Children Are Financial Plan Killers

June 5, 2015

By Daniel Cohen

The title is in no way meant to discourage parenthood. Of course, raising children is one of the most meaningful and rewarding things people do, and there are major financial implications that come with a growing family. For the parents of a newborn today, the future annual cost of a college education may run more than $70,000 per year at a moderate priced private college and more than $35,000 per year at a public university offering in-state tuition discounts once we factor in inflation.  Many factors such as the future cost of the education, whether your child will get any scholarship or grants, and the rate of return on your savings are unknown. And believe me, having three young kids at home and a fourth on the way, I know how expensive it is to raise children. The best thing one can do is to start planning early and make adjustments as time goes by.

Concerning income statistics, a recent Wall Street Journal article reported that men without children earned 40% less than men who were fathers.  This was referred to as the “daddy bonus.”  The article didn’t specify whether men with kids are motivated to work harder to provide for their family or whether companies reward fathers with better positions assuming they are more disciplined and focused due to their commitment at home.  Either way, the median income for fathers is significantly higher than for men with no children in the study of men from age 35 to 49 years of age.  Unfortunately, for women there is a “mommy penalty” as working moms earn less than women without children. However, married working moms are seeing this penalty slowly disappear while unmarried working moms are experiencing the penalty increase.

Beyond the cost of putting kids through college, there are so many other expenses associated with raising children.  The cost of diapers, birthday parties, field trips at school, after-school activities, sports, cell phones, food, family travel, etc. is estimated to add up to more than $500,000 through age 18.  I am sure the fathers reading this are hoping for an even bigger “daddy bonus” to cover the cost of their children.  In my case, I happen to be fortunate as my business has been growing since I had my first child 10 years ago. I’m experiencing firsthand the importance of making adjustments as time goes by.

A popular savings vehicle for parents who are planning for their kids’ college education expense is the 529 Plan.  Distributions from 529 Plans are exempt from federal income tax if used for qualified higher education expenses like tuition, room, board, and books.  The 529 Plans offer a great option for parents to save as they include tax benefits in addition to the convenience of the investment account.  The accounts can be owned by parents, grandparents, or others who want to help save toward higher education.  Contributions can be made monthly, quarterly, annually, or just when funds are available.  Low cost plans from American Funds are highly rated and available through Registered Investment Advisors. Vanguard is another popular company offering a low cost 529 Plan.  There are no income limitations to making contributions to 529 Plans like there are with some other savings accounts.

For information about how to choose between various college savings plans – 529, Coverdell and Custodial Accounts – we’re pleased to share this recent Financial Planning Association article.

The average size of families has been decreasing in recent decades, and the rising costs to support each additional child probably has a lot to do with that.  Financial considerations are part of many families’ planning and that may affect the trend.  The first few months of having a new baby at home can be chaotic at times as everyone adjusts to the random needs of their baby.  Parents have so much to focus on to ensure their long term success. The assistance of an experienced financial planner can bring things back into focus and help you enjoy more precious time with your loved ones.

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