More than saving for college: Costs to consider when raising a child
You don’t need to save the full $233,000 in nine months, but it may feel that way.
The cost of raising a child is daunting. According to the United States Department of Agriculture, it comes out to an average of more than $12,000 per year for a middle-income, married couple. That figures ranges lower and higher based on family income but, in any case, adding to your family means it’s time to take a hard look at your finances.
We asked bankers about common expenses facing parents and what types of financial tools and strategies are available to manage them.
Childcare can range from $10,000 per year to more than $30,000 for in-home care. Determining whether one parent should stay home to raise your child is, first and foremost, a personal decision. But from a financial perspective, you should consider the potential long-term affect when analyzing the short-term benefit.
“For those who plan to return to the workforce, those few years at home can have a lasting impact on wage growth and retirement savings,” said Esteban Zuno, a U.S. Bancorp Investments region manager in Los Angeles.
For parents who do continue to work, workplace needs will shift.
“If my daughter calls me to pick her up from school, am I close enough and able to do so?” said Millie Mia, a U.S. Bank district manager also located in Los Angeles. “Having flexibility in your schedule becomes important.”
And when you are home, she said, “Be present – physically and emotionally.”
Learn more about budgeting and planning for childcare costs.
Before you reach the delivery room, be sure to fully understand your health insurance coverage.
“Determine your worst-case scenario year – what’s the most you would have to pay out of pocket?” said Zuno, who had such an experience after unexpected complications leading up to his daughter’s birth led to $75,000 in medical debt that took nearly five years to repay.
He recommends contributing to a Health Savings Account (HSA), through which you can set aside money on a pre-tax basis to pay for qualified medical expenses. And in the case of complications, seek out a financial expert who is familiar with managing those costs.
“One of the fallacies I had is that the really expensive childcare years would drop off after daycare,” said Zuno. “But then extracurriculars such as music and sports start to add up – when you’re encouraging your child to explore their interests.”
“I’d be embarrassed to tell you how much we pay for a baseball coach,” Mia joked, adding that she’s helped some parents open a separate savings account because it mentally helps them with budgeting for extracurriculars.
And know when you’re budgeting that it’s not just your child that you end up paying for, said U.S. Bank diversity and inclusion head Greg Cunningham, whose son now plays hockey at the collegiate level.
“From buying the bigger car to hosting the team at your house, you become an investor in a village of kids in your community,” he said, adding, “Lean into it.”
This decision should be part of your discussion about where to live. As you may expect, homes located in reputable school districts tend to be priced at a premium. But private schooling can also cost as much as college tuition.
“We’re city people. My wife’s from the Bronx. I’m from inner-city Pittsburgh,” said Cunningham. “But we prioritized school system and space for our kids – so there we were in the suburbs with a trampoline in our backyard.”
If you do choose to send your child to a private elementary, middle or high school, there are financial vehicles with tax advantages to help you pay for it. A Coverdell Education Savings Account (ESA), for example, offers a potentially tax-efficient way to save for K-12 education expenses.
The $233,000 figure doesn’t include college. And a study last year by Sallie Mae found that around one-third of college costs in the previous school year were paid by parents’ income, savings and borrowing. For those who do intend to contribute through a 529 Savings Plan or other vehicle, it could mean diverting resources from what is often life’s biggest expense – retirement.
“When it comes to balancing short- and long-term expenses, it’s valuable to sit down with a financial expert, who can provide an objective voice into what can be emotionally-charged decisions,” said Zuno.