Budget Blunders

Lots of new parents get careless about family finances and make preventable mistakes. Don't let it happen to you.

Money Mistakes

When you're dealing with bottles, diapers, and sleepless nights, it's easy to put certain things on the back burner -- especially dull and boring things like financial planning. That's why lots of young parents make serious money mistakes -- just when it's more important than ever to get your finances in order. The good news: With just a little planning and attention, you can avoid these common blunders.

BLUNDER #1: Not getting the right life insurance

You probably already know how important it is to have life insurance to provide a safety net for your children. (And if you don't, you do now: Get to it!) But many conscientious parents don't have the right kind of coverage. "A lot of people are underinsured," says Tim Wyman, a financial planner in Southfield, Michigan. "They don't realize how much their families would need to maintain a similar lifestyle if the main breadwinner died."

A good guideline is to have seven to ten times your gross income in coverage when your kids are young. (If you make, say, $40,000 a year, you should be insured for $280,000 to $400,000.) Stay-at-home parents should have insurance too: Your family will need to provide for the cost of childcare and other expenses if something happens to you. Everyone's needs are different, so talk to a financial advisor or use a life-insurance calculator like the one at insweb.com/learningcenter to gauge precisely how much coverage to buy.

Most financial planners recommend buying a "term policy," which covers you for a set period like 20 or 25 years, instead of a "whole life" policy, which covers you for your entire life as long as you pay the premiums. (Whole life policies are often touted as a good savings and investment vehicle, but they usually aren't.) And term insurance is less expensive: A 20-year policy for $400,000 on a healthy 35-year-old costs about $400 a year, compared with a whole-life policy, which would run roughly $3,500 a year. Unfortunately, many people mistakenly assume that a little insurance for a lifetime is better than a lot of insurance for a temporary period. "It's really not," says Wyman. "It's more important that you have sufficient coverage, at least for the period when your kids are young."

Other Insurance Mistakes

  • Buying life insurance on a baby. It's really cheap, but unless your baby's a movie star, he doesn't need it. The main purpose of insurance is to replace lost income, and most babies don't have jobs.
  • Not having disability coverage. If you work, check with your employer to find out how much of your income is covered by disability: Often, it's only 60 or 70 percent -- and you pay tax on that income. If that wouldn't support your family, look into supplemental disability policies. (Note: Only income-earners qualify for disability insurance.)

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