Where to draw the line between providing for your children and saving for your own retirement.
Some parents think they’re Superman. Determined to set their children off on the right foot, they commit buckets of money to helping them achieve their goals. From private schools to smartphones, laptop computers and post-secondary education, even home down payments and on-going financial support, parents will dig deep to buffer their young’uns. Hey, I’m all for meeting your responsibilities to your children. After all, they didn’t ask to be born (or so I’ve been told). But some parents take “helping the kids” a tad too far.
When it comes to using your financial resources smartly, one of the trickiest aspects to master is balancing priorities. You want to provide a great place for your family to live. You want to create opportunities for your kids to have mind-expanding experiences. You want to plan for the future.
Planning for the future includes saving for school, getting the mortgage paid off, having some money set aside for retirement.
But how will you decide how much goes where?
Lesson No. 1 has to be living within your means. If you’re taking on any debt at all, that’s got to be the first to go. And if that means no more piano lessons, so be it. Some things are a little important; some things are very important. Being consumer debt free falls into the latter category. And living within your means is the basis for all the rest.
When it comes to deciding whether to pay down the mortgage or set aside savings, the timeframe you’re looking at has the greatest impact. When you took on the mortgage, you chose an amortization of, let’s say, 25 years. As long as that amortization gets you to mortgage free before you retire, stick with the mortgage payments and build your savings for the future. Unless you plan to sell your home (and you don’t care all your assets are tied up in one investment), you have to build savings so you not only have a place to live, but money to eat.
If you’re starting in your 20s save 6% a year throughout your life and you should be fine. Starting in your 30s, you’ll have to go with the much-quoted 10%. In your 40s you’ll have to set aside 18%. Have a group retirement savings plan at work? That counts towards your savings. Have a plan at work you’re not using? Are ya nuts?
Now that you’re paying your rent or your mortgage and you’re setting aside money for your own future so you don’t have to be beholding to your children you can consider paying hockey fees, saving for their future school needs, picking up dinner on the fly as you rush from piano lessons to karate.
If you’ve got the resources to cover it all, go right ahead. You’ve taken care of the big details, so have the life you want. It’s your money to spend as you wish. If you don’t have the resources to have it all at once, you’re going to have to make some choices.
Saving for school is your best bet. The free money (the Canada Education Savings Grant) the government is willing to give you should be incentive enough. You put in $100 a month (you can actually put in up to $2,500 a year to get the max) and the government will give you the equivalent of $20 a month. Where else are you going to get a 20% return on your money? And that’s before you’ve invested it. For more on this, check outMoneySense’s updated RESP Calculator.
Then you’ll have to decide whether you’re going to pay for hockey and piano or soccer and summer camp. Yup, you’re going to have to choose.
While it’s great that you want to give kids everything you can, doing so at the cost of your own future is short-sighted and, well, dumb. Propping them up when they become young adults and refuse to live within their means is even dumber.
And yet so many parents do just that, supplementing their children’s incomes, paying their rent, letting them tap their accounts or their credit as they wish. Imagine letting your kid blow through thousands of dollars of your money because you feel sorry about their “hard life.” Hey, we all have had hard times; learning that we can live through them is an important lesson.
Each of us has to learn lesson No. 1: Live within our means. That includes Darling Daughter and Sonny Boy. If you keep sticking your hand in your wallet, draining your own resources to keep them afloat and you’ll both end up sunk.
Balancing priorities and deciding where to best use our financial resources is a very important step in managing our money, yet so few people stop to think about it. Instead we knee-jerk respond to each call on our wallets. Ultimately, our savings suffer as we seek to keep up with the demand.
Today, stop and think about how you’re using your money. Are you living within your means? Setting aside money for your future needs? Choosing what’s most important over what’s most recently demanded?