Cost of Raising a Child: The Ultimate Investment

Children are a blessing, but the cost of raising a child can be enormous. Like it or not, bringing a child into the world requires more than just …

Children are a blessing, but the cost of raising a child can be enormous. Like it or not, bringing a child into the world requires more than just unconditional love. It might not be a bad idea for parents-to-be to take a break from picking out cribs and figure out how much that cherubic little tike is going to cost them. Without at least a little financial consideration, parents may discover that the pitter-patter of little feet is running off with their wallets.

Food, clothing and education are essential to the rearing of a child. And the cost of all three is on the rise. The cost of corn has skyrocketed in recent months, topping $6 a bushel in April. Corn and corn-based products pop up everywhere in modern Americans’ diets and the rising costs are driving up the prices of other foods. College costs are climbing to unreachable heights for many, with the most expensive U.S. university—George Washington University—charging $40,392 for tuition alone in the 2008-2009 academic year. These expenses are nothing to sniff at, and parents with an investment mentality need to consider the costs and how they will affect their own investment and retirement potential.

The facts

The U.S. Department of Agriculture (USDA) releases a yearly report called “Expenditures on Children by Families.” The cost of raising a child from birth to age 17 increased by approximately 3.2 percent from 2006 to 2007, according to data from the 2007 report. Housing costs accounted for 33 to 37 percent of total expenses—by far the largest share. Food was the second most expensive category, at 14 to 19 percent of the total amount.

In two-parent households, the report divided the total costs based on family income levels. In families with a before-tax income of less than $45,800, parents spent an average of $148,300 on their children from birth to age 17. Parents with income between $45,800 and $77,100 averaged a total of $204,060 on their offspring, and those earning more than $77,100 spent $298,680 per child, on average. Expenses for the youngest child of a single parent with two children were comparable to those of two-parent households, but in these families approximately 7 percent less was spent on the older child. Single parents with three or more children spent less than married couples, but single parents with only one child spent more. These totals do not include the costs of prenatal care and birthing, or expenses associated with post-secondary education.

Medical care is pricey in the U.S., and the costs of prenatal care should be factored in when considering having a child. The Agency for Healthcare Research and Quality reported that the average pregnant woman incurred costs of $7,600 for prenatal care and hospital fees. On average, privately insured women paid 8 percent of the total out of pocket while women on Medicaid paid only 1 percent. 23 percent of women use prescription drugs as part of their pregnancy, with a median cost of $640, according to the report. If there are complications, or the couple uses fertility treatments, the costs could be much higher.

What if parents choose to adopt a child? Infant adoptions in the U.S. typically range from $15,000 to $25,000, according to Adoption Guide 2008. Families adopting internationally may pay fees between $20,000 and $40,000, depending on the country of choice, according to the Guide. Many families who adopt are eligible for a federal tax credit of up to $11,390.

And then there’s college. This expense can vary widely, depending on which school the child attends and whether or not he or she receives any scholarships or student loans. The average tuition for a private four-year institution is $23,712, up 6.3 percent from last year; tuition for a four-year public institution averages $6,185, up 6.6 percent; and tuition for a public two-year institution averages $2,361, up 4.2 percent. College and university statistics are provided by The College Board.

Sometimes numbers like these can be difficult to translate into useful, real world information. With that in mind, here are profiles of some hypothetical children. They come from varying backgrounds, have different goals in life and will ultimately cost their parents different amounts.

Otto: the half-million dollar youngster

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Meet Otto. He was adopted from Russia as an infant, incurring adoption fees and travel costs totaling $30,000. His parents have a comfortable income—more than $77,100 per year—and are willing to spend a little more on their son’s upbringing. During the 17 years it takes Otto to grow into a pampered teen, his meals, clothing and other expenses set his parents back $298,680.

Because of his interest in politics, Otto decides to attend George Washington University in Washington, D.C. Unfortunately for his parents, GWU is the most expensive school in the U.S. The total estimated cost of attendance for the 2008-2009 academic year is $53,657, including living expenses. This is up approximately 4 percent from the previous year. Assuming that the cost of attendance continues to rise at the same rate, Otto’s education will cost his parents $227,851 before he graduates four years later.

