"In raising my children, I have lost my mind but found my soul." — Lisa T. Shepherd
Here at AZTEC Financial Group, we understand that parents face one of the most rewarding but challenging responsibilities known to humankind: raising a family. Even before a baby takes its first breath, its parents have already had to make hundreds, if not thousands, of decisions. "Are we going to have a nursery or have our baby sleep in our room? How are we going to make sure we're on the same page with parenting styles? What can we do to make sure our child grows up happy and healthy? Are we going to raise our family in this home, or move into a bigger one?"
It's a whirlwind of questions, uncertainty, and unknowns. There are no guarantees when it comes to parenting, but that doesn't mean there isn't any guidance.
A substantial part of raising a family is caring for their financial needs, and that means making decisions that affect much more than you. Let's look at eight financial mistakes families often make, and what to do instead.
First, though, a disclaimer: this article is by no means to pick on or guilt struggling families. The cost of living is high, and it's harder than ever to raise a family in this economy. Sometimes it can even feel impossible to cope with family financial problems. Pointing out these mistakes is simply educational, with the purpose of hopefully helping families to avoid unnecessary financial strain where possible.
Mistake One: Navigating Without a Budget
Budgets are like healthy diets: we all understand the general benefit of one, but sticking to it is easier said than done. For busy parents, this is certainly a struggle. You're trying to do it all: make money, keep the house clean, taxi the kids around to appointments and activities, support your spouse, be mentally and emotionally present − it's understandable if pinching pennies and clipping coupons is the last thing on your mind.
The good news is, a budget doesn't have to be extreme. In fact, the more reasonable, the better. Going back to the illustration of healthy eating, have you ever gone on an extremely restricted diet in the name of "health"? Maybe you vowed to never eat fast food ever again, or swore you'd only eat sugar once a month. What happens? You might stick to it for a little while, but then you slip up. All of a sudden, you turn into a vacuum, devouring all of the off-limits foods you can possibly get a hold of.
Something similar happens with a budget. If you're so strict that you can never treat yourself, grab a quick bite to eat with friends, or take a much-needed evening out with your significant other, sooner or later you'll probably go off the rails with your spending.
How to avoid the mistake: Take some time to make an honest evaluation of your expenses, and build a budget around them. It's great to say you're only going to spend two hundred dollars a week on groceries, but if you're habitually coming home from shopping with a bill of three hundred, that might not be realistic for you right now. For fluctuating expenses, like electricity, gas, and credit card payments, take the average of the past six months.
You'll also need to know your household income. If it's irregular, such as with freelancing or commission-based work, you can use the same method as earlier, taking the average of the past six months.
Next, you'll compare your income to your expenses. Are you spending more than you have coming in? Are there any areas that you need to pare down in? If so, set reasonable limits that you can stick to. Remember, you don't want to be so restricted that you end up going on a spending rampage!
The hardest part now is sticking to it. As you go along, you may find that certain limits need adjusting. That's okay! The great thing about a budget is that it is always revisable.
If you need more help, mymoney.gov is a website run by the US government that is full of guides, calculators, and tools to check out.
Mistake Two: Skipping an Emergency Fund
An emergency fund is typically defined as savings put aside for unexpected expenses. If this sounds impossible to do, you're not alone. Many families, no matter their income bracket, find themselves living paycheck-to-paycheck because of living costs. Still, the importance of having an emergency fund is impossible to ignore.
If you're a homeowner, you know too well just how quickly an expense can pop up. A leaking water heater, a faulty appliance, a broken window − without money saved for something like that, the bill would likely end up as high-interest debt from a credit card or personal loan.
An emergency fund also helps in the case of a job loss. Unemployment insurance only covers so much, and having at least some money saved can help cover bills that would otherwise go on credit cards − again, racking up interest.
How to avoid the mistake: Simply put, start building an emergency fund. Every bit counts; even just five dollars a paycheck is better than nothing. When you come across larger amounts of money, like bonuses and tax returns, try to put some of it away.
A helpful tip: consider keeping your emergency fund in a high-yield savings account (HYSA). You can usually get around 5% interest, which is substantially more than the .05% of a traditional savings account. With a HYSA, even without a lot of money in it, it'll still grow over time. Don't underestimate the power of compound interest!
But how do you know how much you should have for an emergency fund? The general rule of thumb is to save 3-6 months' worth of expenses, but every family's needs are different.
Mistake Three: Not Having the Right Insurance Coverage
When my sister had her oldest son, Ben, she started talking about who to elect as a guardian and what life insurance to get, in case something were ever to happen to her or my brother-in-law. At first, I didn't want to hear about it. Who wants to imagine such a horrific thing as losing someone you love?
Now I understand, though; she was being a responsible and forward-thinking parent. She made decisions now that could protect her family later.
