Having a child is an exciting and exhausting experience. The feeling of holding your newborn in your arms cannot be described in words. Along with this exhilarating feeling, though, comes sleep deprivation, hectic schedules and the determination to provide nothing but the best for your precious little one.
Even with the best intentions, it is very easy to lose track of finances or make unwise decisions with money. Here are some of the top money mistakes new parents make:
1. Not having life insurance (or skimping on insurance): We do not want to think about dying, especially after a bundle of joy just entered our lives, but we need to make sure the little one is provided for after us. A childless couple may need little or no life insurance, but having a child changes everything. If you do not have life insurance yet, please start shopping for a policy.
2. Ignoring disability insurance: According to the U.S. Social Security Administration, one in four of today's 20-year-olds will become disabled before they retire. What protection do you have for your biggest asset—your ability to earn income?
3. Buying life insurance for the baby: I never knew people buy life insurance for babies until I started receiving at least one brochure a week from companies selling whole life insurance. Some even kept calling me with different tactics, either to scare me into thinking about any potential illnesses my baby could have in the future that would make her ineligible for insurance (if I don't buy something right now) or to make me believe I am building her a solid financial foundation with the investment portion of the whole life insurance product. I can easily see how these arguments would work on parents who want to do everything possible to give their kids an advantage in life; however, neither of these arguments are valid reasons to buy insurance for your baby. With the recent changes in the health insurance law, the chances of not getting insurance due to an illness are very slim. Even if that were the case, the insurance that is provided by these baby insurance products is too small to really make a difference. And regarding the second argument of providing a solid financial foundation, you will be better off by putting that amount in a college savings account and teaching your kids about finances. How much income does your baby bring in? Zero dollars? That is exactly how much insurance you should get for the baby.
4. Over-spending on baby items: The Internet is filled with lists of items you need for the new baby. In my experience, the best way to go about this is to buy the absolute basics—a place for the baby to sleep, a few Onesies (or sleep-and-plays if you are having a winter baby), diapers, car seat, a few bottles if formula feeding. For the rest, purchase other items as and when you feel the need after the baby arrives. You might find you never miss anything.
5. Falling into the must-have traps: This is similar to the previous point but causes a lot more damage because the cost is high. I am talking about the popular expectation that a family with kids needs a bigger car, a bigger house and a nursery that is completely set up before they welcome the baby.
6. Forgetting what is more important, financially—your retirement: Saving for college is important, but even more important is saving for your future. You can get a loan for college, but there isn't one to fund your retirement.
7. Ignoring college savings: After you fund your retirement and other immediate goals, make it a priority to rework your budget to find money to start a college savings account. Start small and set it up to automatically increase the contribution with every birthday. If you get cash gifts for birthdays and other holidays, make sure to immediately set aside a portion of it to go to the college fund.
8. Postponing estate planning: Many parents assume that, if they don't have a big estate, they don't need a will or any type of estate planning. If you have any assets and you want your beneficiaries to receive them without a lot of hassle, set up a trust or a will. When you add a minor child to the mix, it gets even more complicated if you don't have anything set up. Who will get custody of the baby in case you go? How will your money be spent? Do you want your child to get access to the money right away or do you want to set some money aside for his or her education? Do you want your child to get all your assets or do you want to donate some to a charity? Meet with an estate planning attorney if you have not already; the first meeting is most likely free and you will be able to figure out how much assistance you need to put a plan in place.
9. Not taking full advantage of all the tax/employer benefits: Most people only think of insurance and 401(k)s when they think about their employer benefits. A lot of employers offer much more than that—a flexible spending account, dependent care account, gym memberships, discounts to stores and even subsidized child care. Find out all the benefits you are eligible for and take advantage of them.
10. Failure to plan: When the baby comes, it is pretty much "stop everything else that is going on in your life and take care of the baby." It is a lot easier and better to make a plan as soon as you know you are going to have a baby. The number of options available to save money might also go down the longer you wait.
Those are the big money mistakes of which I am aware. There are also other things like missing the deadline for a bill which can be fixed by planning ahead and automating bill pay, but from personal experience, most of the companies will understand and waive the late fee once if you explain your new life change.