Common $230k money mistake parents make

Most Aussie parents will spend on this “essential” item but the long-term impact could be costing a huge $230,000.

In the current inflation and cost of living crisis, many households are grappling with how they make ends meet. At the same time, with this crisis comes opportunity – property, shares, and crypto are all down from their high points – meaning good investments are today selling at a discount.

The people that come through this period of disruption in a stronger position than they went into it are the ones that can find a way to find some money to keep investing. But, off the back of nine consecutive interest rates rises and sky high prices for everything from petrol to pears, this isn’t an easy proposition.

For families, one big line item in the budget is spending on kids’ extra curricular activities, which has been estimated at more than $1800 per activity per child through a recent report from Mozo.

Spending on your kids is something that’s important, nice to do – and something every parent wants. But it does come at a cost – not just in terms of what it means for your savings today, but also in terms of what it means for your ability to invest for the future.

$1800 invested in the next 12 months will grow to be worth about $236,959 over 30 years based on the long term Australian share market return of 9.8 per cent.

This means you’re potentially making the choice between ballet lessons and the ability to give your kids a chunk of cash they could use for the deposit on their first home in the future. Clearly an extreme comparison, but a valid one.

Making conscious child-related spending choices

This might be a little controversial, but there’s merit in making deliberate spending choices for your children.

Kids spending is an area where I see a lot of people get things way out of whack. As a father of two gorgeous girls, I want the best for my kids. If there’s something I think will add to their lives or make them happy, I often want to give it to them with all my heart.

Fortunately for me, before having children I was lucky enough to benefit from the lessons learnt by some of the people I’ve helped with their financial planning.

While spending on extra classes for kids is nice – it’s also very costly. Picture: iStock.

In my opinion, someone pushing so hard to cover spending on kids to the point you’re stressed out or forced to make major sacrifices in other areas, or until you don’t have money leftover for investing is a disaster.

Finding balance is crucial here. Saying no to a few things your kids would probably enjoy so your family can all enjoy life more, and so you can keep investing to make progress towards financial security, is a result that may give a better outcome for your family.

It’s easy to go wrong with spending here by looking at each individual child related spending decision in isolation. You ask yourself, should my kid do ballet lessons? Do they need to play basketball? Should we send the kids to the more expensive school? Should they learn to play the saxophone?

The answer to these questions often results in you making more commitments and spending more money (not to mention turning yourself into a never-ending taxi service…).

Before you know it, you can end up committed to so many things that you’re having to say no to other important things, or saving and investing less, or often both.

The alternative to the reactive approach of making these choices in the moment is taking a considered approach to what and how you spend money on for your kids.

How to plan your child-related spending

There’s no one-size-fits-all rule that will work for every family, but there is one method every family can use to make the best decisions around their child-related spending. This approach will help you get clear on what you’re spending today, and what money you have to invest for the future.

The key here is having clarity on the impact of your choices today on your position not only today, but for the years to come.

When you’re putting together your spending and savings plan (budget), the key to success is looking at every line item to make sure you’re prioritising the things that are the very most important to you, and deprioritising the rest so you can save and invest more. Often when you’re doing this, your spare cash or savings number is what’s leftover, but it’s often not the least important thing.

Work on which spending is essential for your kids and what they can live without. Picture: iStock.

You should be looking at which child-related spending you see as critical, and which are more nice-to-have. Then look at the impact of not spending on the non-critical expenses, both on your savings today, and in terms of how that money would grow for you if you invest it for the future. You’ll likely be surprised about the big impact these seemingly smaller expenses will have over time.

From there, think about the financial and investing possibilities this money could create for you, i.e. the ability to buy your next property sooner, pay off your mortgage faster, more quickly build your investing income, etc.

Then it’s time to prioritise.

Ask yourself whether each of these extra-curricular options is as (or more) important than saving and investing the money?

There’s no one right answer here, because the right decision for you depends on you. It will depend on where you’re at with your money today, what your money and family goals are for today and the future, and how much money you have to make them happen.

But the key is making a conscious choice and going into any child-related spending with your eyes open.

The wrap

Giving your kids the best of everything is something every parent wants. But this spending comes with a cost, both in terms of your ability to save today, but just as importantly, in terms of your investing potential that will drive your progress into the future.

Instead of making your spending choices in isolation, take the time to understand how your spending decisions today fit in with the bigger picture. This way, you’ll make better choices for your family today, and have the peace of mind you’re making the right moves for tomorrow.

Ben Nash is a finance expert commentator, podcaster, financial advisor and founder of Pivot Wealth www.pivotwealth.com.au, the Author of the brand new book, ‘Replace your salary by Investing’ and the host of the Mo Money podcast

Ben runs regular free online money education events to help you make better money choices and get ahead faster. You can check out all the details and book your place here

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.

Originally published as Common $230k money mistake parents make