10/3/2012 8:26 PM ET|
Financial planning for child care
Expectant parents should prepare a plan for how they'll meet the high expenses of caring for their infant, starting with these 3 steps.
Child care is one of biggest costs of being a parent today. Day care can run from $4,600 a year in Mississippi to nearly $15,000 a year in Massachusetts.
Most expectant parents, however, don't have a clear plan for child care. Unlike a 529 plan, where money is set aside for future college costs, a solid child care plan is largely unheard-of.
Although no tax-advantaged plan has been designed yet to encourage saving for future day care or nanny costs, would-be parents should be able to create a good child care plan on their own in three steps:
Step 1: Decide early what type of care the child will receive
Joseph Clark, a managing partner at the Financial Enhancement Group, believes it's important to answer these questions well in advance: Will the child be put in a day care center or a family child care home? Will the child need a nanny?
"Would-be parents should figure out their monthly child care costs and put that in a savings account or reduce their spending by that amount to see if they can absorb the financial pressure," says Clark.
A recent report from Child Care Aware of America (.pdf file) breaks down the costs of full-time child care in every state. It includes average fees for both child care centers and family child care homes.
In New York, for example, the average cost for infant care in a day care center is about $14,000 a year, or $1,167 per month. In this case, Clark says, would-be parents should set aside an amount to cover the first six months of care, or around $7,000.
If a couple choose to have their child cared for by a nanny, they should be prepared to shell out an average of $831 a week in New York City, according to data from the 2012 International Nanny Association Salary and Benefits Survey (.pdf file).
Whether it's day care or nanny care, "work up to six months of that need in a cash-type savings vehicle," says Clark. "It will require discipline now, but it will eliminate some stressful nights later on."
Step 2: Calculate out-of-work income loss
After a child is born, most couples have a significant loss of income as one parent stays home to take care of the child for the first three to six months. Expectant parents should take this into consideration and save for it before the child is born.
The most straightforward way to figure out how much needs to be saved for the unpaid time away is to determine the net pay the parent will forgo by staying home, says Michael Garry, a managing member of Yardley Wealth Management.
Assume that the parent who will stay home with the baby makes about $35,000 a year, or about $1,350 every two weeks. After taxes and deductions, the net pay comes out to about $1,100. If the parent is going to stay home for six months, the family needs to replace $14,300 ($1,100 times 13 biweekly paychecks); if the parent wants to stay home for three months, the couple should save $7,150 ($1,100 times 6.5 biweekly paychecks).
The parent who plans to stay home with the newborn should check his or her employer's policies for time off, adds Jessica Maldonado, the chief compliance officer for Allos Investment Advisors. Be sure to read into the specifics. How many days are paid? Can Family and Medical Leave Act time be used? What about sick days, personal days and vacation days?
"You should also take into consideration the kind of company you work for and how invaluable your position is," Maldonado says. "If you're the VP at a small company, wearing many hats and with several direct reports, it might be more important for you to return quickly." Some employers are willing to compromise some flexibility in work hours to get a new parent back to work sooner.
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Step 3: Weigh child care costs against potential income
Rick Kahler, the president of Kahler Financial Group, says it's a good idea to compare the cost of child care with the income of the lowesr-wage-earning parent. In many cases, he says, the cost of child care negates working outside of the home.
In Wisconsin, for example, the state median income for a two-parent family is $79,589, while the average cost for infant care in a day care center is $10,775 a year, or about $207 per week. In Milwaukee, the gross weekly salary average for a full-time, live-out nanny is $500.
Assume that the lower-earning parent makes $2,500 a month in net pay. After work-related expenses (transportation costs, lunch, etc.) of about $350, the amount available for child care and other household expenses is $2,150. If this parent's contribution to the household budget is $1,000 a month, subtract that contribution from the monthly available amount; $1,150 will be available for child care.
"There are roughly 4.33 weeks in a month, so the child care costs could not exceed $265 per week or this family would be going backwards," says Maldonado.
For many parents, even though there is no financial advantage to working outside the home, it's an emotional and mental necessity. Parents need to weigh their needs with their child's needs and the financial implications of child care.
"It is wise to create a plan for child care," says Maldonado. "But for it to be successful, the plan should include both financial as well as emotional and values-based components."
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looking at some of these comments and it seems that a lot of commenters don't realize that when a parent makes a significant salary it isn't cost effective for them to stay home and take care of a baby. They could save $14k a year but lose $70 - 100k in potential salary. Usually both salaries are needed for the household to run. Also, moving to "a less expensive house" isn't exactly an option. People buy homes in areas with good school districts so their children can benefit later.
To all providers thank you for what you do. Together you and the parents make a good team.
I'm not saying you have to be rich to have a baby but think about it people. Money does matter. Love doesn't put clothes on their backs, food in their bellies, doctors and dentist visits, good education, etc etc etc. It isn't just about the pleasure of having a baby or umm... the pleasure of making a baby, intended or not.
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