For the past year, my life has been a series of working weeks and wedding weekends. And while I love a good wedding (and there have been some awesome ones), I am familiar with nursery school etiquette and the established pattern of love, marriage, and the baby in carriage.

I’m also given to understand that this carriage is “golden”.

And I’ll bet that it is. This blog post is my attempt to put the numbers in place, and achieve three things:

  1. a heightened appreciation for one’s parents (a universal benefit);
  2. a greater sense of value for children (for those that are already committed – because the more you pay for something, the more you value it); and
  3. a collective thought pause for the as-yet-still-unburdened.

As a starting point, I went onto Google for answers. And here are some:

  • The 2011 annual report by the United States Department of Agriculture* makes a point of saying that the higher your income, the more you spend on your children. Their estimate of annual cost ranges between $9,000 and $25,000 per year; but excludes college costs and anything paid for by parents after the child turns 17. It also excludes the cost of what might have been (ie. if the mother had worked instead of being a stay-at-home mom; or if the money had been invested instead). But basically, after you take inflation into account (2.55% for the next 20 years), you’re looking at a total cash expenditure of around $340,000 all-in if you’re Joe Average.
  • For this exercise, I’m going to use those numbers and then adjust them for the fact that parents are likely to support their child into his/her mid-twenties. And I’m also going to add in the College Board estimates of college and housing costs (which are, well, high – and you can find them on page 22 of the report).
  • Full disclosure: I know that the assumptions are not perfect. That said, I reckon the over-estimations in some areas will equal out against the under-estimations in others. And honestly, this really is about the principle (and, admittedly, some shock factor).
  • I also found this article in TIME Magazine, which suggests that the number from the 2011 report should actually be closer to $900,000 after you take college and longer support periods into account.
  • If you’re looking for number-play, you should read this New York Times article, in which the poor journalist realises that she’s probably going to spend $1.8 million on her child.
  • And then there’s another TIME article from 2009, which gave me this awesome quote…

“It is commonly said that buying a house is the biggest purchase most Americans will ever make. Having a baby is like buying six houses. Except they don’t increase in value, you can’t sell them, and after 16 years they’ll probably say they hate you.”

The American Child

Here is a graph of annual spending on one’s first child (I’ve included low income, high income, and the overall American average):

Unfortunately, that’s just physical cost.

If I was a fairly-rational person, I wouldn’t just “not spend” the money. I’d probably invest it instead. So assuming that you manage to achieve a 5% real return on your money over time (a reasonably achievable return) here’s a graph showing what each year’s cost would be worth by the time the child is 25, if you’d saved the money instead:

Obviously, the time value of money means that your early costs are worth the most at the end. But there is a spike when a child enters college, because now you’re supporting an adult in a separate home with a separate food bill. No economies of scale there!

A summary:

  1. If you’ve chosen happiness over wealth (low income), but still want to give your child some kind of college education, you’re looking to forgo around $850,000 of future wealth. That is: you’d have to put $410,000 aside at the moment of conception if you didn’t want to have to pay for anything else ever again**.
  2. If you’ve chosen the rat race (high income), then chances are that you’re going to spend more on your children than everyone else; which looks like a future wealth cost of around $2 million. And again, in today terms, that makes for a $970,000 set-aside.
  3. Finally, if you’re somewhere in between, it’s an average $1.5 million sacrifice in the future; which works out to a $700,000 effective sacrifice today.

The South Africa Side of the Story

So I realise that working with American figures is a bit irrelevant; because most of my readers are my friends, and we don’t live in America with food stamp purchases and subsidised housing. Also, most of my readers would want to live like the higher income class – with private schools and violin lessons and skiing trips in December.

So I did some rough calculations of what it might cost my peer group to forgo the condom and cast themselves into the genetic pool. And it turns out, with some pretty basic assumptions***, you end up with a range of annual costs of between R160,000 and R240,000. And I think that sounds about right. I mean – it’s a bit less than the high-income category in the States – but living costs, in general, are cheaper in South Africa.

So at South African inflation rates of 5%, that’s a total cash cost of around R13 million. And again, if we assume that you could have invested the money and earned 12% per year (about the same as our housing return in the Rent Vs Buy post), that’s a future inclusive cost of R58 million.

When you pull the number back into today’s terms (ie. present valued the stream of cash flows at today’s prime rate of interest), then that works out to a cost of roughly R5 million.

That is: if you wanted to be be sure that you had enough money to cover your child’s costs and the lost investment returns; then you’d have to put R5 million into a high-interest-bearing fixed deposit account as soon as the home pregnancy kit delivers the happy news.

The Conclusion

If you dispensed with the birth control, you just had a R5 million orgasm.

Hope it was awesome.

PS: I’d just like to thank my parents…

*Animal Farm, anyone?

**Assuming you get a long term deposit interest rate of 3% – being slightly higher than assumed inflation.

***Food costs per meal per day (between R20 and R50 per meal depend on age); schooling per term; cost of an extra dependent on a full coverage Medical Aid scheme; the rent differential on a house with an extra bedroom; an extra tank of fuel each week for runarounds; a R2,000 monthly incidentals for gifts, treats, haircuts, toiletries and the like; an annual R6,000 clothing allowance for Mr Price; and the extra plane tickets.