Although insurance is beneficial for everyone, it's especially so for parents. Six insurance types are particularly important to consider:
Health insurance.
Life insurance.
Auto insurance.
Home insurance.
Disability insurance.
Umbrella insurance.
Even if you have some of these, though, you may not have the right coverage for your needs. What could be worse than feeling secure all this time, only to find out that your insurance wouldn't cover you when you needed it most?
How to avoid the mistake: Every family has different needs, so there's no black or white answer. The best thing you can do is work with an insurance agent, and the nice thing is, it doesn't cost you anything to meet with them. A great local insurance agent to look into is Karen Coons at HBL Insurance, who deals with auto, business and commercial, and home insurance. I also offer help with life, disability, and long-term care insurance.
Whichever path you choose, having your bases covered with insurance can help protect you and your loved ones in difficult times.
Mistake Four: Drowning In Debt
An American writer named Josh Billings once said, “Debt is like any other trap, easy enough to get into, but hard enough to get out of.” How true that is! We live in a society built on debt.
Think about the traditional expectation of a young adult: go to college (debt), drive a nice car (debt), buy a home to raise a family in (debt), keep up with the social expectation of what your family should look like, wear, and do (debt, debt, debt).
Social media can compound the problem, because now we not only compare ourselves to people around us, but also billions of others putting their best face forward online. If we don't match their lifestyle, we may feel bad about ourselves.
This challenge is faced by millions of households. In fact, in 2023 it was reported that Millennials (those born between1981 and 1996) have an average of $125,047 of debt, Gen Xers (born between 1965 and 1980) have $157,556, and Baby Boomers (born between 1946 and 1964) come in at $94,880. Imagine, at all these stages of life – from young parents to empty nesters to retirees – owing around or more than $100,000 in debt. That's crazy!
How to avoid the mistake: The easiest answer would obviously be not to get into a lot of debt in the first place. Keeping life simple, refusing the "keeping up with the Joneses" mentality, and sticking to your budget all help with this.
What's considered "a lot of debt", though? A common way to figure this out is to find your debt-to-income ratio. A good DTI ratio is 35% or less.
If you're among the almost eighty percent of Americans already in debt, though, there's still plenty you can do! If you have a good handle on your debt, then keep doing what you're doing. If, though, you're one of the many that feel they're drowning in debt, the Federal Trade Commission has released an excellent guide to get you started. It answers questions like, "What should I do if I'm having trouble paying my mortgage?", "What can I do if I can't pay my student loan?", "Are debt consolidation loans a good idea?", and "What can I do if I'm way behind on paying my credit card debt?"
Remember, you don't have to tackle this problem alone. And don't beat yourself up too much; like we talked about a moment ago, debt is an accepted part of our way of life. Still, you don't have to follow the same path as everyone else.
Mistake Five: Delaying Retirement Preparation
If you're a young person raising a family, saving for retirement may be the last thing on your mind. After all, you've got a mental checklist to keep track of at all times: keep a roof over your family's heads, take the kids to their dentist appointments (separately, because the dentist couldn't fit them in on the same day), crunch some numbers to see if buying at that wholesale club is actually saving money, help throw together a school project that's due tomorrow (but should've been done a week ago), plan a coffee date with your friend three weeks from now, for forty-five minutes, before you have to pick your dog up from her grooming appointment – it's a lot.
And that's not even considering the financial strain you may be under.
I'm not going to say, "You must make saving for retirement a priority, no matter what!" That wouldn't be reasonable. There's a reason why saving early is so strongly encouraged, though: compound interest can do amazing things. To illustrate, have you ever had a fish tank of guppies? They're such cute, bright little fish, so you buy a few for your kids. All is well until you notice tiny swimming specks in your tank – guppy fry (aka babies). You're now a grandparent to tiny fish, whether you like it or not. Bad news is, female guppies can have a litter of babies every thirty days, and her babies can start having babies in just a few months.
And now you regret ever buying those flashy-finned fish.
Compound interest is somewhat like that, except instead of an overpopulation of guppies, you have retirement savings. To put it simply, any money you save gains interest, and then you earn interest on your interest, and so on. Imagine the interest building on itself over thirty or forty years, rather than ten or twenty. The difference can be substantial.
On the other hand, imagine you were so busy that you couldn't even think about saving for retirement until your fifties. All of a sudden, retirement isn't a far-off, intangible thing anymore; it's real, and it's coming soon. What can possibly do to prepare? Take on extra work or pick up a side hustle, and race to catch up? It's doable, but clearly the more stressful option.
How to avoid the mistake: Consider saving now – even just a little. If you have an employer match option at work, take advantage of it. Automate your contributions, so that saving for retirement doesn't take up even an inch of precious mental real estate. And if you're looking for a more flexible option, so all your savings won't be entirely out of reach if you have a real emergency, consider a Roth IRA. You can withdraw what you contributed without any penalty (not what you earned, though; that has a different set of rules). You'd only want to do so if absolutely necessary, but having that option can give you reassurance.
