Trading Off Your Financial Security For Your Kids
An article on SmartMoney starts by providing an example of a family living on an income of $30,000. The parents in their young twenties struggle to pay their monthly bills, but spare no expense when spending on their child.
For both her first and second birthday, the couple threw their daughter a birthday bash that set them back at least $600. Christmas gifts, planned to not exceed $50, somehow hit at least $300. That may not seem like a lot of money, but it’s a fortune for the Dillons, who last year moved back in with family so they could make payments on their $30,000 credit-card debt, accumulated after a failed business start-up.
The typical advice from financial planners is for the adults of the family to “pay themselves first.” Rather than spending lavishly on gifts and education for the kids, parents should first make sure their own retirements are secure. Is this another case of biased advice, where financial product salesman are looking after their own occupation by promoting investing for retirement?
I am sure industry self-preservation — a primal instinct — is at least a small part of financial advisory, but saving for retirement is also a form of self-preservation. But guess what, the desire to care for and protect offspring happens to be a primal instinct as well. So how can these seemingly opposite innate desires reconcile with each other?
Once you make the decision to have children, you’re accepting the responsibility of ensuring that every reasonable opportunity is available to them. In order for that to happen, it would require sacrifices of all kinds on the parents’ part: foregoing vacations, fewer all-night raves, and maybe even some retirement funds.
The SmartMoney article wants parents to avoid these mistakes:
* Ignoring their retirement. 401(k)s should come before 529s. Borrowing for education expenses is cheap compared to other debt, such as borrowing to fund a retirement.
* A bedroom for everyone. A big house can be a big mistake — not an investment, but a constantly cash-draining expense.
* Keeping up with the Jones’ kids. A fancier birthday party is a bad use of funds. Chances are an expensive party, while a fun experience, won’t be appreciated and won’t do anything to build character any more than a more reasonable event.
* Not teaching them about money. Yes, a solid financial education in the basics of money management is the parents’ responsibility, not the schools’. Most of this comes from modeling the appropriate behavior with money.
What is an acceptable trade-off between saving as much money as possible for yourselves while being able to provide as many opportunities as possible for your children?
Article comments
I am firmly in the save for your retirement first camp. If you can afford to save for both retirement and your child’s education, great but if you have to pick one, it should be retirement. This is what I teach in my classes and this is what I follow. However, there are some things you can do to start saving at least a little for education.
I recommend that everyone join Upromise. It’s free money and you don’t even need a kid to join. I’ve been saving for my child’s education for a few years now – now I just need to have a child. 🙂 You won’t make a million with this program, but it’s free money. Have your family sign up and when your kid starts making money, have them put a portion of it into the 529 account for their education to help build it up.
There is nothing wrong with a child paying for their education. Spend time with them to help them develop good study habits and outside interests that could help them get some scholarships.
IMO, kids should also go to a local community college for the first 2 years of school. The costs can be 1/10 the cost of a university and you get pretty much the same education – in some places better.
It’s an important issue and one people should talk about way in advance.
Great article. I’ve linked it as a Post of the Day
Two things to contribute:
It’s important to keep in mind with stuff like this is that the most expensive thing isn’t necessarily the best thing.
Secondly, I think people who do things like this are actually doing their children a disservice. When you kid graduates and gets an entry-level job, will he/she be able to afford the standard of living mom and dad have provided to date? Not likely. At least not without spending more than they earn.
Agree with all the comments above. Another issue I see with spending $600 on birthday parties, is that you’re teaching your kids from early ages that splurging money is OK.
I currently put $100/mo in my kid’s 529 and I’ll prob start putting more once I finish some auto loans (hate these auto loans)
I think get teased for not having the right stuff builds character. I’m personally glad in hindsight for growing not so well off. It taught me lessons, i value today.
Anything your child isn’t going to remember is worth thinking twice about: lavish birthday parties for kids under 4 or 5, expensive nursery furniture.
The other end of the spectrum is the things that are life-expanding, not just college, but piano lessons or kayak lessons or fencing lessons… though there is the peril of overscheduling.
To me the really tricky part is when your kids are old enough to feel envy or to get teased for not having enough stuff. I don’t want to buy into consumerism to that extent, but I also know what it’s like to get made fun of for not having the right stuff.
I think there’s balance to all of this. My parents made tons of sacrifices so that I could go the college I wanted to. They took on loans, but at the same time they didn’t throw me big parties. Parents should be putting some money into their 401k first before saving for College. But they shouldn’t be going on expensive vacations for themselves before they save for their kids colleges. Kids should be treated fairly within the family without special privileges but unselfishly.
There are many parents who do this. I am a firm believer in saving for a child’s college education from birth, but also feel your own retirement and household finances should be funded and in order first.
I don’t think the common problem is parents contributing to 529s instead of their 401ks, I think the problem is overspending on material goods for kids. Like that $600 party. If you make $30,000 a year and spend $500 on presents for one birthday, that sends a pretty confusing message. It says “My parents can afford to buy me expensive presents, they just don’t want to. See? They just bought me all these toys!”
Not exactly the appropriate model that you were describing. I wonder if any of those toys were put on their $30,000 debt? I think we now know why their credit card debt equals their yearly income.
Long ago I was working retail with a woman with 1 kid, and she spent almost $1,000 on xmas gifts. She made $5 an hour and her ‘boyfriend’ didn’t work.