No one needs to be told that babies are expensive. Numerous organizations publish regular reports revealing the average cost of raising a human being from infancy to independence, and there are online calculators as well, but those figures are downright absurd. It’s not that your mileage “may” vary, but that your mileage “will” vary. How much does it cost? Well, however much you can afford, figure it will probably be about 10% more than that. But that’s life, literally. All of which leads to the inescapable conclusion that most people could probably use all the help they can get when it comes to setting up their finances for parenthood. so for this Silly answers in a variety of ways On the podcast, co-hosts Alison Southwick and Robert Brokamp have invited a special guest to help them dish out those details: Dan Messeca, a financial planner at Motley Fool Wealth Management.
In this segment, Messeca reveals three common personal finance mistakes to avoid: one that likely stems from a lack of time and two that are due to unbridled affection. Additionally, it offers some pointers on resources that can help parents keep their budgets from getting out of control.
A full transcript follows the video.
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This video was recorded on March 12, 2019.
Alison Southwick: Let’s move on to some mistakes you may have seen other people make in your career as a financial planner.
Dan Messeca: The biggest mistake I’ve seen over and over again, working primarily with people approaching retirement, is people who have saved very aggressively for their children, particularly when it comes to college funding, but have skipped their own retirement savings out of it.
The most recent example I can think of is someone who had, I think, four children, each with six-figure savings accounts in their own name or in a 529 plan. And that person’s retirement plan was less than part of the value of their children’s plans.
And they were hoping to retire early, but that’s not an option for them anymore, because they’ve lost all that compound growth that they could have had over the years by giving something to their kids, which is noble, great, and prepared them very well; but that just means that they’re going to be working longer than they wanted to, as a result of that.
Surwick: What are some ways you can prevent that? Obviously, to some extent, by paying yourself first. Putting money into a 529 plan? Keeping money in your own name instead of putting it in your kids’ accounts? Are there different ways to protect yourself a little bit and have flexibility in savings?
Mesecca: The first thing is to make sure you’re maxing out your retirement plan. If you’re doing that and then giving some to your kids, you’re probably already on the right track.
Identify what exactly your goal is for them. If it’s about covering college costs in full, you could at least have a goal for what that will look like, rather than just blindly throwing money into an account. Or maybe you don’t want to cover everything and can do it a different way and contribute less.
The last thing I’ll say is that if you’re really, “I want to make an impactful legacy for them that will take care of them forever,” maybe you might consider something like permanent life insurance, which could leverage your money more than just giving money in their name today.
There are a lot of different things you can do, but I think taking care of yourself first is the most important tip, because once it’s in your name, you lose control of all of that.
Robert Brokamp: It’s definitely important to start saving for your own retirement first, and that doesn’t mean you can’t help with college later on. First of all, money in IRAs can be used for higher education purposes. You may pay taxes on it, but there are ways to avoid some of the penalties. If you’re saving for your retirement all the way through college, if you’ve done a good job, then while they’re in college you can take out the retirement savings and instead of that money going into the 401(k), it goes toward tuition or something like that.
But you have much more flexibility if you focus on retirement first. Then, when you get to college, you already have something saved. 529 plans are good. We’ve got them. I think most people in this room have them.
Southwick: We’ve got them.
Drill: And I don’t think it’s a bad idea to open one as soon as the child is born and just put in $100 every month, automatically, to start building it and have something there. But if you’re not saving anything for his retirement, then I’d avoid doing so, at least as a first step.
Southwick: What other mistake have you seen people make?
Meseca: The next mistake would be not planning ahead. Some of the things I described at the beginning are very long and boring processes, like redoing estate plans or applying for life insurance. Life insurance approval can take weeks. Making an estate plan takes months. And if you wait until the baby is born, you probably don’t want to deal with that because you have so many other things to do…
Southwick: There is so much crying.
Mesecca: There is a lot of crying.
Southwick: So much crying and laundry.
Drill: And that’s just the parents.
Surwick: Ah, the laundry!
Brokamp: But at least you sleep a lot.
