3 Most Common Mistakes: Financial Planning. Not making a will. Carrying too much debt. Forgetting to save.Babble Editors
What are the 3 Most Common Mistakes new parents make when it comes to financial planning?
Expert: Stacey Bradford, former editor at smartmoney.com and author of The Wall Street Journal Financial Guidebook for New Parents
1. Putting off writing a will
“Many parents think planning their will and estate is something they do in their sixties. It simply doesn’t occur to them that they could pass away at such a young age. However, choosing a guardian for your child is the first thing new parents should do. Keep in mind: It doesn’t count if you’ve mentioned to your sister that you’d like her to watch over your daughter should something happen to you or your spouse. Unless it’s in writing, it won’t hold up in court. In other words, if you don’t have a will, the court decides who gets your child – and that may not be the person you had in mind. New parents should also stipulate where their money should go. Too often, parents assume that their savings would automatically go to their spouse if something happened, but that’s not the case. Half the money would automatically be put into a trust for your child. In order to retrieve the money, you’d have to petition the court, which is a complicated process. But if you have a will, you’ll easily avoid this mess. It’s a financial must-do that holds up in any economy.”
2. Carrying too much debt
“Too many young parents aren’t budgeting properly. With the overwhelming extra expenses a new child brings, it’s way too easy to pull out the credit card. New parents find it especially difficult to say no to purchases they see as benefiting their child, like swimming lessons or furniture for a new nursery. You must set a budget and actually live by it. And part of that budget should include actively paying off credit card debt and trying not to incur more. Pinching pennies is crucial in this recession; you may find yourself thrown into a financial situation you weren’t planning (layoffs, fewer hours, not receiving bonuses you were expecting). New moms, especially, are finding the flexible hours they were once afforded are no longer an option. Should you approach one of these financial roadblocks, living within your means affords you some flexibility.”
3. Forgetting to save for retirement
“So often young parents are so overwhelmed by their day-to-day expenses they forget to save for retirement. They’re just trying to get through the next day, the next week, the next month. But it’s super important to think long-term, especially when you have young children. These are your earning years! Once your kids are in high school, you’ll be so focused on how to pay for college, it’ll be difficult to stay financially disciplined. But now’s a perfect time to save money. A general rule of thumb: 10 to 15 percent of your income should go into your 401K. And only after you’ve set aside that money should you even begin to save for college. If you’re a stay-at-home mom, you can often qualify for a spousal IRA to save the money you’d be making if you were working.”
As told to Andrea Zimmerman.