Your family’s future depends on the decisions you make right now.
Personal finance is a difficult subject because it is not something we were taught in school. When we grow up and become parents, the subject is even more difficult.
I spent almost 10 years in the financial planning arena and witnessed the financial mistakes (me included) many parents made. It isn’t easy to know everything, but there are a few big mistakes we can all avoid. Here are the biggest mistakes that I see too many parents making.
The easiest thing to do is ignore a situation—especially finances. Many times parents choose to ignore their financial situation because it is the path of least resistance. This is where I witnessed relationships getting ruined.
It’s easy to get a credit card bill, pay the minimum, and then forget about it until next month. It is even easier to ignore conversations about saving for the future. This is all easy until it isn’t anymore.
Eventually, ignoring conversations about money will catch up to you. You will either realize you ignored the situation about debt so long that you have no idea how to climb out, or that you never saved money for retirement and it is just a few years away.
Whatever your situation may be, you need to sit down with your spouse and talk about it. Have the conversations about your finances. These conversations will make your marriage and financial situation easier in the long run.
Investing in college savings plans before retirement accounts
One thing parent’s worry about is paying for their children’s college. This is an understandable concern since the cost of one year of college for a child born in 2015 will be $46,910 (if college continues to increase at 6.5% per year).
Though we want to pay for college, we need to start with our own retirement first. Loans can be taken out for college, but there is no one handing out loans for your retirement.
Once you start saving 8-10% of your income, then you should start thinking about saving for college. This may not be something you want to hear, but it something all parents need to hear.
Getting overdraft fees
Did you know the average cost of bouncing a check (over drafting an account) is about $30? That means when you write a check and don’t have the money to cover the check, the bank will charge you $30 for the inconvenience.
After college, my first job was working in a bank and I witnessed multiple people over draft their account on a daily basis. You would think after a $30 charge people would learn their lesson, but that is not true because many people continuously overdraft.
There are thousands of people every year who spend hundreds of dollar over drafting their accounts. In 2013, the banks made over $32 billion on overdraft fees. This is an easily controllable. Just learn to balance your checkbook and these fees will be avoided.
Cashing out of a 401(k)
The biggest mistakes I have seen parents make is cashing out of their 401(k) plans early. If you take money out of your plan before age 59 ½, you will be penalized 10% on the amount withdrawn, plus ordinary income taxes on all of the money withdrawn. Additionally, you will lose out on all of the potential compounding interest. OUCH!!!
When I was a financial planner, I had a customer take out approximately $15,000 from their 401(k) plan to purchase furniture for their house. I explained the penalties and taxes to them, but also detailed the amount they would be loosing in lost earnings.
They were in their early 30’s and I assumed they had at least 30 years to retirement. If we assumed a modest 6% return, then they would lose almost $75,000 in growth—all for some furniture. They ultimately decided to take the money out. I understand times get difficult, but try to keep your money in your retirement plans.
No life insurance
As parents, we have a responsibility to our family to make sure they are taken care of—whether we are here or not. This means having adequate life insurance to leave behind.
This area is often overlooked because it is an uncomfortable subject to discuss. The only thing more uncomfortable than having the conversation is being the spouse and children left behind without any savings or life insurance.
Have the conversation with your spouse. Determine how much debt you need to pay off including the mortgage. Then think about how much is needed to supplement income, pay for the kids to go to college, and whatever else. Hopefully you’ll never need it, but I’ve never met a widow who regretted the life insurance proceeds they received.
No will in place with minor children
Did you know if you die without a will in place, most states would determine who would be the guardian of your children? That’s right, if you die without a will, you don’t get decide who raises your children.
If you don’t have a will, get one today. It’s important to have these little things in place because we never know what may happen.
If you can avoid all of these mistakes you will put yourself in a good financial position in life. Personal finance isn’t about getting 20% returns; it is about making good consistent decisions over the long term.
Take care of each of these areas. This will give your family (and yourself) peace of mind.
Flickr/ Darren Cullen