The total cost of raising Otto from baby to adulthood is $556,531. This same amount of money could purchase 36 pounds of gold bullion at today’s price of $952.72 per ounce. If it were invested in a traditional IRA at a rate of 7 percent, deposited in equal increments over 22 years—the same amount of time it takes Otto to reach his college graduation—his parents would have ended up with $1,239,649.22, before taxes.

Sonya: the genius

Sonya was born into a middle-class family with a household income between $45,800 and $77,100, incurring her parents $7,600 in birth and prenatal expenses. She’s well-behaved and focused on her studies. By the time she finishes high school, her food and other expenses have cost $204,060.

Since Sonya always made sure to do well in her honors courses, it doesn’t come as a shock to anyone when she receives an acceptance letter from Harvard University. It’s not the most expensive university she could attend, but Harvard still isn’t cheap, with an estimated cost of attendance of $53,650 for 2008-2009, 3.3 percent higher than the previous year. At this rate, Sonya’s Ivy League education will ultimately cost $221,255.

By the time Sonya graduates, her parents will have spent a total of $432,885. This money could buy 28 pounds of gold bullion, and would have accumulated into $964,236.93 before tax in a traditional IRA.


Joe: the standard son

Joe’s an average kid. His birth cost his parents $7,600 in prenatal and hospital fees, and his parents fall comfortably into the middle income range, between $45,800 and $77,100 per year. From diapers to diploma he racks up $204,060 in food, clothing and other expenses.

When it comes time to pick a post-secondary institution, Joe decides to stick close to his hometown of Seattle and attends the University of Washington as an on-campus student. The cost of attendance at UW was estimated at $18,391 for 2007-2008, and tuition had risen approximately 6.3 percent from the previous year. At this rate, by the time Joe receives his bachelor’s degree, his college experience will cost $85,902.

By the time Joe’s mom and dad get to gleefully snap graduation photos, their son will have cost them $297,562. Had they wanted, they could have hoarded 19 pounds of gold bullion under their floorboards instead. In a traditional IRA, that amount would have become $662,802.58 before taxes, if deposited in equal increments over 22 years.


Audrey: The Budget baby

Audrey and her mom live in Louisville, Ky. Her birth cost the average $7,600 in prenatal care and hospital fees. Since her mom makes less than the parents of the other kids, earning below $45,800 each year, she doesn’t have as much to spend on her daughter’s upbringing. When Audrey hits 18, her mother has invested $148,300 in raising her.

They can’t afford most colleges or universities, and Audrey doesn’t really want to leave her mom, so she attends nearby Jefferson Community & Technical College in Louisville. The cost to attend is $121 per credit hour, and Audrey takes an average of 12 credits each semester, which puts her tuition at $2,904 for 2008-2009. The cost of tuition rose 5.2 percent from the previous school year and at that rate Audrey will incur $5,959 in tuition fees before she graduates two years later. During this time she lives at home, but since she’s a full-time student her mom continues to provide for her. Assuming that the cost of supporting Audrey during those two years is the same as it was at age 17, her mother will spend an additional $17,620 before Audrey finishes school at age 20.

Once Audrey’s done with school and is ready to start providing for herself, her mother will have spent $179,479 raising her. By far the lowest cost of the four, her mom still could have purchased 11 pounds of gold bullion or had $439,728.50 before taxes in a traditional IRA, assuming she deposited the money in equal increments over 20 years.

So what’s the moral of the story?

It isn’t that children aren’t worth the expense; it’s that investors and parents alike should be aware of the financial impact personal decisions can have on their financial situation. If parents-to-be take the time to make a financial plan when expecting a baby, it’s less likely to come as a shock and more likely to help them enjoy the parenting process without constantly fretting about the effect their kids are having on their retirement plans. After all, many parents would say that the experience of raising a child is priceless.


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