The cost of raising a child obviously varies depending on lots of different factors. Surveys over the years are broad and varied and I have seen figures relating to Ireland from €15,000 for year one to €550,000 from cradle to grave.
In Prosperous we are privileged enough that our clients share with us what they spend on their lives. So, we went about finding out what our clients are spending on their children.
A little word of warning here though, Prosperous only deals with clients who earn more than €150,000 per annum or who have investable assets of €250,000 or more.
This is where Parkinson’s law kicks in. Parkinson’s law is the rule that says any “job” or “task” you must do will take as long as the time you have to do that job. For example, if you have 5 minutes to get something done you will get it done in 5 minutes. But if you have an hour to get something done it will take 1 hour.
We believe Parkinson’s law applies to your income. People’s lifestyles tend to expand to fill the income they have. Do you remember the pay rise you got last year? Do you still notice the difference? Most people don’t. That’s because your lifestyle expanded when you got the pay rise.
Our survey is a little skewed, because our clients have strong salaries and/or investable assets. Therefore, they tend to spend more on their lifestyle and this includes what they spend on their kids.
We looked at all types of expenditure from before birth, buggies, cots, doing up the bedroom and medical consultants. Right the way through the rearing process of clothes, food, childcare, school, college, Christmas and birthdays and lots more. To finally giving the child (adult) a €25,000 gift for either their wedding or a deposit for a house at age 25.
In total the cost of raising a child based on our research of our clients is a whopping €354,780. You can add another €67,000 to that figure if you plan on sending your child through private schooling and you hope they move out of home for college.
If we keep the maths simple that means for every child you have they will cost you about €16,000 a year, if you are on the top rate of tax that means each child is costing you about €30,000 of your salary. If you pay tax at 20% it is costing you about €20,000 of your earnings.
There are some things you really need to consider before starting or adding to the family. But I will say that ultimately having children is an emotional and not a financial decision so as a financial planner it really is none of my business!
- Planning starts early, and I mean early. Are your finances in order?
- How will the loss of one income during at least the maternity/paternity leave affect the house financially?
- Will you ever want to go back to work?
- Have you savings to draw on?
- Public or private hospital care?
- Do you want more children? How will that effect the finances, childcare?
- Will you need a bigger car?
- Bigger house?
- Will you need to stop pension contributions for a while? Will you ever start it up again?
- How will you pay for the big things like college?
One of the biggest mistakes we see is people doing the diligent thing of saving for college but saving in the wrong place.
Putting the children’s allowance in a bank account for 18 years is not the right place to save for 18 years. That is because a bank account might average 1% per annum over the next 18 years (even though you will currently get 0.25% or less).
Assuming your child is going to live at home it is estimated that it costs a parent €7,000 per annum to put their child through college. 4 years of college will therefore cost €28,000.
That is €28,000 today, but assuming inflation of 2% per annum you will need a sum of €39,990 in 18 years’ time to get your child through college.
If you save in a deposit account or post-office account and get 1% net per annum you will need to save €169 per month from the day your child is born to cover this.
If, however you save in a well-diversified, well-constructed portfolio you will only need to save €114.50 per month. (assuming 5% per annum net).
This is by far the biggest mistake we see people making. They use short term investment vehicles like bank accounts to save for long term goals.
There are other simple mistakes people make that can make dramatic changes, for example they don’t shop around for things like health insurance. Some companies charge €900 or more to add a child and others will cover the kids for free, particularly when you have several children.
We sometimes see a teenage child who works in the family business but doesn’t get paid. Then the parents go out and pay for things for them or give them “pocket money”. What this means is that the parents are using their after-tax income to pay for things for the child.
Yet if the child was legitimately working in the business and they are over the age of 14 they can work part time and get paid for it. Unless the family business is paying them a fortune it is unlikely they will use up their tax credits. So their pay will be tax free. This means the family are now using the before tax income to get the child through school/college.
When it comes down to it, people tend to make the same mistakes with their own finances as they do for their children. Being aware of what you are spending is the single biggest thing that helps improve your finances.
We get all our clients to go through the exercise of writing down what they spend on a template we use. What clients often say to us is they are shocked with where they spend their money, this often results in people’s behaviour changing.
What you spend your money on is up to you, but be aware of where you spend it.
Until the kids are old enough to do it for themselves your job of minding the finances is twice as hard because you have to do it for you and for them.