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As a parent, you need something else to worry about (or do) like you need one less hour of sleep.
So let me apologize before you read anymore – I’m Sorry because this article is about personal finance mistakes:)
Unfortunately, when it comes to personal finances, many families ignore important aspects of the subject. It’s not that you do this intentionally, life just gets in the way, and your financial plans get placed in the proverbial “junk drawer” left to worry about some day.
This type of some day thinking is what Benjamin Franklin meant when he said, “If you fail to plan, you are planning to fail” and this is what leads to your personal finance demise.
Often, the mistakes most parents make with financial planning are straightforward and easy to fix. However, when you ignore your finances, it can ruin you and your family’s financial life.
6 Personal Finance Mistakes Most Families Make
Preparing for the Inevitable (death)
No one likes to discuss death (especially when you think there is a possibility you won’t be around to see your children grow up), but it is one of those unfortunate things that could happen.
As a mother or father, it is your responsibility to ensure your family will be taken care of financially and physically if you are not around. The way to make this happen is to have adequate life insurance and a Will in place. Not preparing for death is the worst personal finance mistake most families make.
There are usually a few questions people have about this topic:
Question 1: How much life insurance do I need, what kind should I buy, and how much does it cost?
Determining the amount of life insurance is usually the number one question people ask. A good rule of thumb or starting point is to take your salary and multiply it by 20. Then buy a term policy for that amount.
If you earn $50,000 a year, then you would want at least a $1,000,000 policy.
Personally, I think term life insurance is an excellent option for 90% of people. However, I also believe there is a time and place for whole-life insurance. To understand the different types of insurances NerdWallet wrote a great article about them.
The cost to protect your family is very minimal. I pay less than $50 a month as 37-year-old male for a $1 million term policy (I also have additional insurance through work). The premium (cost of insurance) will be determined based on your age, sex, and health. MoneyPropeller.com wrote an informative article about how much life insurance costs.
Question 2: What is a Will and How Much does it Cost?
A Will is essential to your financial plan because it ensures your final wishes are carried out.
One of the biggest reasons parents need a Will is because this document names who takes care of your children if something happens.
Some of the things a will does include:
- Names an executor
- Names guardians for your children and their property
- Decides how debts and taxes will be paid
- Serves as a backup to a living trust
You can get a Will drafted by an attorney or online. Personally, I used GivingDocs.com to create a Will for my family. The cost is going to be a few hundred dollars and up depending on how you build yours.
Guessing Your Retirement Number
According to a recent Transamerica Retirement Survey, 47% of workers guess their retirement number! When I read that statistic, I almost cried.
How can you possibly guess how much money you need to save for retirement? Nearly 1/2 the country has no idea how much money they will need for retirement. They don’t know if they to save $500,000 or $2,000,000.
Luckily, this is an easy fix. There are three ways to calculate how much you need saved:
1) Figure out how much money you spend (not make) and multiply it by 20 (This is the Lazy Way, but better than guessing)
If you spend $75,000, then you will need $1,500,000 saved for retirement. Once you calculate a 4% withdraw rate plus social security, you should safely replace your income.
2) Use an online calculator
A great calculator to use is from SmartAsset. This calculator asks you to input some variables and then gives you a solid number for retirement.
3) Work with an Advisor
The best way to know your retirement number is to work with an advisor. They will ask you an extensive list of questions and then run calculations to show you how much you when you retire.
When it comes to investing money, most people blindly buy mutual funds and ignore the costs. The cost of owning some mutual funds can destroy your savings; sometimes adding ten years to your working life just to save for retirement.
According to Forbes, the real cost of owning mutual funds can exceed 3.00%. If you have $100,000 in a mutual fund, then you could be paying $3,000 a year in fees and expenses. These charges will destroy your potential earnings.
The cost of owning a $50,000 mutual fund with 3.00% in expenses and fees and 8% return will cost you $287,000 over 30 years! This amount of money could be 4-6 years worth of retirement income.
Instead of investing in mutual funds because that is what the “experts” tell you, consider index funds. Check out my article on How to Invest Better than 90% of Investors to learn how to save money with your investments.
It is easy to wait to invest when you have kids. You have bills you want to pay off, things to buy, and little extra disposable income.
However, every day you wait you are losing the power of compound interest. This concept is what Warren Buffet owes a lot of his wealth to; he said, “My wealth has come from a combination of living in America, some lucky genes, and compound interest.”
Compound interest is when your interest earns interest and it is easily the most powerful personal finance tool. The sooner you start investing, the longer your money earns interest.
If you wait five years to start investing $500 a month earning 8% a year, then you will miss out on $241,000. When you wait ten years, then you will miss out on $405,000!
The numbers don’t lie! Waiting to start investing money hurts your long-term savings goals. You just can’t make up the power of compounding interest. Start investing today!
Not Taking Advantage of Your Company’s Match
Over the past few decades, employers have dropped company pensions for 401(k) plans. This move has left you in charge of planning for retirement rather than your company.
Luckily, many companies offer a match. A match is when you contribute to your retirement plan, and your company matches a certain percentage.
A relatively common match is $1 matched for every $1 an employee contributes up to 6%. So if you earn $50,000 and contribute $3,000 (6% of your salary), then your company will add $3,000.
BAM – a 100% return! It doesn’t get much better than that!
When you invest more than 6%, your company won’t match anymore. If you only contribute 5%, then they only match on 5%.
As you can see, a company match is great. The only problem with a company match is according to a study by Financial Engines, 25% of employees don’t take advantage of the full match.
You earn $75,000 a year and only contribute 3% of your income. In this case, you would miss out on saving an additional $2,250 of your money and get the equivalent match or a total of $4,500.
When you do this for 20 years, assuming an 8% return, then you missed out on an extra $205,928 in your retirement accounts.
That is a huge mistake.
Multiple Sources of Income
One of the biggest personal finance mistakes most people make is only having a single source of revenue. It’s important to have multiple sources because life is unpredictable.
Income diversification is a term more people need to understand and implement in their life. Warren Buffet said, “Never depend on a single income. Make investment to create a second source.”
To further push this point, the average millionaire has seven sources of income. I don’t have seven sources, but I am trying. Currently, my sources of income include:
This year, my goal is to expand my sources of income and create more passive income. I look to accomplish this with books, journals, and more courses.
If you are looking to earn more income, check out my FBA B-School course (use code 50off to take $50 off the course) where I share how to set up an Amazon business and how I make an extra $500-$2000 a month part-time.
Some of these financial mistakes can be devastating to you and your family. However, with a little planning and knowledge, you can avoid them.
What are some more personal finance mistakes you think I missed?
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