Updated: 4/1/2011 3:09 PM ET|
Raising your $222,000 baby
Children are priceless, but raising them is one of the most expensive things you'll ever do. Here's how much it costs, along with some strategies for lowering expenses.
Every newborn child is a bundle of joy. But you'd better have a bundle of cash on hand if you want to raise one.
Typical families, those making from $56,670 to $98,120 a year, will spend a whopping $222,360 to raise a second child born in 2009 through age 17, estimates the Center for Nutrition Policy and Promotion (.pdf file), a division of the U.S. Department of Agriculture.
Higher-income families will spend even more. Those earning more than $98,120 will spend $369,360 overall in the U.S. to raise a second child; that figure rises to $411,210 in urban areas of the Northeast.
Though not as steep, the figures for lower-income families are just as unsettling: $160,410 for families making less than $56,670 to raise a second child.
That averages $8,912 a year for a lower-income family, $12,353 for the middle-income group and $20,520 for top earners.
This is no back-of-the-envelope guesstimate. The survey involves interviews with about 5,000 households, four times a year.
The cost per child goes down for larger families. A child with no siblings costs 25% more than one with a sibling, for example. As a percentage of household expenditures, an average couple will spend 27% on an only child, 41% on two children and 48% on three children, the USDA estimates. As the child ages, costs dip from their earliest years to the period when they are 3 to 5 years old, then rise steadily until adulthood, reaching $23,180 a year from ages 15 to 17 for the highest income earners.
Sobering? No doubt. Misleading? Yes. The study doesn't take into account certain expenses incurred by some families, such as heavy medical bills or pricey private schools. It's a composite average, and, by definition, that means your numbers will be a little (possibly a lot) higher or lower. And because the survey ends at age 17, it doesn't take into account the millions of college students who are supported in part or in full by their parents. In 2020, you'll need nearly $225,000 for a private college or $105,000 for an in-state public university.
The study also doesn't consider lost income that occurs when one parent stops working or takes off several years to raise the children during the early years -- or takes a lesser-paying job with more-predictable hours.
Before you take a vow of celibacy, look on the bright side: There are ways to trim the expenses.
The study breaks down overall expenditures into various categories and subsections. (The information is used by state agencies and court systems to determine child-support guidelines and foster-care payments, among other things.) We'll go through each of the major categories, give the total expense for families from the low to high ends, and then offer cost-cutting ideas and some tax tips from our tax expert, Jeff Schnepper.
Cost through age 17: $53,280 to $126,540
Housing is the biggest single expense of raising children, comprising a third of overall annual expenses.
What you can do
You could ignore one of the basic assumptions used in calculating additional housing costs. You could decide not to move into a larger home. The table assumes that for each child you have, you're going to add 100 to 150 square feet of living space to your home. By definition, that means you're going to either renovate your existing house or buy a new one. Go against the flow and figure out how to use the space you've got.
For many families, that solution won't get it done. Try this: If you've had your mortgage for a while and plan to stay in your home, keep track of mortgage rates and consider refinancing when the rate is more than a percentage point below your current mortgage. It can save hundreds to thousands of dollars on the loan.
Challenge your property tax bill if you think it's too high. The National Taxpayers Union estimates that as much as 60% of taxable property in the United States is over-assessed.
Additionally, make your home as energy efficient as you can. That means everything from replacing old and inefficient furnaces and water heaters to bolstering insulation.
Finally, give some thought to moving to a less-expensive place to live. That could mean a smaller house across town -- or in a completely different part of the country. Look into areas where housing prices (and property taxes) may be a bit more manageable. Realtor.org regularly releases statistics on existing-home sales by state.
Make as much as possible of your housing costs tax-deductible. Interest and real-estate taxes are deductible. Use your home equity to finance other expenditures. The interest on debt of up to $100,000 secured by the equity in your house is tax-deductible. It doesn't matter what you use the money for.
