3 BIG Financial Considerations to Having Children

June 23, 2016  | By Kevin Smith

By:  Jonathan McQuade, CFP®

Okay, okay.  Deciding to have children is not often based on the idea of a positive economic outcome for parents.  As the father of two young children, my colleagues like to remind me of the average cost quoted for raising children today ($245,340 per child according to the last USDA study[1]).  After taking a big gulp and reconfirming my love for my kids, I decided to break that number down into bite sized chunks to see which expenses could be, or rather needed to be prepared for.

Health Care:  The cost of giving birth in the United States can be a significant expense for new parents depending on health insurance coverage, location and method of delivery.  Also, as I have learned, young kids can be recurring visitors of the health care system thanks to their fragile immune systems and growing physique which, frustratingly, is unable to match their desire to push physical limits to their boundary.

What to do:

• Choose a health insurance plan that meets your budget and matches how often you use health care. In other words, frequent users of health care might consider a plan with a lower deductible also paying attention to coinsurance and out of pocket max (usually resulting in a higher monthly premium).  Others might view their plan as a safety net against catastrophic injuries and look for higher deductibles and coinsurance (usually resulting in a lower monthly premium).
• The Affordable Care Act created a tax credit for families who fall within a certain income threshold to make health insurance more “affordable”. Check healthcare.gov to see if your family qualifies for a tax credit.
• Establish an emergency reserve that has enough cash to cover your max out of pocket limits in addition to 3-6 months of expenses.

Child Care:  This was an eye opener for me.  The Economic Policy Institute found that in 23 states the cost of full-time day-care is greater than the average cost of in-state tuition at a four-year institution[2].  Wow!  I never expected I could be funding the equivalent of college costs for my children to go to a daycare center.  And don’t forget the costs of baby-sitters for date nights…an essential to keep any relationship with kids going.

What to do:

• For some dual income families, it could make sense financially for one person to leave the workforce until the kids reach school age, particularly if one of the incomes does not at least match the cost of daycare. However, be sure to consider the impact on career trajectory and level of difficulty for re-entering the workforce before putting in your notice.
• If flex work schedules are an option, a mix of day-care and being at home can help offset some of the expense.
• If you qualify, claim the Child and Dependent Care Credit on your federal income tax return which in 2016 is $3,000 for one child or up to $6,000 for two or more children[3].

Education:  The one everybody gets.  Inflating costs of tuition have made it difficult for graduates and parents alike to make it through without accumulating debt.  Certainly, burdened with debt payments is not the send-off into the “real” world that most parents would like for their children.

What to do:

• Education tax credits, such as the American Opportunity Credit, Hope Credit or Lifetime Learning Credit, can help if you qualify.
• Put money into education savings accounts that enjoy tax benefits such as a 529 plan or Coverdell ESA. These accounts grow tax deferred and, if used for qualified education expenses, there is no tax paid on the growth of your investment.
• Grants, scholarships, and work-study are all ways to reduce the accumulation of debt during college.

With proper planning, the major expenses associated with children can become more manageable.  This is by no means a comprehensive list, rather a good start to being prepared for and aware of the financial obligations that arise with parenthood.

Sources

[1] http://www.cnpp.usda.gov/ExpendituresonChildrenbyFamilies

[2] http://blogs.wsj.com/economics/2016/04/11/states-where-day-care-costs-more-than-college/

[3] Consult your tax professional for more information.

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