From working overtime to allowing screen time, modern parents can easily feel as though they are failing on many fronts. As if they don’t already have enough to feel guilty about, parents may be making some serious financial mistakes, too.
According to money.usnews.com, there are universal errors that parents with children of all ages make, says Rafael Rubio, a partner at financial firm Oray King Wealth Advisors in Troy, Michigan. “The only difference is the older the child gets, the less time you have to correct it.”
With that in mind, from failing to save for retirement or overspending on holiday presents, here are common missteps to avoid:
Setting a poor example
One mistake parents make is not realising their current actions could dictate their child’s future financial success. “Children end up doing exactly what their parents did,” says Mark Henry, CEO of financial firm Alloy Wealth Management in Charlotte, North Carolina, and host of “Living Large Radio.”
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 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. Dan Routh, a certified financial planner with Exencial Wealth Advisors in Oklahoma City, says he often sees parents squander extra income because they don’t have that money in a budget. “More often than not, we see bonuses going toward gifts and travel,” he says, rather than being used for retirement, emergency savings or other more substantial financial goals.
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Failing to save strategically
Because money can be tight and children have a seemingly endless supply of wants, parents often put savings on the back burner. However, parents need an emergency fund, precisely because of the unpredictable nature of children and their many needs. “Bad times are going to happen to everyone,” Henry says. It’s a mistake for parents not to have a supply of cash to pay for unexpected medical bills, a surprise class trip or car repairs for a family vehicle.
John Burke, CEO of advisory firm Burke Financial Strategies in Iselin, New Jersey, is sympathetic to parents who lavish their children with clothes, gadgets and toys. “All of us want our kids to have the best,” he says. Burke doesn’t see it as a generational failing of current parents either. He says previous generations probably would have spoiled their kids, too, if they had the level of affluence found in many families today. While parents may want to be generous with their kids, it’s not smart to grant their every whim. Delayed gratification is an important lesson for children to learn if they are to be financially self-sufficient as adults.
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. “They want to keep the kids happy,” Rubio says and so they take luxurious vacations or enrol children in expensive travelling sports teams rather than cheaper community leagues. Creating spending priorities based on what other parents are doing is bound to backfire. Not only could it result in spending on things a family doesn’t value, it could overextend a budget and lead to credit card debt or even bankruptcy.
Prioritising college over retirement
Saving for college before setting aside money in retirement accounts is another common money mistake parents make. 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.
Assuming a 529 plan is best
When it comes to college funds, a 529 plan is often considered the go-to savings vehicle. Money in these plans grows tax-free and can be withdrawn without penalty for qualified education expenses. Many states also give a state income tax deduction for contributions. However, they’re not the only college savings option. Burke advises splitting money among accounts. In addition to a 529 plan, it may make sense to put money in a custodial account as allowed under the Uniform Gifts to Minors Act.
There may be tax advantages for parents to use these accounts, but there is also a potential drawback. “Once (children) turn the age of majority, they can just take the money and you can’t stop them,” Burke says. A financial professional can help you determine if a custodial account makes sense for your situation.