Josh Dudick
Wealth of Geeks
There may be fewer mouths around the dinner table these days, but the cost of feeding them is increasing. Statistics show the costs of raising a child continue to climb. With the effects of rising inflation and worries of an impending recession, families are feeling the financial pinch.
The average cost of raising a child has eclipsed $300,000, according to a Brookings study from last year. The think tank took earlier estimates by the U.S. Department of Agriculture and made adjustments for inflationary trends since the pandemic, finding that total cost per child has risen over $26,000 - more than 9% - since 2020.
The study predicted it would cost a married, middle-income couple $310,605 to raise a child born in 2015 through to age 17, assuming a 4% inflation rate holds through to the early 2030s.
That’s not the whole picture, either. That estimate excludes college tuition and other costs that come as a child transitions from high school into early adulthood. In large part due to unaffordable housing, depending on living arrangements, many American parents provide their children with room and board well into their twenties and even their thirties.
“A lot of people are going to think twice before they have either a first child or a subsequent child because everything is costing more,” Isabel Sawhill, a senior fellow at Brookings, told the Wall Street Journal. “You also may feel like you have to work more.”
Childcare costs are not constant - significant expenses for many families can vary widely depending on the type of care and location. Additionally, the cost of raising a child in a major city is likely more expensive than in a rural area due to factors such as higher housing costs.
Childcare costs seem intimidating, yet they are not set in stone. Expenses vary widely depending on location, lifestyle, and other factors. For instance, the cost of raising a child in a major city is usually much higher than in a rural area.
With careful planning and fiscal discipline, parents can prepare to cover these costs without breaking the bank.
—————
Tax-free degree?
There are several investment vehicles that help lighten the tax burden on college funds.
A 529 plan is the ideal option. These tax-advantaged accounts function similarly to Roth IRAs in that contributions are made with after-tax dollars.
Withdrawals are tax-free so long as they are used for educational purposes.
Entry for 529s is wide open - there are no income restrictions or age requirements. However, annual contributions are taxed above the gift tax limit ($17,000 for 2023).
For low-income earners, there is also the option to contribute to a Coverdell Education Savings Account (ESA). ESA owners have more options in terms of holdings and can select certain stocks and bonds for the fund. Yet there are other limitations compared with 529 plans, the main one being the low annual contribution ceiling — $2,000 a year.
—————
Follow the money
Establishing solid money management practices in the family can go a long way to handling childrearing costs as they increase over time.
Budgeting forms the bedrock of family finances. Tracking expenses and regularly reviewing accounts ensure spending is within monthly income. This also identifies new expenses that might creep up on the household.
Every budget should allocate savings for a rainy day. When surprise setbacks blow a hole in the family bank balance, such as a sudden illness, having an emergency fund can make all the difference.
Studies consistently show medical costs are why most Americans file for bankruptcy - around two-thirds of the total. That high portion has held despite the introduction of the Affordable Care Act. The costs of illness or injury extend beyond hospital fees too. Loss of income due to extended sick leave compounds the problem as it takes out a family’s breadwinner, making emergency savings vital.
—————
Get credible
Credit building is also essential since credit scores are relied upon to evaluate parents for lending, insurance, and even employment. Parents should regularly check their scores online to rectify reporting errors.
Setting up automatic payments to ensure bills are paid on time also minimizes the risk of carrying credit. Nearly half of American credit card holders are now sliding down the slippery slope to spiraling debt by failing to pay off their balance each month.
Another study by Brookings found that people with high credit scores are more likely to be in healthy relationships with their partners and families. This underscores the importance of parents being self-aware of how their credit habits and values are passed on to the next generation.
Parents of older children may also consider getting proactive about building up their credit scores to get a financial headstart on their peers as they enter adulthood.
Setting up a credit card for children is one option. Several credit cards are specially designed for teenagers. Many of these cards come with various safety features to ensure things don’t get out of hand. And when they turn 18, the teen’s transaction history is transmitted to credit bureaus.
Besides getting their kids on their own two feet, parents need to prepare for their retirement through investing. Tailor-made investment plans empower families to meet savings targets, periodically rebalance portfolios and minimize the tax burden.
Following sound financial practices moves parents beyond surviving through childrearing and thriving as a household. By taking these steps, parents can prepare for college properly, gain control over family finances, invest for the future, and prosper over the years ahead.
