Starting a family is one of the most exciting and important decisions a couple is going to make together. Properly raising children can be a rewarding and challenging experience, and setting a financial plan regarding how to handle the added expense and save for the kids' future is an important component of a journey that will run two decades, or more. By recent estimates, it can cost at least $300,000 to raise a single child and put him or her through college. Below is a discussion of how this individual amount is calculated, as well as some of the more important financial considerations.
Saving for Education
College may be 18 or more years off for a couple that is planning to start a family, but it will take that long to make sure the savings are in place. For many years now the costs of attending a four-year university has increased at a pace that's well ahead of inflation. Money magazine recently estimated that the cost to attend an Ivy League school can average close to $40,000 per academic year, including tuition and living expenses. A private college can run around $30,000 annually, as can attending an out-of-state university. In-state college options are much more affordable at around $13,000 annually.
Add in a couple of children, and a couple will need at least $100,000 to pay for their children's college education. There are a couple of programs to help couples get ahead with savings. State 529 plans allow contributions to grow tax-free until the child attends college. Many states also have tax deductions for 529 contributions. Federal tax credits are currently available. These include the American Opportunity Tax Credit that allows a college tax break for families earning $160,000 or less.
Adjusting Your Budget for Additional Spending
There is little questioning that raising kids is going to be expensive. In addition to the need to save for college, there are additional healthcare and childcare options to consider. Bloomberg recently cited a Department of Agriculture report that estimated that it will cost nearly $227,000 to raise a single child to the age of 18. This means that college costs are additional but include the aforementioned childcare and healthcare costs, as well as transportation, which collectively make up the bulk of child-rearing expenses and it can get expensive. Food, clothing and shelter will also apply.
Again, there are programs and tax savings vehicles for families to take advantage of. Flexible spending accounts (FSAs) allow families to put away pre-tax dollars to pay for doctor co-pay payments as well as many other applicable health-spending needs. Children usually require standard check-ups and are going to be sick more often as they build-up their immune systems, so a FSA will easily pay for itself. Also, federal child and dependent care tax deductions exist and can allow deductions for as high as $6,000 annually.
Having a financial plan means planning for the long haul, and though thinking through estate planning and the inheritance that your children will receive many decades forward may not seem needed, it is important to get the process going from day one. A rule of thumb, according to Warren Buffett, is to leave your children with enough assets to do something, but not enough to do nothing. This means that parents should consider leaving sufficient assets for their children to live comfortably and have enough savings for a rainy day, but don't leave too much where they no longer have a need to work and potentially grow lazy in their old age.
Families blessed with excess savings levels will want to consider how to minimize inheritance and estate taxes. Individuals are currently allowed to gift $13,000 without incurring taxes, which means that a couple with more than one child can give $26,000 to each child annually. Starting young could mean nearly half a million dollars is transferred to the child by the time he or she turns 18. Trusts are also viable options for wealthier families.
For instance, a generation skipping trust will provide a benefit for your children's children but also for your children while they are alive. It currently allows for around $2 million that can bypass estate taxes and leave a comfortable nest egg for future generations that can minimize taxes that can go to the government.
The Bottom Line
When it comes to important tax and other deductions that can help a couple save to start a family, it is important to talk with a personal financial advisor or accountant. The tax code is very complex, and unique personal situations need to be considered to make sure that couples qualify for the number of benefits that exist. An equally important topic, not discussed above, is to also teach your kids about saving and spending responsibly. As they get older, it can help the parents save but can also prepare the children for when they are on their own and eventually raise their own families. There are, of course, cheap and expensive options for raising children. Returning to the Department of Agriculture study, costs can range from $163,000 to $377,000 for the first 18 years of life, depending on income levels, tax deductions sought and just how much parents are able to save from their salaries for their children.
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