Becoming a parent often changes your financial priorities and how you spend your money. You want to provide the best for your child but it’s easy to make financial mistakes even with the best intentions. As a financial educator, there are some pitfalls I’ve noticed recurring throughout the years.
Keeping up with the Joneses
Facebook can be a driving force in sabotaging our savings. All day, we are presented with images of what other parents are doing for their kids: birthday parties, gifts, vacations, clothes and activities that always seem better than what you’re able to offer. Wanting the best for our children, we often react by trying to match what we see. The problem? Us British Columbians have the highest level of consumer debt in Canada and in many cases have gotten there spending beyond our means to try and keep up with those around us. One day all this competition will catch up with you! Don’t spend to impress the people who matter the least, at the expense of those who matter the most.
Overemphasizing the RESP
Many new parents rush to start a Registered Education Savings Plan to save for their child’s schooling. It’s a good idea – because the federal government contributes to the plan when you pay into it but RESPs shouldn’t be prioritized for RRSPs. Just like we’re told to put on own oxygen mask on before helping someone else, we need to make sure we’ll have the funds to cover our retirement before we worry about paying for education. There are many more options available to help fund education than you have for retirement.
Not Stress Testing your Home
When you have kids, often your income goes down and your expenses go up. I advise my clients to stress test their budget before upgrading their home. (A stress test is basically a cash flow analysis of monthly income vs. expenses.) This way, they can feel comfortable they’ll be able to afford it if their situation changes. Housing should make up no more than 35 per cent of your gross income. I know this is tough in the Vancouver area but sticking to this figure helps give you a buffer for if interest rates go up.
Buying too much car
As your family grows, you may need a bigger vehicle, but that doesn’t mean it has to sabotage your finances. Don’t drop $40,000 on a fancy new car if you’re struggling financially in other areas. The sweet spot in terms of reliability and value that I recommend is shopping for a used car about 4 to 8 years old with approximately 10,000km/yr. This way, you’re not on the hook for that new car depreciation and you still should have years of good driving.
Not Having Enough Insurance
If seatbelts were an optional feature in a car costing $1000 per belt, would you buy one for your new baby? Or, would you save the money and just hope for the best? Of course you would buy one for all passengers because accidents happen and it’s the responsible thing to do. Insurance is the financial seatbelt for your family. Insurance isn’t a popular topic because most of us already feel like we have too much. We always seem to be paying car insurance, home insurance, travel insurance, etc. What we often forget is when you have a child they are dependant on your income for the next 20 years. If anything happens that prevents you from working, your children suffer. Most work insurance policies don’t provide sufficient life and critical illness insurance. It’s important to do an insurance review with an advisor who can guide you through what you really need to have covered.
Christian Dy will be offering an online financial workshop that walks you through the basics of buying real estate, investing, managing debt and saving for retirement. It will be available next month and we’ll be sure to post the details here!
About the author:
Christian Dy is the senior advisor at Latitude-West Financial. For past 10 years, he has been giving workshops to new couples and graduating students from UBC (Medicine, Dentistry, Law, Education, Business) helping them to understand their financial options before transitioning into their next stage of life. You can visit his website to sign up for his upcoming workshops.