Almost two years ago now, I wrote a blog post on procreative finance (which I realise, in retrospect, was a bit of a bad title). And in that post, I talked about how much it would cost to bring up a child. It’s a bit dated now, so consider this an update.
If you head across to the United States, the Department of Agriculture rather helpfully does this calculation for you, and even breaks it down by income bracket. Here’s their latest annual report, released in August last year, which makes for some pretty fascinating reading.
But here are some costs that aren’t included:
- College costs;
- Costs that are paid by the State (especially in the lower income houses, which will get state-education benefits, and possibly Medicaid);
- The opportunity cost of what else could have been done with that money, or what else the mother/father could have been doing with their time.
I think those costs are important. So I’m going to make some adjustments. And also, other adjustments to take into account the fact that today’s parents are likely to support their child into its mid-twenties.
The Adjustment Assumptions
So, full disclosure: I know that the assumptions are not perfect. But I think that the over-estimations in some areas will balance out against the under-estimations in others. And honestly, this really is about the principle.
The Department estimates that the cost of College and full board accommodation is about $18,400 per year in a State institution, and $40,900 per year in a Private institution. I’ve said that students from lower income families might spend 5 years in college, while higher income college students might spend 6 or so (perhaps a bit high – but there’s a job market that they might not get into). I’ve also assumed inflation at 2% (also a little high, truthfully – but who knows).
So after adjusting for the college years and the post-college years, here is a graph of annual spending on one’s first child (I’ve included low income, high income, and the overall American average):
And if you’re looking for totals, then in nominal terms:
- High Income Households will spend about $1 million on each child;
- Low Income Households will spend about $430,000 on each child (assuming they get to college); and
- The average spend is around $724,000 per child.
Also, if you wanted to put aside some money that would be a “fund” to cover the cost of your grandchild/child, earning a return of just above inflation (say, 1%), then:
- A High Income Household would need to put aside $640,000 – today.
- A Low Income Household would need to put aside $273,000 – today.
- And the average household would need to put aside $459,000 – today.
If I were financially-savvy and chose not to have children, I wouldn’t just “not spend” that money. I’d invest it instead.
Meaning that having a child means missing out on some streams of passive income and capital accumulation. So assuming that I manage to earn a 5% real return on my money over time (quite possible – especially if I were taking risks because of all the no children) here’s a graph showing what each year’s spend would be worth by the time the child turned 25, if I’d invested the money instead*:
*you need to be looking at that y-axis, ne’er were it so appropriately named.
Obviously, time value of money means that your earlier 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.
- 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 $2.2 million.
- 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 $952,000 of future wealth.
- Finally, if you’re somewhere in between, it’s an average $1.59 million sacrifice.
- Per child.
There is a 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 next obvious question: what about here in SA? Where we don’t have the medicaid or the public schooling?