The Effect of Having Children Young on Finances

Having Children YoungFor the record, virtually my entire adult life I have been a dad.  When I was 18 I met Mrs. C. and before I turned 19 we moved in with each other, at the time she had a son who was about to turn 2.  From that point forward I have been in the position of a full time dad.  One thing I have noticed from reading other personal finance blogs is that the vast majority (but not all) of the people who have reached financial independence at a young age did not have children in their teens and twenties. I’m certainly not trying to use having children young as a scapegoat for not achieving super early retirement, but I certainly believe that it makes the journey much more difficult.

Dollar Cost Vs Opportunity Cost

A lot of ink is written on how kids cost $250,000 not including college to raise until adult hood.  Although I think this number is far higher then it should be in terms of actual dollars spent, I think it is actually low when you include opportunity costs.  I have turned down hundreds of thousands of dollars in work over the last 10 years in order to be able to be present as a dad.  When you have kids leaving home for a 6 month project or even completely relocating for a higher paycheck is much more difficult to do.

Actual Dollar Costs

  • Housing: $1,200 per year: This is roughly what the difference in mortgage payment is between a similar 3 bedroom and 4 bedroom house in my area.
  • Child Care $0. We have never paid for day care.  By working opposite shifts and even opposite seasons we have managed to avoid this expense, although the “cost” of doing this will be documented below under opportunity costs.
  • Transportation: $1,500 per year: The school our kids go to does not have bussing to our location so we have to drive them to and from school. The total gas expenditure for this and other misc. running around is around $1,500 a year. We do not subscribe to the theory that you need to drive nicer cars because you have children for safety, so having kids does not make us buy a more expensive vehicle.
  • Clothing: $750 per year: This is higher than what our actual costs are, part of this is because clothes get more expensive as the kids get older. Another reason that our spending on this category is low is that we benefit from a multi-kid discount.  We store clothes from the bigger kid and hand it down to the littler kid (and sometimes 2 -3 more kids across the nephews after that)
  • Toys/Entertainment: $500 per year: This includes birthdays and Christmas. Most fun stuff is cheap and we find toys cheap at yard sales and thrift stores.
  • Food: $750 per year: Kids are small and don’t eat all that much, I can’t see applying half of our food budget to the kids, honestly, I think a quarter of it will cover both kids.

This comes to a total of roughly $5,000 per year, or $90,000 over 18 years.  Additional kids are cheaper because you already have the bigger house, most of the clothes and toys, and they will most likely be driven to the same school. I think incrementally the second kid is way more than 1/2 off, probably even 3/4 off. These are some rough figures that represent my experience in life, of course YMMV.

Opportunity Costs:

  • Restricted on total travel: When travelling you are no longer being paid by the hour, its really by the day because unlike working at home where you can at least see your child for a few hours no matter what your schedule is, travelling takes this time down to zero.  It is much more difficult to justify long work travel when you have children.
  • Restricted on total hours:  Working 72 – 96 hours is much easier to do without kids.  It’s hard to strike the perfect balance between being able to be a parent and earn some extra money.
  • Restricted on risk taking: Quitting your steady job to take on a risky yet possibly highly rewarding project is exciting without kids, but when you have to provide for others risk mitigation is needed and it is much harder to walk away from a steady paycheck.
  • Stay at home Vs. Day Care: This argument is an article by itself. The more kids you have the more it make sense for one parent to stay home versus both working. I’d estimate our yearly loss of income by purposefully having one parent home at all times at $5,000 per year. This is only true for the first 5 years, then school becomes a defacto babysitter and summer is the only concern.

All of these opportunity costs are optional. There is no law that once you have kids you can’t work 84 hour weeks and be gone for half the year.  Of course doing so will greatly reduce the time you can spend with your children and can also strain a marriage.  In my line of work divorce is much more common than the US Average. I’d say of people I work with who have been married over 70% have been divorced at least once. I even worked with a guy who had been divorced 3 times. There have been years where as a family we have turned down north of $50,000 a year in income in order to have a well balanced life.

Anyway you cut it, having children is an expensive endeavor. Whether you see the yearly cost as $5,000, $10,000 or $20,000 per kid, it is a lot of money. The earlier this money has to be spent the more difficult it is to build wealth.  Most people early in their careers don’t earn a lot so having the expense of children can drive their savings rates to near zero, whereas most people right out of college without kids can at least save 10 – 15% of their income.

