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Wednesday, September 8, 2010

Do Children Really Cause Financial Burdens?

I was recently browsing a comment thread on Lifehacker when one particular comment stood out to me:
Having kids is one of the most expensive poverty-inducing things you can do right now. – kalibar
I understand completely where kalibar is coming from with this comment. Many estimates with regards to the cost of raising a child put that figure at $200,000-$250,000 per child over their lifetime – and that’s a serious chunk of change.

When I read these estimates, however, and I look at our own spending, something doesn’t quite add up. To put it simply, we’re not spending that much, even during these expensive years of the child’s life.

Let’s break down what we’re spending right now on our children.

The biggest expense by far for your children will be child care while we you are working. Combined, we spent about $11,000 on child care for  two children in a  year. After that, costs went down quickly – I estimate that all other expenses combined (food, health care, toys, clothing, and so on) would be roughly $7,000 for both children combined. Add onto that $1,200 per child put away for their college education (and I’ll ignore the tax benefits of this, as we don’t have to pay state taxes on contributions) and you have a total of $20,400 spent on both children  in a  year – or $10,200 per child.America's Cheapest Family Gets You Right on the Money: Your Guide to Living Better, Spending Less, and Cashing in on Your Dreams

So, if those costs continued as they are over the next eighteen years, we would spend $183,600 per child during their childhood – not too far from those estimates.

But that $183,600 total is extremely naive.

Let’s look at several elements that will save us money during our children’s lives.

First, $6,000 of that $10,200 is tax deductible. It’s the child care tax credit, and it knocks roughly $1,800 (assuming a 30% overall tax rate) off of our total tax bill – or $900 per child. So, boom, we’re quickly down to $9,300 per child.

Second, we now have two more deductions on our tax returns. At $3,750 a pop,  two children shave $7,500 off of your taxable income. Assuming that same 30% tax rate, we quickly shave $2,250 off of our tax bill, so we’re down to $7,050 per child.

Third, the mere presence of the children changes your entertainment structure. When my son came to live with me, instead of going out to the club with my friends, I became much more content to toss the football around in the park with my son. Instead of going out to the movies three times a week on dates (as was once the case), I stayed home, watched movies in the living room, and play with my son while doing it. Instead of eating out all the time, I would cook a meal at home, and serve her some of that delicious home-cooked food. In recent years me and my son would cook together.

In short, both my entertainment and food budgets went way down upon the birth of my child. I knew this change would happen – it was part of our decision-making process when it came to deciding whether to have my son live with me. I knew that many of the trivial aspects of our life would change. I chose to give up most of my social opportunities and entertainment opportunities in exchange for being able to raise a child in an enriching environment.

So how much did this number crunching actually save me? This is something that’s very difficult for me to estimate, as I didn’t actually do any sort of budgeting or number-crunching during the year prior to my son being born. However, based on what I can estimate from thee year before he came to live with me, I cut my entertainment and food spending (from 2004 to 2009) by $6,500 a year. Now if we use the examples of two children of earlier that’s a drop of $3,250 per child, bringing our per-child expenses down to $3,800 per child.Tax Planning Strategies: Tax Savings Opportunities for Individuals and Families

So, let’s use that for the first five years of the child’s life – $3,800 per kid. After that, you lose almost all of the child care costs – but you also lose your $900 tax deduction – a total reduction in cost of $4,200. What’s that? During the sixth year, our total child cost is actually a gain of $400!!

Obviously, as the child grows, you will begin to accrue more non-child-care expenses for them: education costs, growing entertainment costs, and so on. I’ll actually increase our expense per child at $500 per year after age six.

So, for the first five years, we spend $3,800 a year. At year six, we actually gain $400. Each year after that, you spend $500 more per child than the year before, culminating with an overall after-tax and after-savings cost of $5,600 during their eighteenth year.

What does that total up to? $52,800.

Now, you might quibble with my “back of the envelope” calculations described above and inflate some of the costs. You might even be able to double my estimated expenses by skewing the numbers around.
That doesn’t change the underlying point, however. Children aren’t the enormous expense that they’re made out to be. I’m not claiming that they’re not expensive – not at all. Instead, I’m saying that the quoted expenses bandied about – $200,000 to $250,000 over the child’s lifetime – looks only at expenses. It does not look at some of the savings that will come your way naturally during the child-rearing process, nor does it take into account the tax benefits of children.

What’s the take-home lesson here? Don’t be scared into not having children – or delaying having children for years – by the huge costs bandied about. Those costs only look at the “expense” part of the equation and don’t include the many ways that you actually save money once a child enters your life. For example, a single child, merely by existing, will save you thousands and thousands of dollars on your tax bill over their life.
Start Your Family: Inspiration for Having Babies

So, do children cause financial burdens? Yes, they do – you’re going to be spending money on them. However, that expense is not as large as one might think at first glance, and when you consider the advantages of having children when you’re younger rather than when you’re older (if nothing else, you have much more energy to share with them), you shouldn’t choose to delay children without looking at the larger picture.

Mr. Dangerfield is an I.A.P.D.A Certified Debt Specialist whom has worked in the finance industry for over a decade. He manages , is the author of "A Dangerfield Manifesto" & co-founder of SMG Holdings, the parent company of Squad Music Group, Dangerfield Artistic Entertainment,SMG Publishing and Taboo Dangerfield Publishing Follow me on twitter

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