Stretching a $30,000 income isn't easy for Brittiany Dillon and her husband. Each month, gas and grocery bills alone eat up their disposable cash.
But when it comes to their 2-year-old daughter, the young parents -- she is 21, and he is 23 -- simply can't say no.
"You want your child to have this idyllic childhood and not say, 'My mommy never did this for me,' " says Dillon, a stay-at-home mom.
For their daughter's first and second birthdays, the couple threw bashes that set them back at least $600. Christmas gifts, planned to not exceed $50, somehow hit at least $300. That may not seem like a lot of money, but it's a fortune for the Dillons, who last year moved back in with family so they could make payments on their $30,000 credit card debt, accumulated after a failed business start-up. (They have since paid the credit card balances down to $13,000 and rented an apartment on their own.)
"We've done a lot of things (for her) we know we can't afford," Dillon says. "It's an emotional thing."
The Dillons aren't alone. When it comes to the kids, parents often let emotions rule over financial prudence. Often, that leads to financial mistakes most are embarrassed to admit.
Mistakes are commonParents, even those with generous incomes, overspend on birthday gifts, buy homes in the best school districts that leave them house-rich but cash-poor, or pay thousands of dollars in private-school tuition while carrying thousands more in credit card debt. School trips and lavish family vacations take priority over retirement savings.
"I'm fascinated by the universality of these mistakes," says Marie Claire Allvine, a certified financial planner in Chicago and a co-author of "The 7 Most Important Money Decisions You'll Ever Make." "The interesting thing with parents is, they're with the best of intentions, trying to do all the right things. And they stumble into errors."
In wealthy Westchester, N.Y., a couple earning $200,000 a year could barely afford the $2,500 fee that Kathy Boyle, a New York certified financial planner, charged for creating a plan.
"If you drive by their house in Westchester, their life seems like nirvana. They live in a $1.1 million home on a gorgeous road, with two luxury cars in the driveway," Boyle says. "But walking inside their financial house, it's in shambles."
Today, their 19-year-old son's college bills are paid by a generous family friend because they cannot afford them. Yet the mother stays at home with the 13-year-old daughter.
Boyle advised the mother to consider going back to work, but she declined, saying her daughter "needs her." The extra income could have helped the couple tackle their $20,000 credit card debt and maybe start a college-savings fund for their daughter.
Living beyond one's means -- so the kids can have the best -- is a common picture in the wealthy suburbs, Boyle says. It's also a particularly common scenario with divorced couples. Mothers often insist on keeping the house, even if they can't afford it, because they don't want to "uproot" their children.
"I can't tell you how many women tell me, 'I don't want to move to another school district. I've got to keep the kids steady.' And they don't realize that with no income, they may not be able to refinance if they need money down the line," Boyle says.
To be sure, such mistakes are so often rooted in family values that it's difficult, if not impossible, to override. That's OK as long as parents understand the trade-offs, says Elaine Scoggins, a certified financial planner in Seattle.
Telling parents they need to pay themselves first or else risk ending up penniless in retirement, Scoggins has found, often does the trick. "When they realize how they could affect their own independence and elder years, they become more motivated to cut back in other areas," she says.
Where things go wrongHere are four common mistakes parents make:
- Ignoring their retirements. "Every new parent seems to jump into 529 plans before their babies are sleeping through the night," Allvine says. "They don't look at the trade-offs in their own financial lives -- specifically getting themselves out of debt or funding their retirement -- as higher priorities than college education." Borrowing for school, after all, is easy and relatively cheap compared with other kinds of debt. Remember, the kids can always get student loans, while no one will give you a loan for retirement.
- A bedroom for everyone. "Somewhere in time, good parents decided every child needed a bedroom," Allvine says. "Bigger houses, bigger mortgages, bigger real-estate taxes. They all lead to longer commutes, the need for two incomes and, often, the AMT (alternative minimum tax). Along the way, they're convinced the house was a 'good investment,' not an expense, but they're trapped in these higher fixed costs, lowering both quality of life now and financial options -- retirement, debt payoff, the chance to quit or change a job -- down the line."
- Keeping up with the Joneses' kids. "Throughout the suburbs of America, there is a fierce competition for who can throw the most lavish birthday parties for their children," says Scoggins. "Renting ponies, carnival rides, etc., is a common scene. Setting the bar so high can destroy a child's appreciation of the fact that some of the best things in life are free and set him up for a lifetime of needing a high-cost lifestyle in order to be happy."
- Not teaching them about money. "Parents who are struggling themselves to get the most out of their money become terrible role models and teachers for their children," Allvine says. "Instead of preparing their children to be financially independent by the time they get to college, I see parents either overprotect or educate inappropriately. Tracking Disney's stock is not going to teach a child how to balance a checkbook, learn to be charitable or communicate some day with a spouse or partner."
This article was reported and written by Aleksandra Todorova for SmartMoney.
Published July 3, 2007