Nobody needs to be told that babies are expensive. Numerous organizations publish regular reports revealing what the average cost is to raise a fresh human from infancy to independence, and there are online calculators, too -- but those figures are frankly nonsensical. It's not a case of your mileage "may" vary, it's a case of your mileage "will" vary. How much? Well, however much you can afford, figure it'll probably be about 10% more than that. But that's life -- literally. All of which leads to the inescapable conclusion that most folks could probably use all the help they can get when it comes to setting up their finances for parenthood. So for this Motley Fool Answers podcast, co-hosts Alison Southwick and Robert Brokamp have invited a special guest to help them dole out those details: Dan Messeca, a financial planner with Motley Fool Wealth Management.
In this segment, Messeca reveals a trio of common personal finance blunders you'll really want to avoid -- one that likely stems from lack of time, and two that are driven by unfettered affection. Plus, he offers some directions toward resources that can help parents keep their budgets from running off the rails.
A full transcript follows the video.
This video was recorded on March 12, 2019.
Alison Southwick: Let's move on to some mistakes that you've perhaps seen people make in your career as a financial planner.
Dan Messeca: The biggest mistake I've seen time and time again, working mostly with people approaching retirement, is folks who've saved very aggressively for their children, in particular as it relates to college funding, but skipped out on their own retirement savings in place of that.
The most recent example I can think of is someone who had, I think, four children each with six-figure savings accounts that were in their name personally or in a 529 plan. And that person's retirement plan was less than some of the value of their kids' plans.
And they were hoping for an early retirement. That's just not in the cards for them anymore, because they've lost all that compound growth that they could have had over the years by giving something to their children, which is noble, great, and set them up really well; but, that just means that they'll be working longer than they wanted to, as a result of that.
Southwick: What are some ways that you can prevent that? Obviously paying yourself first, to some extent. Putting money in a 529 plan? Keeping the money in your own name rather than putting it in your kids' accounts? Are there different ways that you can hedge a little bit and have flexibility in the savings?
Messeca: First is making sure that you're maxing out your retirement plan. If you're doing that and then giving something to your children, you're probably on the right track already.
Identifying what exactly your goal is for them. If it's to cover college costs entirely, at least you might have a target for what that's like, instead of just blindly throwing money into an account. Or maybe you don't want to cover everything and you can do it in a different way and contribute less.
The last thing I'll say is if it really is "I want to make an impactful legacy gift to them that would take care of them forever," maybe you can look at something like life insurance on a permanent level, which could leverage your dollars more than just giving money in their name today.
There are lots of different things you can do, but I think take care of yourself first is the biggest tip, because once it's in their 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 then help out with college later. So first of all, the money in IRAs can be used for higher education purposes. You might pay taxes, but there are ways to avoid some of the penalties. If you save for your retirement up until college -- if you've done a good job of that -- then while they're in college you can back off from the retirement savings and instead of that money going into the 401(k), it goes to tuition or something like that.
But you have much more flexibility if you focus first on retirement. Then when you get to college you have something there already saved up. 529s are good. We have them. I think most of the people in this room have them.
Southwick: We have them.
Brokamp: And I don't think it's a bad idea to open one up as soon as the kid is born and just put $100 every month, automatically, to start building that up to have something there. But if you're not saving for your retirement at all, then I would avoid doing that, at least as your first step.
Southwick: What's another mistake that you've seen people make?
Messeca: The next mistake would be not planning ahead. Some of the things I described early are very long and boring processes, like getting your estate plans redone. Applying for life insurance. Life insurance can take weeks to get approved for. An estate plan took months to do. And if you wait until after the baby comes, I would probably not want to deal with it because you have so much else going on...
Southwick: There's so much crying.
Messeca: There's a lot of crying.
Southwick: So much crying and laundry.
Brokamp: And that's just from the parent.
Southwick: Oh, the laundry!
Brokamp: But at least you get a lot of sleep.
Messeca: What I've most often seen is folks who are the parents of 10-year-olds or 15-year-olds saying, "OK, we should probably do an estate plan." Well, they should have done it 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 back to work life and then dealing with all these new expenses. That four-figure attorney bill isn't 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 kids but maybe they have relatives who do have kids or are about to have kids, and you're 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 paying for it), would be a big step forward because when you think of a young family, they don't have time, they may not have money, and again, to be looking at big bill for a financial planner or an attorney just may not seem like the best way to spend money from their perspective. But if you have the resources as grandparent or a parent to these kids, it might be a big help to do that for them.
Messeca: Just a recommendation to someone would be a big help, because as a new parent you probably haven't worked with a lawyer very often, hopefully. Just trying to find out where to start is a pain in the neck.
Southwick: And the last mistake you want to call out on today's show.
Messeca: Don't overspend on your baby.
Messeca: They will outgrow everything real fast. You'll get one photo in the new dress and then it's going to be gone forever. Avoid that trap of thinking she's going to look cute in this so I need to buy all of these things for her. You'll want that money in your emergency reserve for all the other things that will come down the pike.
Southwick: What are some things that you guys have done to not overspend on your baby?
Messeca: I think we've done a pretty 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 to hand down clothes.
Messeca: Yes, we got a nice care package, too, from the Fool, in the mail, which was nice. But even family members will buy you things or give you hand-me-downs, so I think we've done a pretty good job of benefiting from the people around us who just want the things out of their house. We got a second-hand crib, a changing table, all these different things. As long as you're OK with that, I think that's a great way to go.
Southwick: We had a lot of luck with going to consignment sales for kids' clothes, toys, and furniture. We tried, as little as possible, to buy new things for Hanna, and it was fine. We got tons of kids' stuff on Craigslist.
Brokamp: ...if that's active in your area.
Messeca: I feel like there are a lot of Facebook community groups for new parents and everyone's happy to share. That's probably a good place to look.
Engdahl: New stuff is for grandparents.
Messeca: That's right.
Southwick: Grandparents -- that's their job. How about some resources for people to go read more about being financially responsible with baby?
Messeca: One good one (not necessarily to read more, but to help improve your finances) is Upromise. It's a program that helps give you money back toward mostly college expenses for every dollar that you spend. They can link those up with 529 plans, for example, and some of the vendors from who you're already buying stuff will give you a certain percentage of cash back toward an objective like college financing or repaying student loans.
Southwick: And that's the letter "U" and then the word "promise."
Southwick: Not "y-o-u."
Messeca: Have you had any experience with Upromise?
Brokamp: I've used my Upromise card.
Messeca: That's good. I've actually seen the Upromise card out in the world more often, which means that people are thinking about that.
The other one, because you are starting to look at how much you're spending, is just a budget tracker like Mint.com. If you haven't used that before, I use it more retrospectively to see what I've done and see where my dollars are going, but just to make sure that your spending is in line with what you thought it would be, which might influence what your emergency reserve should be as well.
And the last one would be a fee-based planner. We referenced earlier that it's good to work with a financial planner to see what your life insurance needs might be. What your budget should be like. It's sometimes hard to do that on your own either because you don't have the tools or patience. Maybe it's hard to communicate with your spouse about those things. So having a professional third party who can help put that into perspective for you and look at today vs. down the road toward retirement I think is something that's very valuable to almost everyone.