Raising your $221,000 baby
Children are priceless, but raising them is one of the most expensive things you'll ever do. Here's how much it costs, along with some strategies for lowering expenses.
By MSN Money staff
Every newborn child is a bundle of joy. But you'd better have a bundle of cash on hand if you want to raise one.
Typical families, those making from $56,870 to $98,470 a year, will spend a whopping $221,190 to raise a second child born in 2008 through age 17, estimates the Center for Nutrition Policy and Promotion (.pdf file), a division of the U.S. Department of Agriculture.
Higher-income families will spend even more. Those earning more than $98,470 will spend $366,660 overall in the U.S. to raise a second child; that figure rises to $406,680 in urban areas of the Northeast.
Though not as steep, the figures for lower-income families are just as unsettling: $159,870 for families making less than $56,870 to raise a second child.
That averages $8,882 a year for a lower-income family, $12,288 for the middle-income group and $20,370 for top earners.
This is no back-of-the-envelope guesstimate. The survey involves interviews with about 5,000 households, four times a year.
The cost per child goes down for larger families. A child with no siblings costs 25% more than one with a sibling, for example. As a percentage of household expenditures, an average couple will spend 27% on an only child, 40% on two children and 47% on three children, the USDA estimates. As the child ages, costs rise through age 5, plateau from ages 6 to 11, then rise again, reaching $22,960 a year from ages 15 to 17 for the highest income earners.
Sobering? No doubt. Misleading? Yes. The study doesn't take into account certain expenses incurred by some families, such as heavy medical bills or pricey private schools. It's a composite average, and, by definition, that means your numbers will be a little (possibly a lot) higher or lower. And because the survey ends at age 17, it doesn't take into account the millions of college students who are supported in part or in full by their parents. In 2020, you'll need nearly $225,000 for a private college or $105,000 for an in-state public university. (Run the numbers with our tuition calculator.)
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The study also doesn't consider lost income that occurs when one parent stops working or takes off several years to raise the children during the early years -- or takes a lesser-paying job with more-predictable hours.
Before you take a vow of celibacy, look on the bright side: There are ways to trim the expenses.
The study breaks down overall expenditures into various categories and subsections. (The information is used by state agencies and court systems to determine child-support guidelines and foster-care payments, among other things.) We'll go through each of the major categories, give the total expense for families from the low to high ends, and then offer cost-cutting ideas and some tax tips from our tax expert, Jeff Schnepper.
HousingCost through age 17: $53,100 to $126,180
Housing is the biggest single expense of raising children, comprising a third of overall annual expenses.
What you can do
You could ignore one of the basic assumptions used in calculating additional housing costs. You could decide not to move into a larger home. The table assumes that for each child you have, you're going to add 100 to 150 square feet of living space to your home. By definition, that means you're going to either renovate your existing house or buy a new one. Go against the flow and figure out how to use the space you've got.
For many families, that solution won't get it done. Try this: If you've had your mortgage for a while and plan to stay in your home, keep track of mortgage rates and consider refinancing when the rate is more than a percentage point below your current mortgage. It can save hundreds to thousands of dollars on the loan. You can get an idea about current rates and offers at MSN Money's Mortgage & Refinance page.
Challenge your property tax bill if you think it's too high. (See "As home values sink, tax appeals soar.") The National Taxpayers Union estimates that as much as 60% of taxable property in the United States is over-assessed.
Additionally, make your home as energy efficient as you can. That means everything from replacing old and inefficient furnaces and water heaters to bolstering insulation.
Finally, give some thought to moving to a less-expensive place to live. That could mean a smaller house across town -- or in a completely different part of the country. What with median home prices in some areas topping $600,000, look into parts of the country where housing prices (and property taxes) may be a bit more manageable. Realtor.org regularly releases statistics on existing-home sales by state.
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Teens need jobs, too
Imagine trying to find a job in this economy. Now imagine doing it with zero experience, little education and no résumé.
Make as much as possible of your housing costs tax-deductible. Interest and real-estate taxes are deductible. Use your home equity to finance other expenditures. The interest on debt of up to $100,000 secured by the equity in your house is tax-deductible. It doesn't matter what you use the money for.
Consider a home office. Now, you can qualify for a home office even if you do only managerial duties or simple record-keeping there. Prior to 1999, it had to be where you actually performed the activities of your job.
If you have a home office, you can deduct the percentage you use for business of all your housing costs. These include interest, taxes, insurance, utilities, landscaping, depreciation and the cost of any furniture or equipment you use in your home office. For more about claiming those deductions, see "The tax traps of working at home."
How much will your family spend?*
*Estimates of expenditures on the younger child in a two-child, two-parent family. To estimate expenses for an only child, multiply the figure by 1.25. To estimate expenses for each of three children, multiply by 0.78.