Economic Comparison: Having Kids in 20’s Vs. Kids in 30’s

Having Kids in Your 20’s:

While the primary goal for a late teens/ early 20’s financially responsible person is to build their career and stash up retirement funds. The primary goals for a young parent are amazingly different; getting by takes center stage.  While I don’t agree that on average it takes a whopping $13,900 per year to raise a child, the added expenses and TIME DEMANDS of being a parent greatly slims the available delta between earnings and expenses, making saving anything very difficult.

Even after securing the basics to get by having a child also increases the desire and need for a permanent home. Most people don’t want to have their child grow up hopping between different houses and cities.  Having an established home and home ownership are good for child development.  Now extra money instead of being put into retirement accounts, goes into saving for a down payment on a house.

The Upside: Children will be grown and out of the house in the couple’s 40’s, giving them some time to catch up on retirement savings. By buying a house earlier and living on a tight budget, people who were young parents once the kids are gone are used to living frugally and will be able to save and invest a high percentage of earnings in their 40s and 50s.

Having Kids in Your 30’s

People who wait until their 30’s to have children have some distinct advantages:

Established in career with higher incomes: During their 20’s they could relocate without much thought. They could take more risks because the consequences of failure were much less than that of a couple with kids.  They could work 12 hour, 16 hour, 18 hour days to get ahead. Having an extra 10 years to build up their careers also now provides them with a much higher income then they would have had 10 years prior, making it much easier to cash flow children.

Have built a nest egg: Even with a reduction in contributions, compounding interest will carry their retirement funds when they do have to reduce contributions due to costs associated with having a child. Of course by the time this couple is in their 30’s and having children it is likely they can afford to continue to save large chunks of money AND cash flow raising a child. If a couple waited to have children for 10 years and instead of spending $14,000 per year on kids invested it in retirement accounts for 8 years and saved for a house down payment for the final 2 years; at the end of 10 years at 8% annualized returns would have roughly $187,000 in retirement funds, which would at this point be able to generate $15,000 per year going forward. They would also have $28,000 saved for a down payment on a modest house.  Even if they never added another dime to retirement accounts, they would have $1.6 Million by age 60.

The Downside: The kids will be incurring college expenses around the time this couple would be looking at retirement.

Some people wait until their 40’s or beyond to have children. My Grandpa who is in his early 70’s had kids in his 20’s, another set in his 40’s and now has kids the same age as mine (third wife and they adopted). There is no perfect timing for people to have children, however delaying having children until you are financially established will greatly increase the probability of being able to build wealth. For some people becoming financially established may only take a couple years, for others it may take decades.

The Concept of Children as Liabilities:

A Major part of this problem is how we view children in our society. The mere existence of a study that claims it costs a quarter million to raise a child is an indicator to what our values are as a society. I can guarantee that across the world people from other nations look at these numbers and laugh at us.  Even in this country if we go back 50 years or 75 years, this concept would make people laugh, mostly because children were not seen as liabilities, but as assets.

My great grandparents had 12 kids, and over the course of their lifetimes, even inflation adjusted probably didn’t see $250,000, much less spend it 12 times.  I know we are well past the days of Thomas Jefferson’s dream of a country of Yeomen Farmers.  In “those good ole days” by the age of 6 a child could be earning his keep and by 12 easily producing in excess of his consumption.  The older kids looked after the younger kids and everyone lived off the family farm in a tiny house by today’s standards.

Young teenagers could often find work and any able bodies could work as many hours as they wanted in factories, textile mills, and mines.  Yes at times child labor was extremely exploitative, but the concept of children working should not be seen as exploitative.  Children used to have a strong role in helping support the family, but that is no longer the case.  In many states it is illegal for children to work more than a few hours a week until they are 18, and even then there are substantial regulations that keep employers from wanting to employ them. In Michigan teenagers under 16 can only work a combined 48 hours per week between school and work. With school taking up 35 hours, this only leaves 13 hours for work, while leaving 120 hours of the week untouched.

What are your thoughts on the costs of raising children, when it makes sense to have them and of course whether it is incredibly exploitative for precious snowflakes to work more than 13 hours a week?


John C. started Action Economics in 2013 as a way to gain more knowledge on personal financial planning and to share that knowledge with others. Action Economics focuses on paying off the house, reducing taxes, and building wealth. John uses the free tool Personal Capital to track his net worth and posts quarterly updates on his finances. Check out the Action Economics archives section for all past posts.

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