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Top Financial Mistakes Parents make with their Kids

Updated: Feb 28

While parents always have the best intentions for their children, their instincts at times do not prove correct to take the best decisions for their kids. Be it sheer ignorance or guilt or over-protectiveness, parents many a times commit financial blunders which can prove expensive in the long run. There are universal errors that parents with children of all ages make. The only difference is the older the child gets, the less time a parent has to correct it. Here are a few crucial mistakes which every parent should avoid:

Buying Life Insurance for Child: When it comes to making investments for their children, most parents tend to focus exclusively on products with the label ‘child’ on it. In reality, there is not much difference between a child insurance plan and other traditional plans. The basic principal of investment backed insurance plans is to invest in different asset classes (mostly fixed income), provide life cover and have a time frame for maturity. And, child insurance plans are no different. Except for the word ‘child’ in the product name. And, except for the fact that the insured person here is a child. Such products prove to be expensive for parents and do not serve the purpose for the child as the latter is not earning.

Investing in Child’s Name: Parents invest in their child’s name with a view to earmark a separate fund for their education goal. They also feel investing in the child’s name would later on inculcate the right money management habits in them. But this is not a healthy practice. As the child attains maturity at 18, he/she will be treated as a separate entity for tax purposes and will have the legal right over the investments. He/she will have complete control over the accumulated corpus but might lack maturity in utilising the same. This can later on cause serious conflicts between parent and the child.

Encouraging Unrealistic Expectations: Parents want to give the best of everything to their child. Expensive birthday parties, toy bikes, Iphone, tablet, video games, play station, kids have it all before they turn 10. Parents have no idea where to draw the line. It is not just about making the right financial choice and avoid unnecessary spending. It is about kids getting used to instant gratification and unrealistic childhood expectations getting out of control. This can create problems for kids as they grow into adults and unfortunately parents realise it too late.

Setting a Poor Financial Example: Parents fail to have an impact on children as an authority when they follow the philosophy of ‘Do as I say, not as I Do’. This is especially true in the case of personal finance. With parents living beyond means, buying unnecessary stuff on credit card, not saving for the future, such behaviour is likely to dictate the same financial traits in the children. As adults, they are likely to repeat the same financial pitfalls as their parents. Also, if parents are not adequately literate in managing their own money, they are likely to pass on their half-baked knowledge to kids.

Not teaching Kids about Money: One of the most important conversations parents fail to have with their kids since a young age is about money. It is imperative that kids form a healthy view about money and parents need to play a big role. Teaching kids the value of money and why savings are important is the biggest lesson kids can learn at a very early age. As they grow older, conversations can move to banking, budgeting, avoiding debt, financial planning, etc.

No strategic Savings Plan for Kid’s Education: Amid the busy routine, it is easy to let proper planning slide. With graduation and higher graduation costs shooting through the roof, parents fail to realise that they need to properly plan for their kid’s education. Merely saving a regular sum is not enough. Holistic goal planning for education considering inflation, time horizon, how much to invest, where to invest, etc to meet the target corpus is usually not comprehended by most parents.

Supporting Children indefinitely: Many a times, parents fail to draw the line of when to stop supporting children. The guilt gets the best of the parents and they create a repetitive pattern of dependency and wrong expectations for their kids. Instances of parents dipping into retirement savings to buy their kids a house or marriage is very common. In the long run, this could impair the parent-child relationship.

There is no precise handbook which can guide parents while handling kids and money. But one of the best gifts a parent can give their child is imparting them the right values on money and empowering them to master financial responsibility as they grow up. Parents can learn to lead by setting a good example in financial behaviour. Remember, kids not only watch, they are listening all the time.

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