Consider a home office. Now, you can qualify for a home office even if you do only managerial duties or simple record-keeping there. Prior to 1999, it had to be where you actually performed the activities of your job.
If you have a home office, you can deduct the percentage you use for business from your housing costs. These include interest, taxes, insurance, utilities, landscaping, depreciation and the cost of any furniture or equipment you use in your home office.
|How much will your family spend?*|
|Less than $56,670|
|Through age 2||$8,570||$2,960||$1,110||$990||$630||$590||$1,870||$420|
|3 to 5||8,630||2,960||1,210||1,030||500||560||1,760||610|
|6 to 8||8,330||2,960||1,640||1,140||560||620||780||630|
|9 to 11||9,040||2,960||1,890||1,140||570||670||1,190||620|
|12 to 14||9,450||2,960||2,040||1,250||640||1,020||810||690|
|15 to 17||9,450||2,960||2,030||1,380||720||950||830||580|
|$56,670 to $98,120|
|Through age 2||$11,700||$3,890||$1,340||$1,420||$740||$790||$2,630||$880|
|3 to 5||11,730||3,890||1,430||1,470||600||750||2,510||1,080|
|6 to 8||11,650||3,890||2,010||1,570||670||880||1,540||1,090|
|9 to 11||12,420||3,890||2,290||1,580||690||940||1,940||1,090|
|12 to 14||13,090||3,890||2,470||1,680||820||1,320||1,750||1,160|
|15 to 17||13,530||3,890||2,450||1,810||880||1,240||2,210||1,040|
|More than $98,120|
|Through age 2||$19,410||$7,030||$1,820||$2,160||$1,030||$920||$4,680||$1,770|
|3 to 5||19,410||7,030||1,910||2,200||870||870||4,560||1,970|
|6 to 8||19,380||7,030||2,520||2,300||950||1,010||3,590||1,980|
|9 to 11||20,230||7,030||2,850||2,310||990||1,080||3,990||1,980|
|12 to 14||21,510||7,030||3,050||2,410||1,150||1,510||4,310||2,050|
|15 to 17||23,180||7,030||3,040||2,550||1,260||1,430||5,940||1,930|
|*Estimates of expenditures on the younger child in a two-child, two-parent family. To estimate expenses for anonly child, multiply the figure by 1.25. To estimate expenses for each of three children, multiply by 0.78.|
Cost through age 17: $29,760 to $45,570
This accounts for 12% to 19% of the overall expense (families at lower incomes spend a higher percentage on food).
What you can do
Set strict limits on the more discretionary forms of food spending. For example, tell your children they can spend no more than $7 a week on fast food. That alone may save a couple hundred of dollars a year.
Use the Web to shop for bargains.
There are -- literally -- thousands of shopping-related Web sites, and many of them now allow you to compare costs among similar items. Here's a simple trick that really works: When you're searching for a specific item, go to one of the search engines and type in that item and the word "discount." You'll be amazed at what you'll find.
Consider joining a warehouse club such as Costco, BJ's or Sam's Club. They're not suited to everyday shopping, but they let you stock up on certain items in quantity, often at substantial savings. Look to these places for items such as soda, canned and dried goods, and other sorts of nonperishables. If you lack adequate storage space, divide your bulk goodies among neighbors and friends.
Wholesale food services, which sell meat, noodles, fish and other groceries in bulk, will deliver to your door. Not only can you plan meals well in advance, but shoppers also can save close to 50% off conventional grocery store prices, although you still have to go to the store to buy fruits, vegetables and other items.
If you're self-employed, you can deduct 50% of your meals and entertainment, if business-related. If your children refer clients or customers to you, you can deduct the cost of taking them to a restaurant if business is discussed.
If self-employed, you also can deduct the cost of food for a business party. Make a separate shopping trip and keep records of your business guests and the business discussed.
