Parents: Top Ten Money Mistakes
The Most Common Financial Errors and How to Avoid Them
Recognising our financial mistakes is part of getting older. Perhaps we leased a car we knew we couldn’t afford or taken on a payday loan and spent money before we’ve earnt it. As parents, our money mistakes are a bigger issue because our children depend on us to make the right choices. Keeping a tab on these common mishaps can mean that we avoid them in the future.
- Not Having a Plan
If you’re not aware of what you’re doing with your money – where it’s all going and why – then you’re not likely to manage it well.
Hannah Shingle, a single mother from Brighton, learned that not planning for your money realistically can result in some difficult situations. Working as a freelance writer, she would count on money to come in at a certain time – and when it didn’t, she was left in a tight spot. “Because I’ve been expecting the money, I’ve spent as though I’ve already received it,” Shingle says. “That has made for some hairy situations when I have just about not been able to put food on the table – literally.”
“Not doing money on purpose” is the biggest mistake people make, according to Dave Ramsey, author of The Total Money Makeover: A Proven Plan for Financial Fitness. “When people start bothering to not care who got thrown off the island, and instead have a game plan and an overall intentionality on the issue of money, they make pretty good decisions,” he says.
- Not Having a Budget
“A budget has a bad reputation that’s unfounded,” Ramsey says. “John Maxwell says ‘a budget is people telling their money what to do instead of wondering where it went’ and that’s all it is. It doesn’t have to be a form of medieval torture; it’s not one spouse trying to control the other spouse; it’s none of those things. It’s just a paper game plan – and it’s not this generic month from heaven, it’s this month.”
The key to making a budget you can use is “try, try again.” Make a budget each month and tweak it as needed. If you didn’t give yourself enough money for groceries, next month’s budget can reflect that. Just do it.
- Using Credit Cards
Credit cards are often a problem for parents because we rationalize purchases as being for our children. But it’s actually counterproductive to being a good parent to buy things we can’t afford.
“Stuff is not the answer to making some child happy,” Ramsey says. “We all know that with our intellect, but our emotions and our damaged lives get twisted into it and it becomes credit card debt. Credit card debt’s not pretty just on the financial mathematical side, but when you really dig into what causes it emotionally it’s really nasty stuff.” To solve the problem, he suggests cutting up your credit cards.
Brette McWhorter Sember, author of Repair Your Own Credit and Deal With Debt, also says it’s best to stop using credit cards and loans if you’re in debt. If you’re not willing, consider getting rid of all but one credit card and trying not to use it.
- Taking on Too Much Debt
Most parents have more debt or take on more than they are able to handle. This includes buying items like vehicles on instalment policies. “Purchase items that you can afford, rather than what you think you’ll afford next week,” says Helen Rothwell, a stay at home Mum from Carshalton, Surrey.
“We never save for Christmas so we end up letting bills go unpaid so we can give our kids a great Christmas and then we can never catch up with the bills that were pushed to the side,” says Traci Draper of Inverness, Scotland. “We always start out the new year this way. It’s worse than credit card debt I think.”
Payday loans for emergencies can also be a huge financial error because the amount you repay will be considerably more than you borrowed, causing disaster for your savings.
The emergency loans lender SimplePayday explains:
“Financial experts suggest that it is still better to have savings put away for emergencies, and, if this is not an option, you could also ask your bank for a temporary overdraft extension.”
“With these options being the only interest-free ways of obtaining cash in a crisis, they are clearly the first port of call to anyone who finds that they need to bridge the gap between pay days. We also suggest that if your expense can be left until your payday, it is better to wait, as these loans are not meant to be used for casual spending, or a purchase that is not absolutely critical.”
Reigning in nights out, takeaways and frivolous spending can all be ways to avoid using short term loans or cash advances. Having better spending habits will also promote not having to rely on or use cash lenders found online.
For those of you who have trouble figuring out how to “reign in,” Ramsey has more drastic advice: “Don’t carry credit cards with you. Having to return home to get them means you have to really think about the value of what you are buying on credit. Where possible, wait at least 24 hours before making any purchase greater than £500.”
That works for the big stuff, but the smaller stuff requires figuring out how to use your everyday cash wisely. There are some excellent resources available to help you do this, with advice on emergency cash scenarios from setting up a budget to hosting cheaper birthday parties.
