Nearly everyone has heard the tauntingly childish song “first comes love, then comes marriage, then comes the baby in the baby carriage.” While the order of events varies nowadays, for many couples approaching “phase 3,” the cost of expanding your family is one of the biggest concerns. Most people say that “you’re never really ready,” but having a clear idea of the financial picture is an important step for family planning. According to the U.S. Department of Agriculture, the cost having a child will exceed $245,000 over a lifetime, on average. If you’re wondering when you should have a child, this comparative study of two fictional couples breaks down what kind of financial cost you could run into during your twenties versus your thirties.
The younger hypothetical couple is 26 years old, and makes a combined salary of $73,000, and they’re still tackling student loans and credit card debt from college. They devote nearly their entire paycheck to expenditures throughout the month but want to have a baby and feel that they could make it work. Meanwhile, at 36, the older couple is doing well financially. They make roughly $120,000 and are almost done paying off their student loans, with little debt and a retirement fund established. They waited to have children until they hit a six-figure income and now feel ready to financially have a child. They have even saved up $15,000 for fertility treatments, like IVF, which costs $12,400 a round on average.
There are four areas where the cost of having a child could be estimated. Gail Rosen, a certified public accountant looked at these hypothetical cases, and decided which couple would “win” in each family planning category.
The first financial category to consider is how a baby can impact taxes. Both sets of parents are able to take dependent exemptions for their children, but the younger couple’s lower income allows them to take the full child tax credit, up to $1,000 a child. Rosen explains, “The child tax credit starts to phase out at $110,000 for couples filing jointly so the older couple may only get a $500 tax credit. They’ll also likely phase out of qualifying altogether in a few years, as their income rises.” Even though the younger couple makes less money, they have the tax advantage in this situation because they fall into a lower tax bracket. Since they can take full advantage of the tax credit, they potentially walk away with more of their paycheck than the older couple.
The second financial area to consider is a baby’s impact on retirement. It’s important to stow away savings as early as possible to build your nest egg. Rebecca Kennedy is a certified financial planner and analyzed the couples’ retirement planning potential. She argues that having a child at 26 is “more likely to cut into prime saving years because younger couples tend to have tighter budgets and don’t contribute as much to retirement. Exacerbating the situation is the fact that most people in their 20s don’t think about retirement—baby or no baby.” A Principal Financial Group Study found that only 30% of Millennials save at least 10% of their income in an employer-sponsored plan. The older couple wins the advantage in this category because, “being able to contribute aggressively to retirement before a baby comes along leaves them better able to take advantage of compound earnings. Their money could grow astronomically, because they started early.”
The third category of financial cost is the cost of college. In theory, couples can start saving for a college fund before having a child. However, it is not usually a priority until the baby arrives. It is fairly safe to assume that both couples have eighteen years to save for their child’s tuition. While the younger couple will be able to take advantage of tax credits, like the American opportunity Tax Credit that grants up to $2,500 per eligible student, the older couple is more likely to contribute more to a 529 plan. As a result, the older couple is able to save more for their child’s college tuition because their income allows more wiggle room for saving.
Lastly, the couples need to assess the cost of childcare. Childcare is one of the most expensive items in a new parent’s budget. “According to Child Care Aware of America, the average cost to send one infant to day care eats up anywhere from 7% to 16% of a couple’s income.” Keeping those numbers in mind, the older couple seems better prepared to cover the cost of childcare. However, the younger couple is more likely to have access to free childcare from their family. A younger couple likely means younger grandparents, who are more likely to babysit a grandchild. “In fact, Child Care Aware found that grandparents were the second most popular form of child care: 32% of those polled take advantage of their own parents’ help. That can be huge in helping offset some of the cost.” It is also possible for one parent to stay home, and the couple making the most money is more likely to be able to support that change. This area is a tie between the couples because while the older couple has more financial room to cover the cost, the younger couple may have the help to cover childcare for free.
There are numerous factors to consider for family planning and the cost of having a child—whether it is your first, second, third or beyond—and there is not always a right answer for what is the ‘best time.’ However, family planning can go a long way in helping you prepare financially for a bigger family. Talking to an expert at Apex Financial Advisors can help you develop a strategy for saving and spending, and come up with a reasonable budget that will keep your family’s wealth on track through all of life’s big changes.