Marketwatch: “The Top 5 Financial Mistakes Parents Make”

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Melissa Ouch, a financial planner in Glenview, IL says that parents tend to make the mistake of prioritizing college savings over more important issues such as life and disability insurance and retirement:

To help them prioritize, Osuch has a formula: The most important component is protection and insurance, followed by establishing an emergency fund, saving for retirement and then, finally, socking away money for college. 

Mistake #1: Buying the Wrong Life Insurance – Or None At All

It doesn’t cost that much to buy life insurance when you are young but it is really important to do so if you have young children.  You can buy cheaper term life insurance which covers you for a fixed term – for instance, until your youngest kid turns 25.  This is definitely worth the price and will make a ton of difference to your spouse and kids if something happens to you.

Mistake #2: Not Buying Disability Insurance

Again, if something happens to you that disables but does not kill you, you want to have money so that your family can live.  Disability insurance isn’t all that expensive when you are young and it’s well worth the peace of mind.

Mistake #3: Not Making a Will

Without a will, the state decides who cares for the deceased’s children and who manages their finances.

Yikes!

When parents put their wishes in writing, they make those decisions instead.

‘Nuff said.

Mistake #4: Not Saving for Retirement

Neglecting retirement savings also doesn’t do any favors for grown children, who could be faced with the burden of financing their parents late in life, said [Cicily Maton, a financial planner in Chicago, IL]

Mistake #5: Not Saving For College

Certainly, its a nice a thing to do to save a bit for your child’s college education.  Set up a Coverdell Account when they are young and put $1,000 or $2,000 in a year, which can be invested at your discretion.  This money grows tax free and withdrawals are tax free as well if they are spent on education.  If you find yourself falling behind as they get closer to college you can always set up a 529 Plan as well, which allows higher annual contributions than Coverdells. 

I do agree with the financial planners quoted in the article that this is the last priority.  The reason is that there is always the possibility of going to a cheaper, though still excellent, state school.  For instance, your kid can go to UC Davis for $8,300 a year.  If you’re really strapped, your kid could go to a community college for 2 years before transferring to a state school to get their degree.  A year at Sierra College, for instance, can be had for $524 a year.  Doing it this way, you could have an undergraduate degree from UC Davis for around $17,500.  Now that’s a deal!  Even 4 full years there would only cost around $33,000, definitely doable if you start saving early. 

And even if you don’t have enough when the time rolls around, you can get financial aid or take out attractively structured student loans: you don’t have to start paying them off until after graduation, when your kid can start working, and the interest rates are low. 

Obviously, it’d be great if you had a $130,000 to send your kid to Princeton (currently running $33,000 a year – or the cost of an entire education at UC Davis).  But if you don’t, there’s alot less to worry about here than if you don’t have proper life or disability insurance, or are not propertly saving for retirement.

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