To a young married couple getting ready to start a family, it may seem as if they have their whole lives in front of them. Of course, from a time standpoint they do; however, from a financial standpoint their time horizon is affected by each financial decision they make. Bad decisions or financial mistakes can shorten the time horizon if they are not quickly reversed. With so much at stake financially, young couples can’t afford to learn everything from hindsight; but they can learn from the mistakes made by others. These are the top financial mistakes many young couples who are planning a family tend to make:
Living without a Budget
With few responsibilities, newly married couples are able to enjoy their lives, often spending freely from the moment they start their honeymoon to the point in which they welcome their first bundle of joy. With the cost of raising a child approaching $300,000, young couples who fail to live by a strict budget, may find themselves struggling to achieve their most important financial goals. Expectant parents need to develop a realistic spending plan that accounts for the increasing costs of child rearing while ensuring their financial security; otherwise, they could end up in the same financial position as nearly 50 percent of today’s retirees who have little confidence in their capacity to create lifetime income sufficiency.
Living above your means
True, if you live on a strict budget, you are less likely to fall into this trap; however, young people are also more likely to buy on impulse, pay more than they should on cars and rent and clothes; and they tend to rationalize splurges with delusions of income increases that will eventually cover the costs. All you need to do is ask around. It doesn’t usually happen like that.
Not building a cash reserve
Stuff happens to each of us. And, when two people join in marriage, it can happen more frequently and in bigger slices. From medical emergencies, to losing a job, to major car repairs, unexpected expenses will arise, and without a cash reserve to pay for them, a couple will either have to go into debt or do without. The very first savings priority for a young married couple should be to build a cash reserve fund of at least six months worth of living expenses.
Living without a budget or beyond your means almost always entails the use of credit. For young couples planning a family, the moment they can’t afford to pay their credit card bills in full each month is the moment they are in trouble. Spending more than you have budgeted for and then making minimum payments on your credit card is the path to insolvency. At the very least, it’s a formula for potential financial problems. Few young families can afford to carry expensive debt, especially when they need to save for important financial goals. Credit cards should only be used for emergencies, or only when you know you can pay the balance in full each month.
Not watching where your money goes
You might think you’re living within your means, but it’s all the small expenditures we don’t account for that can add up and kill a budget. Things like ATM fees, buying soda by the bottle instead of by the case, buying that extra snack, throwing a magazine into the shopping cart, or taking an unnecessary trip in the car. These “insignificant” expenditures can add up to $20 a day if you aren’t watching. Budget for these extras each month and then stick the cash aside. Once you go through it – no more extras.
Not having financial goals
You have a lifetime ahead of you, so why the need to set financial goals? All you need do is ask one of the millions of Baby Boomers who are nowhere near close to having the capital to live another 30 years in retirement. It is never too early to start planning for retirement, but your financial future will also be muddled with plans to buy a house, to start a family, to send kids to college. Setting goals early will actually simplify your life because you shoot for one at a time.
Not saving from the start
The biggest asset young couples have is time. Yet, time is a wasting asset, it’s value declines with each day that passes. Not understanding how the time value of money works, can cost couples tens or even hundreds of thousands of dollars in lost savings. For example, if a young couple starts saving $400 a month right after they get married they could accumulate nearly $700,000 over the next 40 years. If they wait 15 years to start saving, they would need to save more than $300 a week to accumulate the same amount over 25 years. * Financial goals become more expensive, and less achievable when time is allowed to pass without saving for them.
Not keeping your job options open
If you have a job, you, of course, want to do everything you can to keep it. But, if you’re not constantly looking out for new opportunities, or having some backup plans ready, you could find yourself spending a lot of time between jobs. While you shouldn't strive to be a job-hopper, it’s important to recognize that only you have control over your job security, and it may not be with your present employer.
*Assumes an average 5 percent rate of return which cannot be guaranteed.
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