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?
Published or updated June 7, 2007.