Financial Independence and The Cost of Raising a Family
A few weeks ago, Darrow Kirkpatrick blogged about the cost of raising a family while you’re saving for financial independence. Before I read his post, I had just finished emptying our 529 account with the final payment for our daughter’s college room & board. This seems like a great opportunity to compare our parenting expenses to the national statistics.
Raising a family is worth every penny, but finances are the wrong reason for starting a family. Hopefully, you make your decision to have kids (or not) for all the right reasons in your situation. Nobody has to start a family– there are already plenty of people in the world who need your love & support. Families are a personal choice, and financial fears should not hold you back.
Yet starting a family might even improve your finances.
Before we justify that bold assertion, I highly recommend that you click the link to Darrow’s post. (It’ll open a new tab in your browser so that you can switch back & forth between our blogs.) He and I reach the same conclusions, although we got there by different paths.
For those of you reading on a tiny mobile device, here’s a key quote from Darrow’s post:
According to the USDA’s 2012 Expenditures on Children by Families, child-rearing expenses to age 18 across the U.S. averaged $241,080 per child in two-child middle-income families. Higher-income families spent $399,780 per child. (Expenses for an only child were greater by a factor of 1.25, while those for 3rd and subsequent children were lower by a factor of 0.78.)
That cost doesn’t even include college! Are you really going to spend a quarter-million bucks on your child? More importantly, how much sooner could you retire if you invested that money?!?
First, let’s see whether those numbers are realistic. According to the government’s agricultural experts, my spouse and I should have spent at least $300K raising our little bundle of joy. If we’d elected to stay childless and invest that $16,700 per year in the S&P500 between 1992 and 2010, then we’d have a cool $543K in our Fidelity account.
We reached financial independence in the late 1990s, so even by the end of 1997, we would have saved a minimum of $85K. That would have substantially improved our net worth, generated a few thousand dollars a year in dividends, or made a nice down payment on a Hawaii rental property.
Yeah, but who even bothers to track 18 years of expenses, let alone the costs of raising a child?
Hey, I’m a nuclear-trained submariner. I like taking logs.
My spouse and I have recorded our spending since 1986. By the time we started a family, I was rockin’ Quicken 5.0 for DOS on our PC-XT. That database is getting a little creaky today with over 150,000 transactions, but it includes everything from the crib (garage sale, $10) to the college fees.
How much did it cost to raise your kid?
I’ll spare you the suspense: just under $156,000. (The data table is at the bottom of this post.) You can also scroll down there to see the USDA’s infographic on the cost of raising a family, which breaks down the numbers in much more detail.
Raising our daughter cost barely more than half of the USDA estimate. Admittedly I didn’t track her food expenses separately for all of those years, but our happy & healthy darling cost at least as much to feed as a full-grown adult. If you check the prices on formula & baby food, and if you’ve seen a teen eat, then you’ll know that this figure is conservative. That hammered our spending harder than anything else, and at 22% it’s well above the USDA’s 16% average.
I also included over $27K for the price of starting college and, in our case, nearly a semester of room & board. The USDA data goes up to age 18 but they didn’t consider all of the expenses for Kumon math tutoring, AP classes & exams, SAT/ACT fees, college visits, and applications. (If you’re doing it from Hawaii then add extra for airfare.)
You could spend far less on your own teen’s college prep, or you could spend far more on private high schools, but I bet we’re pretty close to the middle of the bell curve. I think it’s also a fair compromise on the perpetual debate over whether to pay full retail for Harvard– or make them pay their own way through college.
I should point out that the USDA also spends way more than necessary. They claim that “housing” a child is nearly a third of the total cost, but we had already bought a home that we were perfectly happy with. We didn’t buy a bigger place just because we were parents, and we were already in a great school district because we shopped for a nice neighborhood.
The USDA also claims that transportation is 14% of the total, but our daughter only rode the school bus for three years out of 12. She wore out some sneakers and bicycle tires, but when she got her driver’s license she paid that back that investment by running all of our household errands. We did some driving for sports and other activities, but we could have stayed local and ridden a bicycle.
The real payoff
You might be reassured to know that the cost of raising a family is a very wide bell curve with fat tails, and it’s a relief to know that you can do it for even less money than we spent. But if you could spend “only” $100K to launch your first child from the nest, how can this expense possibly improve your finances?
Yeah, I know, some of you more experienced parents are snickering: “Because you won’t have any spare time in your life to spend more money on anything else!” I can’t argue with that. Raising our daughter involved far more trips to the park and the library than to Bangkok or Europe.
But we parents didn’t just trade our liberty cards for a pile of food & diapers. Nearly every new parent has experienced this feeling on the first day after labor & delivery: “Holy crap, I’m exhausted we’re responsible for a human life. We’d better grow up and get our act together!” Starting a family makes you get a handle on your lifestyle, whether you’re competing for “Parents of the Year” or just trying to improve on your own upbringing. Before kids, you might not have wanted to examine the details of your entertainment budget. Once you have kids, however, you start tracking your spending just to figure out where it’s all going.
You also behave more responsibly. Admittedly you’re also too tired to get into as much trouble as you used to, but nothing improves your driving more than strapping a baby seat into the vehicle. Racy sports cars are eventually replaced by larger, more crash-resistant kid haulers. You spend less money on expensive home furnishings and instead you focus on baby-proofing. Your old wild weekend behavior that might have resulted in a visit to the emergency room is now spent at the doctor’s worrying about a cough or an ear infection. You even eat healthier. Worst of all, you now have to set a well-behaved example for a new little person who will try to imitate everything you do.
Better yet, you start planning for everyone’s future. It’s not just getting the kids out of the house and over to the park to burn off a little energy before nap time. You not only take fewer risks with your lifestyle, but you cut back on risky behavior with your money. You not only continue saving and investing, but you may become more thoughtful with your career planning. You might still quit your corporate cubicle for a startup or self-employment, but you’ll be much more analytical about the decision– and you’ll work a lot harder to make it pay off.
When we had our daughter, our planning for financial independence changed from a fantasy to a reality. I wanted to spend less time working for a paycheck (and deploying to the Western Pacific) and more time helping my daughter grow up.
I’d like to think that my spouse and I would have saved for financial independence with or without starting a family. However, starting a family made our goals much more compelling, and our daughter motivated us every day.
So don’t let the USDA scare you about starting a family, let alone have money anxiety. If you decide to start a family then it’ll be for all the right personal reasons– and it’ll be a good decision. The USDA’s “average expenses” reflect more about America’s hyperconsumer lifestyle than the true cost of feeding a few more mouths at the table. (Amy Dacyzcyn, the original Frugal Zealot, raised six kids on her spouse’s enlisted Navy paycheck.) Instead, you can apply the same techniques to family budgeting that you do for financial independence– track your expenses and then spend the money only where you find the most value. Before long you’ll have your expenses more in line with your priorities, you’ll be spending far less, and you’ll be on your own path to financial independence.
Darrow, thanks again for inspiring this post!
Here’s the cost of raising our child to her 18th birthday:
The infographic of the USDA’s cost of raising a child (PDF)
“Can I Retire Yet?” blog post: Having Kids vs. Retiring Earlier
USDA’s cost of raising a family
Retiring early– with kids?
Book review: “All The Money In The World” (includes a section on raising kids)
Old-school frugal (part 2 of 2) (Amy Dacyczyn)