4 Financial Mistakes Our Parents Make – and How to Avoid Them
It might – or might not – surprise you, but your parents aren’t perfect. And when it comes to finances? Your parents might have struggled with their finances while you were growing up. But just because your parents continually made – and might still make – money mistakes doesn’t mean that you have to follow their example.
Now that you’re an adult, possibly with children of your own, you don’t have to repeat history. While your parents might not have provided you with lasting financial lessons, you can still be a good money role model for your own children.
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Michelle Smith, CEO of New York City’s Source Financial Advisors, says that it’s important for today’s young parents to learn from the mistakes of their own moms and dads. Too many parents, Smith says, don’t pass on what is acceptable financial behavior to their children.
“Over the last 15 years, I see a big difference with how parents have dealt with kids and money,” Smith says. “What I see is that parents have stopped teaching their kids any financial habits at all. They don’t talk about money.”
Smith stressed the importance of avoiding a sense of entitlement when raising kids.
“We are raising a lot of entitled kids today who have no idea about the value of money,” she adds.” If they want something, they get it, without learning anything about the work that goes into acquiring that money.”
Here’s a list of the top ones. Avoiding the biggest mistakes our parents have long made and continue to make will provide a boost to your own finances. You might even pass along some money savvy to your own children.
Here are four money mistakes your parents make and how to avoid them:
Mistake No. 1: Always paying with plastic
There’s nothing wrong with using credit cards if you pay off your balance at the end of each month. But Bill Engel, senior vice president at Fort Pitt Capital Group in Pittsburgh, says that too many of our parents never did pay off those balances when they came due, and that’s a bad habit that they too often passed on to us.
How to avoid: Pay with cash instead.
“I always tell my clients to use cash as much as possible,” Engel says. “There is an emotional pain when you watch the cash in your wallet shrink. It makes you think twice about some purchases. That doesn’t happen when you use plastic.”
Mistake No. 2: Not saving for retirement early enough
Sally Brandon, senior vice president at Palo Alto, California-based Rebalance IRA, says that too many of our parents made the mistake of not saving early enough for retirement.
It’s easy to see how this mistake happens: Retirement seems so far in the future when you’re in your 20s. It might even seem far away when you’re in 30s.
But those who start saving for retirement — even small amounts — when they’re in their 20s? That’s a smart financial move, Brandon says.
How to avoid: Save for retirement as early as you can.
“Young people have time on their side,” Brandon says. “It is important for parents to show their own children the benefits of starting to save for retirement early. You can have more than $1 million saved by the age of 65 if you put away just $5,000 a year starting when you’re 25. That’s powerful to see how, thanks to compound interest, that money can grow.”
Mistake No. 3: Too much impulse-buying
How many times have your parents bought something simply because they wanted it, even if the flat-screen TV, laptop or car were far outside their budgets?
Jim McCarthy, certified financial planner with Directional Wealth Management in Morris County, New Jersey, says that impulse buying is a bad habit that too many children inherit from their parents.
How to avoid: Make a budget and stick to it.
“They don’t follow a budget,” McCarthy says. “They see something, like it and buy it. That impulse buying is a bad habit.”
Mistake No. 4: Keeping up with the Joneses
It’s easy to get jealous when the neighbor pulls a luxury car into the driveway next door. But acting on that jealousy can get you into financial trouble. Unfortunately, too many of our parents have done just that over the years, said Engel. They often buy the latest and greatest just because someone else they know has done the same thing.
When people buy items without saving for them, this is something that can cut into their savings, Engel said. It’s easy to pass this attitude onto younger generations, something that today’s parents have to be especially mindful of.
How to avoid: Think long and hard about whether you’ll need something before you buy it.
“My boys play little league baseball,” Engel says. “If you look at all the bats lined up for these kids, you’d be amazed. There are $250, $300 bats for kids who might never play beyond this year. That’s a bad financial decision. It sends a message to kids that if they want something, they should just have it, no matter if they have the money for it.”