Having a child join your family is wonderful and can yet feel overwhelming. There are hundreds of new decisions to make, and every one of them can weigh on you, as you want the absolute best for your son or daughter.
Finding a friend or relative who has been through the process and has the advice you need can be great. But, particularly when it comes to decisions around your finances, you may want to take that wisdom with a grain of salt. No one has all the answers, and even if your friends have the best intentions, they may have received misinformation themselves.
Here are a few of the "tips" around spending and finances that I've heard as a parent, and some of the actual downsides your friends may not know to mention.
College is Expensive—Save All the Money You Can in a 529 Plan
A 529 plan is a wonderful savings tool for parents, as it allows you to save money for your child's college education while taking advantage of certain benefits, such as reduced tuition costs or tax-free investment growth. There's nothing inherently wrong with 529 plans, and they can be a great choice, but you need to know the restrictions and potential downsides before jumping in fully.
First of all, if you choose a 529 Prepaid Plan, as opposed to a 529 College Savings Plan, you get to lock in tuition at current rates for a set of universities. But, if your kid decides to go to a school other than the set universities, that early investment may be significantly less valuable. Alternatively, if you choose a College Savings Plan, it can be critical to evaluate the plan you choose before putting any money in yourself. Some plans have higher fees and limited investment options that can negate a lot of the benefits of their tax-free growth.
And while it can be good to save more early on so you have more years of compounding growth, remember that if you withdraw the money or use it for nonapproved educational expenses, you'll face both income taxes as well as a 10% penalty on the withdrawal. Many 529 fans praise the plans, as they can be transferred to nearly any member of a family, for a variety of educational purposes. But if you don’t have another family member waiting to get back in the classroom, make sure you know you’ll likely be charged a penalty to use the money.
Buy in Bulk, or Off-Season, to Save on Kid Stuff
Oftentimes, singles have a lot of tips on how to save on baby basics: From pushing you toward a Costco membership, to tips on other places to get diapers in bulk, everyone has an angle on pinching pennies. At first, the ideas sound outstanding. If you're going to need hundreds of wet wipes and can pay significantly less by buying per-crate, why wouldn't you? A similar thought would be, “I know my kid will be cold in December, and winter clothes are half-price now, so it seems like the time to buy.”
Thankfully, my more experienced parent friends chimed in and helped me understand the unpredictability of even a baby's preferences. If one brand of wipes gives your kid a rash, suddenly you may have to not only throw out the crate you bought, but buy dozens more. Or what if your kid grows much faster than expected and those discounted winter jackets are unusable?
It can be very valuable over time to learn those tricks to save money, but doing it before testing a product out to determine if will work for your child is just a waste.
Save Money for Your Kids, and Teach Them to Save, With Life Insurance
Life insurance can be a great product for parents to purchase for themselves, as it provides peace of mind that your child and family will have assets to lean on if you pass away. Child life insurance, on the other hand, is, at best, questionable in value. Since children don't earn salaries, typically the only financial risk you face if they pass away is final expense costs, which come to around $10,000 on average. But children are also quite unlikely to die—people under 25 accounted for just 2.3% of deaths in 2015.
While children's life insurance policies are a form of whole life insurance, meaning there's a savings component that grows over time, the small policy premiums mean that money grows quite slowly. It's also subject to a number of fees and the death benefit is typically limited to around $100,000. So, while many of these policies are advertised as an investment in your child's future or a simple way to teach them to save consistently, the lesson for your children isn't great. Giving my kids an allowance and teaching them to save a portion each month sounds both simpler and cheaper, and it is actually a better money lesson.