Savvy Banking: The top 5 money mistakes parents make

Money, money, money.

It’s on our minds a LOT, right? How to budget it, thinking about whether we have enough to pay the bills that month, saving for a vacation.

Wouldn’t it be helpful if someone could tell us how to avoid some of the biggest money mistakes? Well, we’re in luck! Holly Wheeler of First National Bank of NWA is here to help in this new installment of Savvy Banking.

Click here to read previous Q&As with First National Bank of NWA which focus on money questions like how to save for your kids’ college, how to bank from your smartphone and deciding how much house you can afford.

Today’s question is: What are the top 5 money mistakes that parents make?

Children are a true blessing. They are our greatest responsibility, as well as the most important and expensive commitment we will ever make.

Based on a 2014 study, it will cost an estimated $241,080 for a middle class couple to raise 1 child for 18 years in the U.S. More than anything we want our children to grow up in a stable world, one in which they are physically safe, emotionally nurtured and financially secure.

The one thing that is certain for parents is that we will make mistakes, probably more than we care to mention and most of the time we don’t even realize we are making them until it’s too late.

When it comes to teaching children about money, there is no right or wrong way. All families are different and unique.

I bet it’s safe to say that many parents are guilty of making all or at least some of the following universal money mistakes with their children. Don’t feel bad if some hit a little too close to home. The good news is that they are all correctable…

1. Not teaching kids about money at an early age

Children listen and watch everything we do. It’s interesting and a little scary to think that we, as parents have so much influence over the relationship our kids have with money.

It may be surprising to learn that this starts during the early childhood years. Kids learn money habits earlier than most people realize. Many times parents don’t want their kids to have to worry about money or where it comes from. Let kids be kids and they can deal with finances when they are older. The problem with this theory is that when that time comes, it’s usually too late.

Teaching your kids about money and involving them in certain family financial decisions can go a long way in helping them understand the value of a dollar. The next time your child is begging for the newest Teenage Mutant Ninja Turtle toy or that Disney Princess Dream Castle, instead of saying, “We can’t afford it,” or “It’s too expensive”, help them to understand the other things that Mom and Dad have to spend their money on.

By teaching your children basic financial literacy, you are giving them a gift that could positively impact the rest of their lives. Without that basic financial foundation, your kids could grow up having trouble balancing a checkbook, writing a check, budgeting, or even saving money.

Spend * Save * Share

There is a lot of debate about whether or not you should pay your child for doing chores. On one hand, paying your kids to do chores could teach them that they only have to help if they are going to be paid. One the other hand, getting paid for work is how the real world operates.

Adults don’t get paid if they don’t work, so why not pay your kids for the “work” they do? Regardless of which side of the debate  you are on, giving children allowances is a good way to begin teaching them how to save money and budget for the things they want.

It’s important to set parameters. For example, Make sure your children know exactly what you expect from them in order to earn their allowance. Also, make allowance day a routine, kind of like a pay day. Give them the same amount on the same day each week.

When your child receives money for chores, birthdays or holidays, help them to divide the money into three categories: Save, Spend & Share. This will help to develop their budgeting skills and teach them how to save, which will hopefully follow them through adulthood.

Paper or Plastic

Ah, who doesn’t love the convenience of the beloved credit cards and debit cards. Studies have shown that people spend 30% more when they use cards instead of cash.

Paying with plastic makes it easier to ignore how much you are actually spending in the moment and can lead to more impulse buys. And yes, that study even includes debit cards. We’ve all heard the warnings about avoiding credit card debt, not spending more than you make or have in your budget, etc.., but have you thought about the bad example you could be setting for your children when you pay with plastic?

When kids see that small magical card being swiped, it’s hard for them to comprehend that money is actually being exchanged for your purchases. It’s important for children to understand that when we buy something, the money that is spent is actually gone.

As inconvenient as it may seem, try using cash for everyday purchases, even if it’s only for a few weeks. Using cash is a good alternative because it gives your child a visual idea of how money works.

However, let’s be realistic, the majority of us will continue to use our precious plastic, and that’s okay. Just take some time to explain to your kids that the transaction is actually taking money from your bank account, or that it creates a bill that has to be paid as in the case of a credit card.

2. Giving your kids whatever they want

Have you ever found yourself shopping with your toddler when all of the sudden you want to crawl in a hole because your child is throwing the fit of a life time while lying on the floor of the toy isle screaming because they “need” something that you know they will lose interest in by the time you get home? This has happened to me more times than I would like to admit.

The easy thing to do is just give in; whatever it takes to calm them down and get out of there with the least amount of embarrassment possible.

It’s Okay to say “No”

It seems that many parents today believe that in order to be a good parent they have to say “yes” to everything. We see it a lot with parents who didn’t have much growing up, so they want their kids to have what they want when they want it.

Unfortunately this does much more harm than good because it creates entitled children who expect everything to be handed to them. They come to expect that instant gratification is normal and this can set them up for a lifetime of disappointment and unrealistic expectations.

Unfortunately this becomes a hard cycle to break. Many adult children continue to expect their parents to fund their life, and the cycle of entitlement continues…..

There is nothing wrong with buying occasional gifts or surprises for your children, as long as it’s on your terms and not theirs.

3. Setting a bad example

How can parents expect their children to value money and save for the future when they don’t do it themselves. Kids mimic everything we do. Our bad habits can quickly become their bad habits.

Save * Save * Save

We all know that we should save money.

