Having a child is a commitment of time, resources, and energy. Sometimes, new parents underestimate the financial resources needed to raise a child. The estimated child-rearing cost from birth to age eighteen is $241,080 in the United States. Bear in mind that this figure does not include college or other incidental costs like piano lessons or extra medical care for the child. Since having a child can be so financially taxing, savvy parents know they need to be smart about money. Listed below are five of the biggest financial mistakes new parents make.
1. Forgoing Disability Insurance
In every occupation, accidents can happen. Most employers offer disability insurance that guarantees the employee 60 percent of pay in the event that they are injured while working. For most families this is enough, but for new families with incomes over $100,000 it may be wise to get a supplemental plan.
When considering disability insurance, take into account your family’s regular spending patterns. Imagine what would happen if you or your spouse were out of work. Look for disability insurance that can pay the bills and maintain your standard of living in the event that something happens to you. Parents without disability insurance put themselves at risk for destroying savings and accruing debt, which can cripple the financial future of their children.
2. Acquiring Inadequate Life Insurance
Life insurance is intended to provide for your dependents. As such, new parents should absolutely make sure that they have a life insurance plan to provide for their baby in the unfortunate event that one or both parents die. Like disability insurance, most employers offer a life insurance plan. However, new parents should opt into individual policies because:
- Life insurance policies through employers typically do not have enough coverage to provide for young children. Most analysts recommend having at least a $500,000 policy to cover child-rearing expenses.
- Employer-based plans are tied to the employers. As such, if you lose your job you also lose your life insurance. Individual policies are independent of such factors.
- Individual policies are not much more expensive, if at all, than group policies, especially for healthy individuals.
- With an individual policy, you can also opt into term insurance. This type of insurance is cheaper and more flexible because you specify the amount of time you would like to be covered, which is usually until the time you expect your child to graduate from college. With term insurance you should make sure that upon its expiration there is an option to convert it to life insurance.
3. Waiting to Save for College
College costs are going up every year, so it is never too early to start saving for higher education. By the time a child is in high school, it is too late to start thinking about saving for college. Instead, start a 529 college savings plan or open a Coverdell education savings account for your child starting at a young age. You and your child will be relieved when high school graduation comes around and it is time to start paying tuition.
4. Putting Saving for Retirement on Hold
Though a child’s future seems to be of utmost importance for new parents, parents must not forget to think about their own future. Financial advisors agree that saving for retirement should always come first before saving for college. Make a budget that allows you to max out your 401(k) contribution and open an Individual Retirement Account (IRA) sooner rather than later. Though your child may be able to help support you when it comes time for you to retire, do not count on it. Save up your money so that you can have a comfortable retirement.
5. Acting Irresponsibly
Lastly, avoid filing unnecessary chargebacks. A chargeback is when a cardholder disputes a transaction on their credit card account. Chargebacks are intended to protect consumers from fraud, but some people abuse the system (like filing chargebacks when asking for a refund from the merchant would be more appropriate). Chargebacks carry hefty penalties for businesses, so most businesses are eager to work with you one-on-one to resolve a problem instead of having you use your bank as a middle man to dispute a claim. Filing unnecessary chargebacks is a bad financial habit that some parents fall into for various reasons such as buyer’s remorse or ignorance about the intended function of this tool.
If you aren’t fussed about the bad example you are setting for your kids or the fact that chargeback fraud severely cripples the innocent merchant, at least think of your own financial future. If you engage in chargeback fraud with your debit card and the bank finds out, they will probably close your account. New parents have a lot to think about. Do not dismiss these financial matters as inconsequential. A little financial foresight now can have a huge payoff for you and your children down the road.
Jessica Velasco is a Des Moines native, mother of two boys, and lover of ice cream. When she isn’t writing, she is probably cleaning crayon off the walls, chasing the escaped dog around the neighborhood or feigning deafness in the bathtub.