Raising a child and planning for their future is important—but don't forget about yours in the process. Here are financial mistakes to avoid and money moves to make instead.

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Raising a young child involves so many daily challenges, 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.

An image of crumpled dollars.
Credit: Getty Images.

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 certified financial planner at Southbridge Advisors in Marietta, 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 your retirement—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 59 1/2—or a traditional IRA, where 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 for a complete list of 529 offerings and your state's tax rules.

4. Overlooking eligible tax savings

Fast fix: Do your homework, and find tax breaks that apply to you.

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 $3,000 for each child, depending on your income), child and dependent-care credit (which covers up to 35 percent of the cost of daycare, pre-K, and day camp), adoption tax credit (up to $14,300 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: Your Guide to Every Tax Break the IRS Allows. To check out your family's eligibility for these, visit the IRS Credits & Deductions for Individuals page.

5. Taking a pass on a healthcare 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, chief of content officer at the American Retirement Association. 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 $2,750 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 $7,200 (family) or $3,600 (individual) tax-free, and invest the funds (which carry over indefinitely) if you don't need them right away.

Parents Magazine