.
Alternatively, if you have built up a substantial nest egg, have no debt or mortgage, and all of your children are grown and fully support themselves, you may not have a need for life insurance. If you all of the sudden stopped receiving paychecks, would you have enough passive income through investments and savings to be able to live out the remainder of your life without the need to work? If the answer is “yes,” then you are probably self-insured and do not have a need for life insurance.
Have Term Insurance in Place Prior to a Negative Diagnosis
Another pitfall is delaying obtaining a life insurance policy when you really need it and are healthy. All too often, seemingly healthy individuals are diagnosed with a health condition that causes life insurance to become extremely expenses or pronounces them un-insurable. A diabetes or cancer diagnose could cause life insurance companies to determine that you are too high risk and deny coverage or cause the premiums to be unaffordable.
Instead, by obtaining life insurance when you are healthy but still need the security to provide for your family if the worst were to happen, you can ensure your family is taken care of if you are no longer around.
While virtually no family has their finances in perfect order, by following these recommendations and avoiding these money mistakes that many parents are prone to make will help you begin building wealth and living the best possible lifestyle free of worry and regret.