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.)