If your children are old enough to work for you and are required to be on the business premises and available for work during lunch, then the cost of that lunch (if available to all employees) is deductible to you and tax-free to your children! Again, proper record-keeping is paramount here, as is the rule of reason.
Cost through age 17: $20,790 to $41,790
Transportation can eat 11% to 13% of the total. This includes the purchase and finance charges of vehicles, repair and fuel expenses and insurance.
What you can do
Avoid buying a new car. Estimates hold that the value of a new car drops by as much as 40% in the first two years of ownership. Instead, look into a used car such as a relatively new model that's coming off of a one- or two-year lease. It's likely to be in good shape, it may have some of its original warranty in place and, best of all, it should be available at a huge discount off its original price.
After you've found the car, don't forget to shop for the best insurance rates. The cost of auto insurance can vary by several hundred dollars for the exact same level of coverage.
If your children work for you and use your car for business purposes, then the business percentage (business miles over total miles) of your gas, insurance, repairs, interest, maintenance, registration, depreciation, tolls and parking are all deductible. Alternatively, you can deduct your mileage -- set at 50 cents a mile for business travel in 2010 -- plus tolls, parking and interest expense for your car.
Put your children's cars in your name. It reduces the insurance you have to pay (multiple-vehicle discount) and allows you to deduct any business expenses incurred on your return. The downside is that you may be liable for any accidents. That's why you have auto insurance . . . which is deductible to the extent the car is used in business.
Cost through age 17: $10,980 to $18,750
Clothing accounts for 5% to 7% of the total costs.
What to do
New parents quickly discover the cottage industry of saving and sharing newborn and toddler clothes, so take full advantage to skirt the outlandish expense of buying clothes for your little one(s). Also, seek out some of the thousands of manufacturer outlets across the country where you can buy perfectly good clothes as little as half their original price.
The Internet also offers outlet-shopping opportunities. At Bluefly, for example, shoppers can choose from dozens of designer labels at discounts as large as 75%.
Buy neutral-colored clothing that can be shared easily among siblings, regardless of gender. Shop sales, and shop at the end of season, so you're not paying a premium for your children's clothes. Finally, as your children get older and start generating some sort of income -- baby-sitting, shoveling snow, perhaps a part-time job -- make it clear to them that, should they want a designer-label piece of clothing, they'll have to cough up at least part of the cost, if not all of it.
Clothing is not deductible. However, advertising is deductible if you are self-employed. If you are an employee, remember that you can be self-employed with a second job. Schnepper had shirts made for his children to promote his book, with "Ask My Dad How to Pay Zero Taxes" printed on the front. That's tax-deductible advertising. Think Century 21 agents and their gold jackets.
Cost through age 17: $13,230 to $20,460
Health care represents 6% to 8% of the total costs, but those numbers are misleading. For some families, it's a nonissue; for others, the numbers can be mind-boggling.
What to do
Because much of this expense comes from health insurance premiums, it pays to shop around if you have the option of choosing your insurance carrier. Monthly premiums can vary a lot. Sites such as eHealthInsurance also offer information on health maintenance organizations and preferred provider organizations.
From there, you can trim your health care expenses by going with the largest deductible you can handle. Also, check to see if your premiums are lower if you pay semiannually or annually instead of more frequently. If the cost of prescription drugs seems off the chart, check to see if Internet-based drugstores can supply you for less -- two are Drugstore.com and Rx.com. If you can't afford health insurance, you can still find free or reduced-cost care.
If you work for a large company, make certain you use your employer's cafeteria plan if one is available. This lets you set aside pretax dollars for expenses such as deductibles, copayments and noncovered items such as dentistry and eyeglasses. It doesn't reduce the cost of health care directly, but it shaves money off the taxes you pay on money that does go toward medical bills.
Medical expenses are deductible to the extent that they exceed 7.5% of your adjusted gross income. Such expenses include not only doctors and hospitals, but also dentists, prescription drugs, medical insurance and any necessary medical equipment.