Most financial planners recommend having at least three to six months of living expenses set back as an emergency fund or a rainy day fund. This makes sense, but sometimes it’s difficult to come up with a practical way to do it. A highly effective way to contribute to your savings account is to have your paycheck directly deposited to your bank.

Most employers will allow you to split your earnings into multiple accounts. You can start slow by having a couple hundred dollars from each pay check deposited directly into your savings account. It’s out of sight and out of mind. As you get pay increases, you can increase the amount that goes to savings.

First National Bank of NWA proudly offers a service called Save the Change. Every time you swipe your First National Bank of NWA Debit Card, your purchases are rounded up to the next whole dollar amount and the difference is transferred into your savings account.

Teach your kids to save money by making it a visible habit you all participate in. For example, keep a jar in your kitchen and label it for an event your family wants to save up for and put spare change in the jar on a regular basis.

It may seem a little old school, but kids are visual learners and hopefully a simple project like this could lay a foundation for them to be savers as adults.

Stop Playing the “Keep Up” Game

A big problem we see today is families living outside of their means. There will always be someone with a nicer home, fancier cars, cuter clothes and those that take multiple vacations each summer. Unfortunately these things are being thrown in our face constantly through social media. It’s hard sometimes not to focus on the things you lack, but it is so important not to compare yourself to everyone else and remember to be thankful for what you do have and what you can afford. If you continue to play the “keep up” game, you will find yourself in a pile of debt that you could possibly spend the rest of your life digging out of.

4. Delaying Saving for College

The future is now and it’s NEVER too early to start saving for your child’s college education. According to the College Board, for the 2014/2015 school year, the average cost of one year at a four-year public college is $23,400 (for in-state students), while the average cost for one year at a four-year private college is $46,300 (these costs include tuition & fees, room and board, books, supplies and transportation). Even if these numbers don’t go up, that would come to $93,600 and $185,200 respectively for a four-year degree (and college costs have increased each year for decades). Oh, and don’t forget about graduate school.

Prepare * Prepare * Prepare

Sure we all dream of our kids following in the footsteps of Peyton Manning or Serena Williams. When your 5 year old is the best T-Ball player on his/her team (in your opinion), you might think that they will be the next Derek Jeter. Let’s step back to reality and remember that he’s 5 and it’s T-Ball! The odds are slim to none. There are a lucky few that will receive scholarships, either athletic or academic, but it’s best not to count on it. Start a college savings fund as soon as possible. Visit with your financial advisor to determine what type of account to invest in. The two most common are the 529 College Savings Plan account and an UTMA account, which were discussed in detail in the April 29, 2015 article (Insert Link). By starting today, you can help your children become debt-free college graduates. Save a little each month, take advantage of compound interest, and have a sum waiting for you when your kids are ready for college.

5. Losing Focus on Your Financial Future

Don’t Forget about your Nest Egg

With college approaching sooner than retirement, you might be more inclined to skimp on your own nest egg. This isn’t good for anyone. Financial experts say that the goal should be to save at least 10% (or more if possible) of your income for retirement. Aim to save at least this much in a tax-advantaged retirement account, such as your employer’s 401(K) plan, and be sure to take advantage of any matching opportunities they may offer. If you are self – employed, consider setting up a Simplified Employee Pension (SEP-IRA).

By putting more cash into your retirement savings, you may actually improve your child’s chances for college loans and scholarships. Schools don’t count money that is invested in retirement accounts, like 401Ks and IRAs when calculating need based financial aid.

Plan / Review / Update

I saved this one for last, because nobody likes to think about death, much less their own death. However, being prepared and planning for the unexpected could be the biggest gift you give your family. Start with the basics by putting together an Estate Plan – Everyone should have an estate plan, regardless of the value of his / her assets. The purpose is to plan for the future, both yours and your family’s. You will need a will so that you can name a guardian for your children (this is quite possibly the hardest conversation you will have with your spouse) and to make sure your assets will be distributed accordingly. Also consider preparing a living-will, as well as a health-care proxy and a durable power of attorney, which allows you to designate someone to make medical and financial decisions on your behalf if you should become incapacitated. Depending on your financial situation and your family dynamic, a trust may be appropriate. Contact an attorney that specializes in estate planning to help you through the process. Their price will range depending on the complexity of the estate plan.

This seems to be the thing that most families put off because it’s hard to get excited about it. I cannot express how important this is for your family, so take a deep breath, suck it up and get the process started. You will feel a huge weight lifted off of your shoulders once you know that your family is protected.  Important to Note: Once you take the time to go through the dreaded process, you will need to review and update it if necessary every few years.

Lastly, you will want to make sure you have enough life insurance. Many employee benefit plans include life insurance coverage, as well as supplemental coverage that you can purchase, and in some instances you can purchase small policies on your spouse and kids. It’s a good idea to take full advantage of these benefits as the premiums are typically less expensive than a term policy offered by most insurance companies. Many insurance experts suggest having enough life insurance to cover 10 times your annual salary. It’s a good idea to contact your insurance agent to make sure you are adequately covered. Don’t wait! The younger and healthier you are, the lower your annual premiums should be.

Holly Wheeler is a Vice President and Private Banking officer for First National Bank of NWA She has 14 years of banking experience in the NWA market. She obtained her bachelors degree from the University of Arkansas and is an Honor’s Graduate from the Arkansas Bankers Association’s School of Lending. She is a Sustaining member and past board member of the Junior League of NWA, as well as the treasurer for both the NWA Delta Delta Delta Alumni Association and Housing Corporation. She is the proud mom to her sons Ross and Charlie and wife to her husband Britton.