Become a portrait of financial bliss: New parents are prone to making money mistakes
Published by Florida Times-Union on April 11, 2004.
Just to get this out of the way first: If you ask a few people about the biggest financial mistake made by parents, you're sure to get one response: "Having kids in the first place."
There's some truth to that. Producing the next generation isn't a quick path to riches. Becoming a parent means getting rid of at least part of your income, at least temporarily, at the same time that expenses skyrocket.
As a result, financial management becomes more important than ever. Much of handling your money post-childbirth is really no different than it was before the rugrat showed up, just somewhat more difficult. If you struggled with credit card debt, didn't budget and had trouble saving before, you'll have to start with the basics.
"We needed to give ourselves a family financial makeover," said Ann Douglas, an author whose experience dealing with family finances led her to write Family Finances: The Essential Guide for Parents. "We had credit card bills mounting, just a lot of debt building up. You think you have a chance to catch up, but catching up when you lost one person's income is difficult."
With three kids at the time -- a newborn, an 18-month-old and a 3three-year-old -- Douglas and her husband cut out all discretionary spending, putting the money toward their $35,000 credit card bill, debt that has now been paid off, overcoming the first parental financial mistake: Not getting rid of debt.
"It took two years of really buttoning down the hatches," Douglas said. "We knew we had to get rid of it."
Most financial advice assumes that debt, especially credit cardconsumer debt like credit cards, is at least under control, if not abolished. While it might still be a good a idea to move ahead with saving and investing plans, the main focus has to be paying off bills.
To do that, you'll have to avoid overspending.
New parents, frankly, can be suckers. Once you're lost in the bowels of a baby store, it's quite easy to believe that your new little darling will be scarred for life if you don't buy a baby-wipe warmer.
"You can tend to be a little overzealous with your first child.," said Bert Costa, who's both a parent and chairman of the Jacksonville Financial Planners Association. "There's always more pictures around the house of the first child, and more of them are takening in the studio."
If you can't avoid the temptation of high-priced (but oh-so-cute!) baby goods, at least don't make the mistake of buying everything new.
"We've gone to secondhand stores that have had some really good deals," said Ben Ross, who found good deals on clothing, toys and other items. "It's not like they go bad."
And new doesn't mean full-price. Ross' wife, Melanie, hunts out sales, stocking up on especially good deals.
"We were at the Gap yesterday and found a pack of T-shirts for 97 cents -- and we bought every package we found in the store," Ben said. "When we find a deal, we try to get a lot of it."
Parents who don't focus on cutting expenses in such areas have often failed to plan for lost income.
"A lot of people just don't realize in time that their lifestyle has changed hugely," Douglas said. "The big once-a-year vacation they could afford they just can't, at least for a while."
Tom Tracy, for example, remembers the yearly ski vacations he used to take with his wife. Now, with a 2two-year-old son and a baby on the way, they're more likely to hang out closer to home.
"You readjust your lifestyle," Tracy said. "You don't go on as many trips. You just adjust."
Another way of adjusting is to cut back on eating out.
The Rosses, for example, were able to save a lot of money by cutting back on visits to restaurants, a drain on their finances they noticed after keeping track of receipts for a month.
Now, Ben Ross said, "we do a lot more of the grocery shopping together so we get things we both like, so we won't be tempted to eat out a lot."
Of course, the point of eating at home and shopping at consignment shops is to have the funds necessary for more important purchases. Chief among them: insurance. But be careful: One common mistake of new parents is buying the wrong insurance.
The types you should look at getting, said Costa, the financial planner, are life and disability -- and you should look at policies for both parents. "If something happens to the stay-at-home parent," he said, "it becomes just as much of a financial burden."
To figure how much coverage the stay-at-home spouse needs, try to figure out how much child care, increased health care and other expenses would cost if the spouse was unable to fulfill those duties.
Buying insurance might be more important than saving, Costa said. "Saving and investing -- people normally do that to meet a goal," he explained. "The loss of revenue eliminates any possibility of meeting that goal."
That said, there's no need to get insurance on your child. Remember, the point of life and disability insurance is to provide a cushion in case something happens to a provider.
That, of course, is a somewhat morbid thought -- which is why it might be a good idea to turn your mind for a second to thoughts of a long and happy life. That will give you the chance to sidestep another mistake: Not planning for your own future.
Sure, you want to send Junior off to college when the time comes, but keep in mind that you'll also want to send your self off to the golf course a few years after that. Compound interest -- what Costa calls the seventh wonder of the financial world -- can help you work toward both goals.
Which presupposes that you're not making the biggest long-term financial mistake: failing to save.
"Don't think you have plenty of time," Tyler said. "The more you can get your money working earlier, the better off you'll be."
For the Tracys, who are just looking to invest $50 a month in an education fund for their children, the sacrifice is no greater than skipping the morning coffee stop. "That's less a day than the $4 you spend on a cup of coffee," he said. "Is your children's financial well being more important than a cup of coffee?"
Sidebr: Parents and Finances
Even though you can't send Junior out to work in the mines, your new child can help the bottom line -- at least on your tax return.
Two credits you should be aware of:
Child Tax Credit. The government will give you up to $1,000 for dependant children under 17 years of age if you're married filing jointly and make less than $110,000, single and make less than $75,000 or married filing separately and making less than $55,000
For more information, check out IRS Publication 972 at www.irs.gov/pub/irs-pdf/p972.pdf
(Remember, if you already received an advance child tax credit in 2003, you have to account for that on your tax forms.)
Child-care tax credit. If you're spending money on child care -- this credit can't be used if one parent is staying at home -- you can get a credit of up to $480 for your first child and $960 for two or more children.
Note that it might make more sense to investigate flexible spending arrangement plans that might be offered by your employee. These plans let you save $5,000 tax free if you use it for child care. You can't both use the plan and get the child-care credit.
If you're looking to start investing for your child's college education, one option to examine is state-administered college savings plans, known as 529s because of their IRS Section number.
Tax is deferred on earnings on money invested in the plan, and the funds are not taxed federally when used to pay for "qualified higher education expenses."
Information on Florida's plan, which charges no commissions or sales fees, is available at www.florida529plans.com/Savings/index.html.
Florida also offers a prepaid college plan, allowing investors to pay the cost of tuition, local fees and dormitory housing at a guaranteed rate. The money in the plan will cover the actual cost of any Florida public college or can be transferred to most private college in or out of state.
Another way of trimming tax liability is to invest in a Coverdell Education Savings Accounts, known as "educational IRAs."
These plans, as well as other options, can be compared at www.americanfunds.com/servlet/ContentServer?pagename=afweb/shareholder/