If you are self-employed, 100% of your health insurance costs can be deducted, without any reduction, even if you don't itemize.
Anything you pay for the diagnosis, cure, relief, treatment or prevention of any disease is deductible.
Child care and education
Cost through age 17: $21,720 to $81,210
These expenses account for 14% to 22% of the overall cost. Big caveat: Big as they are, those figures do NOT include college.
What to do
If staying at home full time isn't feasible, look into forming a cooperative with other parents. For instance, each parent could agree to look after all of the children in the group for a certain number of hours a week. However, this may require a potential investment in day-care equipment and local licensing if enough children are involved. Alternatively, if you have a parent of your own nearby, see if he or she would be willing to do some baby-sitting.
Child care: If you and your spouse both work (or one is disabled or a full-time student), then you qualify for the child-care credit. That credit, a dollar-for-dollar reduction in your tax, covers up to 35% of the first $3,000 you pay for a child under age 13. For two or more children, the credit tops out at $6,000. That could mean, if you have two children in care, an additional $2,100 in your pocket.
Here's where it gets to be fun. Not only does the credit apply to child care and baby-sitting, but it counts any home care necessary for you both to work as well. Therefore, if you hire a maid to clean your house because you work, the cost of that maid counts toward the credit! The cost of a day camp can be deducted too, but not if it includes overnight stays.
Don't forget the child tax credit. For each child under age 17, you will get a credit of $1,000 for 2010. The credit phases out as your income exceeds $110,000 ($75,000 if single or head of household).
Education: Set up an education IRA or invest with various state prepaid tuition plans where the income is either tax deferred or completely excluded.
Alternatively, or in addition, invest some dollars under your children's names. The income will be taxed to them at their lower rates.
Once they enter college, the American Opportunity Tax Credit (formerly the Hope Credit) and the Lifetime Learning Credit will reduce your taxes further. For the 2010 tax year, the American Opportunity credit covers $2,500 in qualified expenses (phased out for higher-earning families) and up to four years of college. The Lifetime Learning Credit, which covers both undergraduate and graduate studies, is 20% of the first $10,000 paid. Note, though, that you can't use both credits for the same student.
When they graduate, interest on any student loans may be deductible -- even if you don't itemize. You can deduct up to $2,500 in student-loan interest above the line.
Cost through age 17: $10,650 to $35,040
This last category takes in 7% to 9% of the total cost and includes things such as personal-care items, entertainment and reading materials.
What to do
Stock up on personal-care items at bulk warehouses where the cost is cheaper per item. To trim the expense of fun, check out entertainment clubs where, for a flat fee, you get significant discounts at restaurants, movie theaters, fast food joints and theme parks. To cut down on the expense of books, rely on your local library or used-book stores. Likewise, if you're in the mood to rent a movie, many libraries have substantial tape and DVD collections.
If your children are interested in summer camps, check out local community organizations rather than sending them off to two-week camps that can run into the thousands of dollars. Music? Rent the instrument to begin, with a purchase option if your child sticks with it. Don't forget about pawnshops and used equipment, either. And, as with other sorts of more discretionary expenses, expect older children earning part-time income to contribute something.
Instead of paying strangers to mow your lawn or clean your pool, pay your children. If you are self-employed, hire your children to work for you. The IRS has validated children as young as age 7 to work for their parents' unincorporated businesses. For 2010, you can employ and pay each of your children as much as $5,700 (plus an additional $5,000 per child if they opt for a deductible IRAs), tax-free to them and deductible to you. If your business is not incorporated, and your children are under age 18, you don't have to pay Social Security, Medicare, state unemployment or disability, either.
Let them use these dollars, tax-deductible to you, to pay for these miscellaneous expenses. Then smile and think about how much you are going to cost them when you get older.
VIDEO ON MSN MONEY
What I would like to see is an article on how much it costs to raise a child for the people who have kids and expect welfare and free handouts to pay for them. Now that would be interesting.
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