- Not Having an Emergency Fund
“Having no money set aside is like sending an engraved invitation to have Murphy move in your spare bedroom,” says Ramsey. “Being broke attracts problems – it’s amazing. Having three to six months’ expenses lowers the stress level in the house, changes Mom and Dad’s feel and makes you a better parent. It really does.”
Long-term financial planning can be a scary thought when you are still trying to afford diapers and Lego, but the experts stress the importance of planning ahead for major future expenses like college and retirement.
“You’ve heard this before … start saving early and often, especially for your child’s college education,” says Ramsey. “Designate funds, even if a small amount, for regular contributions to a savings plan and ditch the emergency loan lenders.” He recommends automatic paycheque withdrawal to save the money before you ever see it and encouraging relatives to contribute to your children’s college savings.
However, college funds may not be the most important long-term saving priority. “If you have to choose between saving for college and retirement, save for retirement,” says Miller. “If you build up your retirement savings when you are young, you will have more cash flow for college when that time arrives.”
Sometimes it might feel selfish to prioritize your needs in front of your kids, so Miller recommends a way of saving that will do both. “The best solution: Make the maximum contribution to a Roth IRA each year,” she says. “These funds may be used for college.”
- Not Saving for Your Children’s College Education
Ramsey recommends opening an Educational Savings Account. “You can put in up to £2,000 a year per child if you make under £200,000 a year, and that is more than adequate to send them to a state school and pay for it with tax-free growth,” he says.
- Not Saving for Retirement
“Ensure you save for retirement, not just your child’s University,” says Sember. “Children can get loans for University, you won’t get the same for retirement.” Set up a savings account for your baby and deposit cash gifts into it throughout his life. Make time in your life to do financial planning. It may seem like things are too crazy, but you need to think about it now.”
- Failing to Teach Children About Money
Your children can easily pick-up bad spending habits, as parents you have a duty to teach them about the value of money and how to get it – from work. Ramsey says it’s advantageous for kids to have opportunities at working and saving money.
Family financial planning is not just for parents. “It’s never too early to educate your child about the importance of saving and how money grows over time,” says Leff. “It’s also important to share with your child your own values about financial, material and spiritual wealth.” Your children will learn by watching how you handle finances.
Well, no one said financial advice would sound easy, but don’t be overwhelmed. As Miller so succinctly reminds us: “By the inch it is a cinch; by the yard, it is hard.” Try a budget. Make a will. Hide one of your credit cards. Baby steps. Parents are good at those!
- Not Having Life Insurance
Ramsey says you’ll need ten times your current income for a 20-year life insurance scheme. And that goes for stay-at-home mums too. “If Mum passes away, there’s a huge economic value that has to be covered that she brings,” says Ramsey. “She’s the taxi, the cook, the nurse-maid … she’s all of those things and all of those things will take £30,000 to £40,000 a year to replace.”
This is not news for parents, as we are managers of the unexpected. But planning for unwelcome surprises goes beyond extra clothes in the diaper bag.
“While no one likes to think about facing difficult times, it’s important to be prepared,” says Ramsey. “Be sure to have adequate life insurance and an up-to-date will and explore trust funds and other options with an estate attorney to ensure your assets will be protected and available to your child.”
In case you’re wondering, trust funds aren’t just for rich people, and wills aren’t just for people who are old. Both are excellent tools for making sure you have a say in how your children are taken care of if something should happen to you and your spouse.
Surprisingly, life insurance and wills don’t require a lot of time and money to put into place. For wills, there are two options: do it yourself or consult a lawyer. It’s a bit like doing your taxes – if you are willing to spend a lot of time reading and researching and your situation is fairly straightforward, one of the online will kits might allow you to do your own will.
- Deciding Not to Pay off the House
Most financial advisers say it’s better not to pay off your house because you get a tax deduction for it. “Basically, if you have a £10,000 tax deduction for interest, it saved you only £3,000 in taxes because it only lowered your income by £10,000,” says Ramsey. “And so, what you’re doing effectively is sending the bank £10,000 to keep from sending the taxman £3,000. This is a bad plan. You’re much better off to have paid for [your] home. It stabilizes the family in ways that can’t even be described.”