The Financial Implications of a Second Child
By Katy Song, CFP®
Many factors go into the decision to grow your family, and affordability is usually one of them. To determine whether or not a second child is financially feasible, you need to consider the costs of raising that child from birth through financial independence, which is hopefully when they graduate college. Here are a few of the largest expenses to evaluate.
Does Size Matter?
Housing-related costs (mortgage, insurance, and property tax) are the largest expenses for most families. In planning for Baby #2, ask yourself if you need (not want) to move to accommodate your growing family. Not everyone is able to afford their dream house when they first move to Marin. If you bought at the peak of the market, you were probably thinking you would be in your house for 5-10 years and then upgrade. Given decreased home values, you may have to stay in your “starter” home longer than anticipated.
If staying put is not a viable option, you may want to consider renting for a few years while your children are young. Typically, you can afford a nicer home if you rent, and you can save the money you would have spent on homeowner’s insurance and property tax for a down payment on your next home.
Dreaded Childcare Costs
The cost of childcare in Marin is crazy! If you look at average childcare costs for the U.S., you see numbers like $400 per month. Unless you go the co-op route in Marin, I doubt you will find full-time childcare for under $700 per month. If you are a dual income family and plan to continue that route when Baby #2 arrives, childcare will likely be your second largest expense after housing. Even for the SAHP, you may have your first child in pre-school or want some childcare to maintain your sanity.
The most important thing to consider is that these costs are TEMPORARY. Your kids will grow up and go to elementary school, and since many families move to Marin for good schools, primary and secondary education will be relatively free. View these temporary childcare costs as an investment in your children’s education and your happiness, not just as a cost!
If you have two children under the age of three, the full cost (room, board, tuition, etc.) of a public university education in California will be approximately $512,000 by the time they are in college. This assumes the costs of attending college grow 5% each year until they start school, which has been the trend. This means that you need to be saving over $16,000 per year to fully pay for college by their respective freshman years. Of course, you can take out loans and apply for financial aid or scholarships, but all parents should be aware of the magnitude of savings required.
Decide if you have room in your spending plan to save for college now or whether to wait until your children are out of daycare.
You probably already have most of the supplies you need, so the costs of baby’s first few months should be minimal. If Baby #2 is not the same gender as your first child, you may need some clothes and toys. Here is where you can recycle, reuse and borrow. Fortunately, you probably have a lot of new friends through playgroups or pre-school that may have already gone through Baby #2 phase and can give or loan you things you need. Also, check out kid consignment shops. Some items have never been worn, and books and toys are available at steep discounts.
Don’t Forget the Tax Benefit of Baby #2!
While all of these costs add up, Baby #2 also brings certain tax benefits. Depending on your Adjusted Gross Income (AGI), Baby #2 may enable you to increase your Dependency Exemption by an additional $3,650, and provide up to $1,600 in tax credits ($1,000 Child Tax Credit and $600 Child and Dependent Care Credit).
The costs of raising children in Marin can be staggering, but the happiness I get from my daughter is priceless. We are expecting our second child, and I have run through my own analysis of the costs outlined above. For us, Baby #2 means less income or increased expenses for childcare. Taking the time now to calculate the financial implications makes me feel more in control, enables me to let go of any financial anxiety, and enjoy my pregnancy more.