This past Mother’s Day was an important time to appreciate the mothers in our lives. If your mom is anything like mine, she tends to put the needs of her family first, often to the detriment of her own. We see the same thing when it comes to personal finances. Here are some of the most common financial needs moms often neglect at various stages of life:
New Mothers: Not Taking Advantage of a Dependent Care FSA
Daycare is often the single biggest expense that new mothers face. The average cost of center-based care for an infant in the US is over $1,200 a month. One common mistake is not taking advantage of an employer’s dependent care flexible spending account (DCFSA), which allows parents to contribute up to $5,000 pre-tax and use the money tax-free for qualified childcare expenses.
These accounts are often overlooked by new employees who may not have a child yet and then get lost in all the excitement that comes with a new baby. (Be aware that some employers provide you a limited amount of time after the baby’s birth to enroll, so check your employer’s requirements.) This tax benefit can save $1,600 out of $5,000 in expenses for a family in the 32% tax bracket.
Mothers of School-Age Children: Prioritizing College Savings Ahead of More Important Needs
I often see mothers contributing or asking about contributing to education savings accounts for their children. In some ways, this makes sense with all the news about rising student loan debt burdens. 529 plans and Coverdell education savings accounts allow you to invest and use the earnings tax-free for qualified education costs. The former can also provide a state income tax deduction and access to unique investment options.
The problem comes when mothers save for education costs above other financial priorities. Before funding a 529 plan, it’s a good idea to first make sure you have enough savings in an easily accessible emergency fund to cover at least 3-6 months of necessary expenses. You would hate to withdraw money from a 529 plan for emergencies because the earnings in these accounts are subject to taxes and possibly a 10% penalty when used for non-qualified expenses. Your 529 plan may also be invested aggressively and sold at a loss if you need the money earlier than planned.
It also makes sense to pay off any debts with an interest rate of 4-6% or above before saving for college expenses. There’s a good chance that you’ll save considerably more in interest than the investments in the education account will earn. This is especially true with today’s rising interest rates and still high stock market valuations.
Finally, mothers may want to prioritize saving for retirement over education expenses. After all, there’s no financial aid for retirement. This is particularly important for women since they tend to live longer than men and may need a larger nest egg to cover those additional years. Keep in mind that if you end up with more retirement savings than you need, you can use money in an IRA penalty-free for education expenses or use money from any retirement account penalty-free at age 59 ½ to help children pay back their student loans. Just make sure that you’re on track and not jeopardizing your retirement.
Empty Nesters: Not Having a Plan for Long Term Care Costs
Women make up more than 70% of nursing home residents and more than 75% of residents in assisted living communities. Unfortunately, Medicare and other health insurance policies don’t cover these long term care costs. Medicaid does, but it requires you to spend down practically all of your assets to qualify, and then you’ll be limited in your choice of care and facilities.
A long term care insurance policy can protect your assets and your choice of care. In particular, see if your state offers a long term care partnership program since policies purchased in these programs provide asset protection even if you use up all the insurance coverage and end up needing Medicaid anyway. If you’re worried about rising premiums or not needing the care, consider a single-premium policy that pays a death benefit if the long term care benefits aren’t used. In any case, it’s often recommended that you purchase a policy in your 50s to early 60s, as waiting too long can make it much more expensive or even impossible to qualify for should something happen to your health.
It’s understandable and even admirable for moms to want to put your children’s needs first. But as they say, when you’re listening to the safety instructions on a plane, be sure to put your oxygen mask on before putting them on your kids. Moms can often forget this applies to their financial well-being as well.