By: Sarah Stewart Legal Group
Parents are busy. They cart their children around to endless activities while trying to manage a household, and oftentimes, work. In the midst of all the craziness, it’s easy to forget how important your finances are and how to plan for the future, when the kids have left the nest. Here are the 5 most important financial mistakes for young parents to fix:
(1) Neglecting your retirement account.
Many parents try to fund their children’s college educations, but don’t save for their own retirements. Really, parents should focus on saving for retirement over funding college. First, there are scholarships and loans available for college while there aren’t for retirement. Second, who’s to say college 20 years from now will be of the same importance or that your child will even decide to go to college? Maybe they’ll be the next teenage genius, business-building sensation!
If you are employed, focus on your 401k accounts first. Many times, employers will match a portion of their employees’ contributions. If that is not an option, choose a ROTH IRA or traditional IRA. Talk to a professional about the best option for you.
(2) Forgetting to save.
What would happen today if you and/or your spouse lost your job? Would you have enough money to pay bills, buy groceries, and pay for gas to get you to interviews? If you’re like most young parents, the answer is no. Most financial experts suggest having 3 to 6 months of total living expenses saved as an emergency fund. Start today! Open an online account with a bank. Don’t order checks, and set up a direct payment from your account in whatever amount you can reasonably afford each month. Resist the urge to dip into the account, unless it’s an emergency, until it passes your 3 to 6 month emergency fund requirement. This will allow you to weather the storm of unemployment, or pay unexpected medical or home repair expenses when they come up.
(3) Failing to take tax breaks.
Most parents are aware of the tax breaks available per child. However, they sometimes miss less obvious tax savings. Be sure to speak to your accountant, or look into tax savings on daycare, child tax credits, tax credits for adoption, and tuition credits for special needs students. You can find information on these credits at irs.gov.
(4) Starting savings accounts owned by your child.
Opening a custodial savings account when your child receives money for education from a family member seems like a good idea. But, there are drawbacks. You can’t reach the money if you need it, savings are taxable, the account will count against eligibility for financial aid, and the return on investment is usually not very high. Your family should consider a 529 college-savings plan instead. If you use the account toward eligible education expenses, the money will grow tax-free. Also, the accounts usually have a higher interest yield than CDs and other savings accounts.
(5) Overlooking health-care flexible spending accounts.
Many companies allow employees to save pretax dollars for medical expenses. Only about 20% of employees take advantage of the plan, likely because of the nature of the savings that if you do not use the account, you will lose that money. To take full advantage of this opportunity, look at your medical records. Determine how much prescriptions, dental, vision, and doctor’s appointments were for the past year, then use that total for your FSA at enrollment. Keep in mind, there may be a cap.