Young families want to start out on the right foot and for many that means addressing finances and developing a plan so finances help instead of hinder them in the years to come. Eradicating or significantly reducing debt is essential for young families.
But being beholden to debt isn’t the only mistake young families make. The following are a few common mistakes that young families focused on their future should avoid.
• Getting by without a budget. It’s possible to live without a budget, but that doesn’t mean it’s prudent. Living without a budget makes it hard to corral spending or to know just how much you’re spending each month.
When sitting down to establish a monthly budget, the task can seem daunting, especially if you have never before lived on a budget. The first step toward establishing a budget is to determine the monthly costs of necessities (mortgage payments, car payments, groceries, etc.) and then make a list of those things you spend money on each month that aren’t entirely necessary (cable television bills, dining out, and so on). This can help you trim some of those extra costs that can make it difficult to save for your future. The first couple of months living on a budget might be rocky and you might need to make a few adjustments along the way. But establishing a budget will make it much easier for you to meet your long-term goals.
• Failing to save money. Some young families feel their savings account is their home, the value of which they expect to appreciate considerably by the time they’re finished paying off their mortgage. Unfortunately, the housing market of the last several years suggests that homes might not be as great an investment as they once were. In fact, many homeowners have more debt on the property than the property is worth.
Though the prevalence of underwater mortgages doesn’t mean families should avoid buying a home, it does shed light on the importance families must place on saving money and avoiding the assumption that their home will finance their retirement. There’s no telling if the value of your home will keep pace with inflation over the next several decades, so it’s important to save money and keep saving as the years go by.
• Saving for college as opposed to retirement. Parents, of course, want their children to go to college and many would prefer that their kids won’t end up buried in debt to afford tuition. However, it’s not a good idea to make the kids’ college tuition a higher priority than your own retirement. Kids can earn scholarships to college, but no such scholarships exist to finance your retirement. If your child’s college savings plan is getting more of your money than your own retirement savings, reverse this plan immediately. You can still contribute to your child’s college fund, but don’t do so at the expense of your own retirement.
• Living above their means. Young families in which Mom and Dad both have strong credit scores and histories will find they’re attractive to prospective lenders. As a result, it can be easy for young families to fall into the trap of living above their means, whether it be buying a home that stretches their budget or a car that might be flashy but is ultimately unaffordable. This is a potentially dangerous situation to find yourself in, as the first unforeseen expense can have a devastating domino effect on your finances. Though it might be tempting, don’t live above your means.
Today’s families face a financial future that’s as uncertain as any in recent memory. That reality only emphasizes the importance families must place on making sound financial decisions that don’t put their futures in jeopardy.