The USDA’s most recent data on raising children in the United States revealed that it costs $284,524 to raise one child to 17 years of age [1]. However since then, we’ve seen a pretty stark increase in living expenses. According to the Bureau of Labor Statistics Consumer Price Index Inflation calculator, that number would be closer to $335,411 today [2].
This obviously doesn’t include a college education, which can easily surpass that! The prospect of financial planning for parenthood can be daunting, but it’s manageable when you balance meeting immediate needs with thinking long term.
Basic costs
Where does that $335,411 go? Twenty-nine percent goes to housing, as the USDA observes that most families move to larger houses with each child added to their family. Eighteen percent of the cost goes to food, while sixteen percent goes to childcare and education, including daycare, babysitters, books and school supplies, and averaged elementary and high school tuitions. Fifteen percent goes to transportation, which includes car payments, repairs, gas, and even airfare, while nine percent goes to healthcare. Six percent ends up in clothing, and seven percent covers miscellaneous expenses such as toothbrushes, electronics, hockey equipment, dance lessons, and non-school books [1].
There are obviously many variables in those numbers, such as where in the country you live, what school you choose for your child, and what your child might pay for himself when he’s a teenager with a summer job [1].
A child’s expenses increase with his age. The USDA reports that parents will spend $13,900 per year on their 15-year-old versus $12,680 on their infant [1]. These day-to-day expenses can be handled on a per-item basis; parents will often find themselves saying yes to tutoring and no to the new video game console. Budgeting resources for the family are basically the same as those for a couple without children, or for a single person. Strategies like buying used, sharing with other families, and having teenaged children pay for some of their leisure purchases all add up to managing the family’s finances.
What’s complicated about family finances, then? In a word, college.
Paying for college
Many of the greatest costs associated with raising a child are for nonessentials like theater camp and a new car. However, most parents intend to at least partially pay for their child’s college education, and that expense is considered essential.
According to the College Board, the average annual tuition and fees for in-state public four-year institutions are approximately $11,610, and $43,350 for private non-profit four-year institutions [3]. On top of that, you can expect a 6% annual inflation of those costs. Besides crossing your fingers for a merit scholarship, what can you do to prepare for those costs? There are several reliable options.
The first option is a 529 college plan. This tax-advantaged investment plan is designed specifically as a college fund. The 2019 SECURE Act (Setting Every Community Up for Retirement Enhancement) also made it possible to pay off up to $18,000 in student loans with the 529 fund, as well as use it for apprenticeship programs [3].
There are two types of 529 plans. One is a savings fund similar to a 401(k), while the other is a prepaid tuition plan that locks in current tuition rates at a specific college or university, then pays it directly when your child begins attending the institution [3]. Each plan has its advantages and drawbacks, so it’s wise to speak to a financial advisor at your bank to learn whether this is a good choice for your family.
Coverdell ESAs (Education Savings Accounts) are a similar fund offered by the US federal government. This option has a cap on how much can be contributed per year, but funds can be used for elementary and high school as well as higher education [3].
Several US states offer a pre-paid state college tuition program. If you live in Florida, Illinois, Maryland, Massachusetts, Michigan, Mississippi, Nevada, Texas, or Washington, check out your state’s website for information on terms and benefits [4].
Another option is starting an IRA just for college savings. While most IRAs penalize you ten percent for withdrawing funds before you are 59.5 years old, higher education expenses are exempt from this penalty. You are still subject to income tax after withdrawing these funds, so speak to your financial planner about restrictions and drawbacks to this option [3].
Next, there’s the American Opportunity Tax Credit. This tax credit allows students to redeem the first $2,000 and 25 percent of the next $2,000 spent on college, each year for four years, for a possible total of $10,000 in tax credits. These credits are partially refundable, meaning that even if you don’t owe income tax, you can receive up to $1,000 per year in cash from the IRS [5].
Merit- and need-based scholarships and grants are in abundance. Work study and employer tuition subsidies are also assets to explore. When planning for your child’s higher education, consider a plan with many facets, and always make sure your investment or savings funds are FDIC insured [5].
