Raising a young child involves so many daily challenges that it's likely you have little free time to think about your financial future. But failing to do so can cost you and your family big-time. These five young-parent mistakes are the most crucial ones to address ASAP.
1. Living without a safety net
Fast fix: Set up an emergency fund.
Do you have enough cash tucked away to pay bills and cover your living expenses if you or your spouse lose your job? If not, make it your top financial goal to open a savings account and transfer a minimum of $25 every paycheck (and more if possible) via direct deposit, says Jane Nowak, a financial planner in Smyrna, Georgia. She recommends building a cushion of at least three months, and six months or more if only one parent works. That should buy you time while you look for a new job or help if you have an unexpected home repair or a medical crisis.
2. Ignoring your retirement
Fast fix: Start saving for 2050 -- today.
Too many parents squirrel away money for college while ignoring retirement planning. Do the opposite. "You can borrow money for your kid's tuition, but not for your retirement," says Kelly L. Higgins, founder of Lautus Wealth Advisory, in Troy, Michigan. She suggests allocating funds from each paycheck toward your golden years. If you have the option, choose a 401(k) account, since many employers will match a portion of your contribution. If not, pick a Roth IRA (the investment earnings are tax-free after age 591/2) or a traditional IRA (eligible contributions may be deductible, and the money isn't taxed until you withdraw it).
3. Opening a savings account in your child's name
Fast fix: Pick a 529 plan.
When Grandma writes you a check for your child's future education, it's tempting to open a custodial savings account on your kid's behalf. Here's why you shouldn't: You can't access the money if you need it, the account's earnings are taxable, and the balance will count against your financial-aid eligibility, says Gregory Meyer, community-relations manager at Meriwest Credit Union, in San Jose, California. Instead, put the money in a 529 college-savings plan. The money grows tax-free as long as you use it toward eligible college expenses. Plus, some states offer an up-front tax deduction. Visit savingforcollege.com for a complete list of 529 offerings and your state's tax rules.
4. Overlooking eligible tax savings
Fast fix: Do your homework.
You probably know about the personal exemption of $3,950 per child but might miss out on some less-obvious breaks. These include the child tax credit (up to $1,000, depending on your income), child- and dependent-care credit (which covers up to 35 percent of the cost of day care, pre-K, and day camp), adoption tax credit (up to $13,190 to cover fees, court costs, and travel expenses), and tuition for special-needs students (the tuition and other unreimbursed medical expenses must exceed 10 percent of your adjusted gross income), notes Jeff Schnepper, author of How to Pay Zero Taxes 2014. To check out your family's eligibility for these, go to irs.gov/Credits-&-Deductions.
5. Taking a pass on a health-care flexible spending account (FSA)
Fast fix: Sign up and save big.
Most large companies let you set aside pretax dollars to use toward out-of-pocket medical expenses. Yet only one in five employees take advantage, in part because they're spooked by the "use it or lose it" nature of most FSAs, says Nevin Adams, director of the American Savings Education Council. His solution: Add up your prescription, vision, doctor, and dental expenses from the previous 12 months, then allocate that amount (up to the annual FSA maximum of $2,500 per year) at open enrollment. This simple move could save you 20 to 50 percent on eligible health and medical services. And if you're in a high-deductible medical plan, a Health Savings Account (HSA) is even better: You can contribute up to $6,550 tax-free and invest the funds (which carry over indefinitely) if you don't need them right away.