However you start the ball rolling, you'll be glad you did.
Mistake Six: Not Planning Ahead for the Cost of College
College is expensive; there's no doubt about that. In fact, college costs have increased by 169% in the last forty years, while wages for 22 to 27-year-olds have only increased by 19%. It's not just tuition costs, either; do you remember what housing costed when you were college-age? How about a grocery bill?
Because of such high costs, these kids are starting out with tens of thousands of dollars of debt hanging over their heads. And if their monthly payment doesn't cover for the interest stacked on top of their loan, they may actually end up owing more down the road than the loan was worth – even after consistent payments.
How to avoid the mistake: Not all parents have the option to help ease the burden of secondary education for their children, but at least being informed about what's out there can be beneficial.
First off, there are 529 plans. These are plans specifically designed for college saving, where your money can grow without being taxed beforehand. Just like saving for retirement, the best rule of thumb is to start contributing as early as possible, so those guppies can multiply – so to speak. Another great thing about a 529 plan is their tax benefits. Withdrawals aren't taxed on a federal level when used for education-related expenses, and depending on where you live, they may not be taxed on a state level, either. And they don't just cover traditional college; 529 plans can be used for graduate programs, trade schools, online schools, and even some international universities.
Secondly, make sure you're covering all your bases with scholarships. Talking with the guidance counselor at your child's school is a great place to start. For online research, the US Department of Labor has compiled a list of almost 10,000 scholarships that can be filtered by location, degree level, gender, and more. And remember to have your child fill out a FAFSA (Free Application for Federal Student Aid). Although it isn't always required for scholarships, it can open the door to more financial aid opportunities.
Whether you're years away from sending your kid off to college, or right at the starting gate, hopefully some of these tips can help both of you start with the best foot forward.
Mistake Seven: Refusing to Think About Worst Case Scenarios
We naturally don't like to think about the "what ifs", but when you have a family depending on you, it's necessary. It's a common plot device in movies and books for newly orphaned children to be shipped off to a secretly evil relative (A Series of Unfortunate Events, for example), but sadly, children ending up with the wrong guardians does occasionally happen in real life. And if no family members volunteer, then they'll go into the foster system.
Another consideration is your estate, any assets you have; typically, it would all be divided equally between your biological and adopted children. But what if you have step-children? What if your children are minors, and can't manage money themselves? These are all considerations that can get messy without clear instruction.
How to avoid the mistake: As a parent, it's crucial to have an estate plan, including a will. This way, you'll be able to clearly state who would take in your children and how and when funds would be distributed. By doing so, you'd be taking major stress off of your grieving loved ones.
If you have a relatively simple estate and an uncomplicated custody situation, then you may be fine writing your own will using an online program. However, for more complicated situations, an estate attorney may be your best bet.
Mistake Eight: Not Teaching Kids Money Management
In an ideal world, school would prepare students for life in the real world. It would teach skills like basic cooking, using credit cards wisely, and changing a tire, but unfortunately, that's not usually the case. If parents don't teach their children these important life skills, then they'll figure them out the hard way, or learn from their peers (which we all know isn't always the best choice). Or, in some cases, they may never learn them.
When it comes to lacking skills like money management, budgeting, and credit use, a young person can easily dig themselves into a pit of debt. Even if they land a job that pays well, they still might always be broke – their spending habits could eat up all their income. And if they end up with a ton of high-interest debt, such as credit card bills, they may struggle to ever catch up with the ever-growing balance.
How to avoid the mistake: Take your children's financial education into your own hands. Young children can learn the basics through play, and any age can grow to appreciate budgeting by receiving an allotted allowance. As they get older, provide them with easy-to-understand guides that build on their knowledge.
Do you want to know the very best thing you can do to help your children learn about good money management? Set the example. My dad did just that for us kids growing up; he worked hard, made sure our needs were covered, and spent responsibly. Even now, if I need financial advice – like whether to save up cash for a car or get a loan, if CDs are worth it, if renting or homeownership is better – he's there with a reasonable, level-headed, and experienced response.
Some parents shy away from talking about their finances with their children, but if they're old enough to understand, there can be benefits to getting them involved. It may help them develop a realistic understanding of the cost of living and the value of the dollar.
Teaching your children to make wise money choices can help them to avoid the many pitfalls and stresses that burden many adults in the "real world". What better gift could you give them?
Financially-Fit Families
Looking at those eight money mistakes families often make, how did you stack up? If you saw something you need to work on, don't stress; just pick one reasonable action to get started with. And as always, we at AZTEC are here for support. Helping families in the Seacoast community build a strong financial foundation is a passion of ours.