The Biggest Financial Mistakes I See

May 10, 2019
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When it comes to finances, there are a whole host of mistakes you can make, some minor and some that have long-term consequences. The same can be said of parenting. When you combine money and parenting, then there’s no lack of problems you can encounter. Some of the biggest financial mistakes I see have to do with parents not intentionally teaching their kids about money and not setting them up for future financial success. But many financial mistakes parents make with their kids can be avoided with some forethought. Here’s how.

Enabling Or Equipping?

Most parents want their kids to succeed financially, but what many parents don’t realize is that building a strong financial foundation does not happen by accident; it takes intentionality. When your kids are young, you do everything for them, from tying their shoes to washing their clothes.

Since you spend so many years providing for their every need, it’s easy to go on autopilot and continue that pattern, even as they grow older and become more capable. When you do too much for your kids and don’t let them stretch their own muscles (i.e. fail and succeed at small things), you could hurt them down the road. Give them opportunities to manage their money while the stakes are low. As you work on your finances, let your kids in on the process to show them the importance of prudent money management.

Doing it all for them may seem like the easy way, but you don’t want to end up like one of the 79% of parents who provide financial support to their adult children—to the tune of an average of $7,000 a year! (1)

Lay The Foundation

When it comes to teaching your kids financial principles, it’s never too early to start. And if you think your child is too young to understand financial matters, think again. Researchers have found that by age 4, kids understand that money can be exchanged for goods, and by age 7, they understand spending and saving, and are already forming their own financial habits.(2)

How do you practically help your kids succeed financially? For one thing, teach them the difference between wants and needs. Give real examples of wants and needs to teach the basics of financial priorities, even as you go about daily life together. Show them wants you’ve had to say no to in order to take care of needs, and share with them the perks of having financial discipline, like living with less debt and having the freedom to pursue opportunities.

Secondly, let them practice. Teach them how to create and stick to a budget with their allowance and take ownership of saving for things they want. This not only imparts the value of money but gives them a framework with which to handle money as they earn more and pick up more financial responsibilities, like paying rent or owning a car.

Don’t Rob Your Retirement

Too many parents withdraw money from their various retirement accounts to help their children rather than see their kids burdened by student loans. Sometimes parents pause contributions into their retirement accounts while their children are in school in order to pay tuition bills.

There are three reasons why it is critical to avoid this mistake. First, except for certain circumstances, early contribution withdrawals from a traditional IRA or other pre-tax retirement accounts will result in a 10% penalty and taxes. Roth IRAs have more flexibility and allow you to withdraw contributions without penalty, but not without long-term consequences.

Second, and most importantly, when you draw from your retirement savings to cover college costs, you lose out on the growth potential. Depending on how old you are, you may never be able to rebuild your savings. It may seem convenient to use your retirement savings in this way, but you are robbing your future retirement to do so.

Finally, college is a huge learning opportunity for us with our kids, and what we teach them in the planning process could influence how our students handle their own planning. Use these pivotal young adult years to teach them financial responsibility. Have them contribute to their college costs by working part-time while they study or help them search and apply for scholarships that will lower their costs. This lets them invest in and take ownership of their college experience.

Invest Wisely

Most parents probably wish they could give their children more, and many use any extra income to pay for their kids’ wants. And while there’s nothing wrong with using some of your tax refund to get your child in martial arts classes or buy them that video game console they’ve been asking for, your own needs and wants matter too.

Just as airline attendants instruct you to put your own oxygen mask on before you put it on your child, be sure to prioritize investing in yourself. Besides, when you focus on your goals, it will help your children down the road. By purchasing a long-term care insurance policy or hiring a professional to help with estate planning, your children will not have to deal with the financial burden of taking care of your physical needs as you ageor muddling through paperwork and legal obstacles when you pass away.

If you want to use your extra money to bless your kids, how about paying for a family vacation instead? That way you can create memories and enjoy an experience that is more meaningful than any dollar amount.

Need Some Extra Help?

If you feel overwhelmed with the task of teaching your kids about money and are worried about making some of these mistakes, you probably agree with the 72% of parents who wish they had someone to help them.(3) Imparting financial wisdom to your kids is a challenging process that takes years. The important thing is to start the conversation, even if you don’t feel prepared. As your child grows and needs more in-depth financial knowledge regarding things like 401(k)’s, taxes, mortgages, or inflation, I can help. I want to partner with you to equip your children for a bright financial future. Find out what I can do for you and your kids by getting in contact with me at (949) 221-8105 x 2128 or michael.loo@lpl.com.

About Mike Loo

Mike Loo is an independent financial advisor with more than 20 years of experience in the financial services industry. His mission is to make a meaningful impact on the lives of clients and the people they care most about, help them make educated decisions with their money, and build a strong financial foundation for both themselves and their next generation. Mike is committed to meeting a high standard of excellence, taking the time to listen to clients’ needs, and designing strategies that aim to help clients save money and reduce debt. He seeks to fit a client’s investments into their life and educate them so they’ll understand their investments. To learn more about how Mike may be able to help, connect with him on LinkedIn, call his office at (949) 221-8105 x 2128, or email him at michael.loo@lpl.com.

Mike Loo is a registered representative for LPL Financial (LPL) and an Investment Advisor Representative (IAR) for Trilogy Capital (TC). Securities offered through LPL, Member FINRA/SIPC. Investment advisory services offered through TC, a Registered Investment Advisor. TC markets advisory services under the name of Trilogy Financial (TF), an affiliated but separate legal entity. TC and TF are separate entities from LPL.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

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(1) https://www.forbes.com/sites/nextavenue/2018/10/02/parents-support-to-adult-kids-a-stunning-500-billion-a-year/#3ce34565c877

(2) https://mascdn.azureedge.net/cms/the-money-advice-service-habit-formation-and-learning-in-young-children-may2013.pdf

(3) https://www.ml.com/the-financial-journey-of-modern-parenting.html