This story was produced in partnership with Betterment, the largest independent online financial advisor.
As every parent knows, bringing a child into the world is that rare moment in life when your entire outlook shifts. Suddenly the person at the center of your universe isn’t you.
There’s something incredibly noble about the sacrifices parents are willing to make for their children. But from a financial perspective, too much focus on your son or daughter can actually put your own well-being in jeopardy.
“When you have a child, you want to create a game-plan and do regular check-ups on how you’re doing financially, so you can plan for your family’s future,” says Garrett Oakley, CFP®, a financial planner with the automated investment firm, Betterment. “You don’t want to forget the whole family and focus exclusively on the child.”
It’s often the case that parents make well-intentioned financial planning decisions focused on helping their children but that don’t end up helping the family in the long run. Here are some of the biggest culprits.
1. College Savings
Oakley says he talks to a lot of new moms and dads who are already focused on saving for their child’s future. The problem is when they forget about more near-term needs. “We always hear parents ask, ‘how do I start paying for college?’ which is great,” he says. “But it’s not always the first step.”
It’s more important to set up an emergency fund that covers 3-6 months of expenses. Betterment calls this a safety net. Parents should also think about financial tools that protect against worst-case scenarios, like life insurance, disability insurance, and an updated will.
Parents shouldn’t neglect their retirement account for the sake of a college fund either. Oakley argues that university students have a lot more financial options at their disposal than their parents. “There’s no grant or student loan for retirement,” he says.
2. Health Insurance
Between pediatrician check-ups and the occasional ER visit, having a child means you’ll probably spend more on health care than you ever have before. But too many parents assume that means they’re better off switching to a higher-tier, more expensive insurance plan.
“From a monetary standpoint, that might not make sense,” says Oakley. In many cases, the steeper premiums negate the benefits of a lower deductible and reduced coinsurance. Plus, the tax advantages of a health savings account, which you can use if you purchase a high-deductible plan, help defray some of those out-of-pocket costs. Oakley urges parents to run some sample scenarios to see if a more elite plan is really worth the extra monthly outlay, net of taxes.
It’s normal for newer parents to underestimate just how big a dent child care will put in their budget. According to a Care.com survey, the average annual cost of a daycare center for a baby was $10,468 last year, but exceeded $20,000 in some high-cost parts of the country. Nannies are an even pricier proposition, with the average in-home helper costing $28,905.
For some, this cost might eat into most of their after-tax income. Rather than assuming it’s a better financial deal for both parents to continue working full-time when your kids are little, weigh your options.
Certain couples may find that having one spouse telecommute or work part-time can help alleviate their daycare costs. “Some of my clients work from home to avoid daycare bills, making use of company flexible arrangement policies,” says Stephanie Genkin, CFP®, who runs the advisory firm My Financial Planner in Brooklyn.
4. Custodial Accounts
On the surface, setting up an investment account for your child under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) sounds like a great idea. You get to save for their future, but retain control over the account until the child reaches your state’s “age of majority,” either at 18 or 21.
But Oakley worries that contributions to a UGMA or UTMA account may give you less financial flexibility than simply investing in your own name and gifting money to your child as needed. Once you put money in, it belongs to your child. “They don’t realize that’s an irrevocable gift,” he says. What’s more, recipients can do whatever they want with the money once they become a legal adult, for better or worse.
A lot of parents establish a custodial account with their child’s higher education costs in mind. But Oakley and Genkin caution that funds in your child’s name have a bigger impact on financial aid decisions than those you keep in your own name. So the reward for all that saving may be a smaller grant or scholarship.
For more complex financial decisions like saving for college, getting in touch with a financial professional can help alleviate headaches down the road. These days, that’s getting easier than ever. For example, Betterment’s mobile messaging feature offers fast, personalized financial advice without the need for an in-person visit. And those with the Betterment Premium plan enjoy access to a Certified Financial Planner™ at any time.
5. Buying a House That’s Too Big
When you have a new child on the way, it’s natural to start dreaming about a larger home with more bedrooms. But if you’re already on a tight budget, a more spacious abode might be the last thing you need.
Young homebuyers, in particular, tend to focus on the price of the home itself when deciding how much they can afford. It’s easy to forget that more square footage can also bring larger energy bills, property taxes, and maintenance.
If upsizing comes at the cost of bigger priorities, like your retirement savings, think about ways you can make better use of the space you already have. Among your options: adding closet shelving or finding decorative ways to reduce the clutter around your home.
Investing in securities involves risk and there is always the potential of losing money. Visit www.betterment.com for more information. Determination of largest independent online financial advisor reflects Betterment LLC’s distinction of having the highest number of assets under management, based on Betterment’s review of assets self-reported in the SEC’s Form ADV, across Betterment’s survey of independent online financial advisor investing services as of May 24, 2017. As used here, “independent” means that an online financial advisor has no affiliation with the financial products it recommends to its clients.