Meseca: What I’ve seen most often is people who are parents of 10- or 15-year-olds saying, “Okay, we should probably do an estate plan.” Well, they should have done that 15 years earlier, but the fact is you have so much going on that you don’t want to deal with it or think about it because if it’s not taking care of a newborn, it’s adjusting to going back to work life and then dealing with all these new expenses. That four-figure attorney bill is not the most welcome thing. The more you can get ahead of that, the better it is.
Brokamp: And for people listening who don’t have children, but maybe have relatives who do have children or are about to have children, and are looking for a way to help them and help them financially, helping them identify a good financial planner or a good estate planning attorney (and maybe even pay for it), would be a big step forward because when you think about a young family, they don’t have time, they may not have money and, again, looking big at billing a financial planner or an attorney It may not seem like the best way to spend money from your perspective. But if you have the resources as a grandparent or parent of these children, it could be a big help to do it for them.
Mesecca: A simple recommendation to someone would be a big help, because as a first-time parent you probably haven’t worked with an attorney very often, I hope. Just trying to figure out where to start is a pain.
Southwick: And the last mistake I want to point out in today’s program.
Meseca: Don’t spend too much on your baby.
Surwick: What the?!
Messeca: They will get over it all very quickly. You will get a picture in the new dress and then it will be gone forever. Avoid that trap of thinking she will look cute in this so I need to buy her all these things. You will want that money in your emergency reserve for all the other things that come up in the future.
Surwick: What are some things you have done to avoid spending too much on your baby?
Meseca: I think we’ve done a good job of spending very little on things for her, because people like to give you things when you have a baby.
Southwick: Especially here at the Fool. They love passing clothes.
Mesecca: Yeah, we also got a nice care package from Fool in the mail, which was nice. But even family members buy you things or give you used clothes, so I think we’ve done a good job of benefiting from the people around us who just want the things they have in their house. We got a second-hand crib, a changing table, all these different things. As long as you’re okay with that, I think it’s a great way to proceed.
Southwick: We’ve had a lot of luck with consignment sales for kids’ clothes, toys, and furniture. We tried to buy Hanna new stuff as much as possible, and that was fine. We got a ton of kids stuff on Craigslist.
Drill: Free cycle…
Southwick: Free cycle.
Drill: …if that is active in your area.
Meseca: I feel like there are a lot of community groups on Facebook for new parents and everyone is happy to share. That’s probably a good place to look.
English: New things are for grandparents.
Surwick: Good!
Mesecca: That’s how it is.
Southwick: Grandparents, that’s your job. How about some resources for people to read more about how to be financially responsible with the baby?
Meseca: A good program (not necessarily to read more, but to help improve your finances) is Upromise. It is a program that helps you recover money for college expenses for every dollar you spend. They can link them to 529 plans, for example, and some of the sellers you’re already buying things from will give you a certain percentage of cash back toward a goal like college financing or student loan repayment.
Surwick: And that’s the letter “U” and then the word “promise.”
Meseca: Correct.
Southwick: Not you.”
Mesecca: Have you had any experience with Upromise?
Brokamp: I used my Upromise card.
Meseca: That’s good. In fact, I’ve seen the Upromise card out in the world more often, which means people are thinking about it.
The other option, because you’re starting to see how much you spend, is simply a budget tracker like Mint.com. If you haven’t used it before, I use it more retrospectively to see what I’ve done and see where my money is going, but just to make sure your spending is in line with what you thought it would be, which might also influence what your emergency reserve should be.
And the last one would be a fee-based planner. We’ve mentioned before that it’s good to work with a financial planner to see what your life insurance needs might be. What your budget should look like. Sometimes it’s hard to do that on your own, either because you don’t have the tools or the patience. Maybe it’s hard to communicate with your spouse about those things. So I think having a professional third party who can help you put that into perspective and look at the present versus the future path to retirement is a very valuable thing for almost everyone.
Dan Messeca is an employee of Motley Fool Wealth Management, a separate sister company of The Motley Fool, LLC. The information provided is for educational purposes only and should not be construed as individual advice. For individual advice, please consult a financial professional. The Motley Fool has a disclosure policy.
