If you’re at a stage where you’re introducing a new member to your household—or soon will be—congratulations! It’s a beautiful, joyous time in nearly every aspect, with the possible exception of finances. (And maybe sleep!) We’ve probably all seen the data around how much it costs to raise a child, and those costs start coming due almost immediately. Parents who’ve made the decision to continue pursuing their careers may need to arrange for childcare as early as six weeks after giving birth, and unless you’re lucky enough to have close family in the area who are willing to do the job, that means signing up for childcare.
If you’re new to the daycare scene, the cost is likely to come as a shock—it can easily match or even exceed your mortgage payment! (If there’s one good thing that can be said about the cost of daycare, it’s that it makes your monthly housing bill seem oddly reasonable.) Everyone manages this cost in their own way, but I’ve seen more than one couple prioritize daycare to the point that everything else—especially investing—falls by the wayside, not realizing the long-term impact of this strategy.
Another common pitfall related to daycare costs occurs when daycare ends—a time when most couples expect their childcare-related expenses to end as well. As a financial advisor and a mom who’s been through it all myself, my advice is to celebrate with caution! Keep reading to find out more about these pitfalls and ways to navigate them, so you can actually enjoy those early years rather than just trying to get through them.
Struggling to balance daycare (or other) costs and long-term goals? Let’s figure it out together. Reach out to the Curio Wealth team.
Pitfall #1: Adopting An “All-In on Daycare” Mindset
When you’re initially confronted with the cost of daycare, no doubt it seems overwhelming. For my family, it made up one-third of our entire budget. I still remember tabulating the total number of years we’d need daycare in order to support the family size we’d been dreaming about (ten years!).
The prospect of sustaining those payments over such a long time at first seemed impossible—and it may seem that way for you, too. But don’t let that perception lead you into the trap of throwing all your financial resources into daycare. Doing so could put your financial future at risk.
Many people in this scenario tend to see things as black and white. They think, “I won’t worry about investing during the daycare years—it’s just too hard. I’ll deal with it after daycare.” But by doing so, you lose the benefit of compounding, the quiet force that turns small, consistent contributions into much larger balances over decades. Compounding is such a major part of investing; that’s why the rule is to invest “early and often.” It’s very difficult to catch up to where you would have been had you not skipped even a few years of investing early on.
Rather than making a decision to put your whole financial life on pause upon experiencing the initial shock of daycare costs, think about it before daycare even becomes a reality and devise a plan. Review the money coming in and going out on a monthly basis and then consider:
- Ways to reduce your expenses. Look for ways to reduce your spending on non-fixed items, like restaurants (or grocery shopping), travel, entertainment, and gym memberships.
- Large payments that might be ending soon. Maybe you have a car that’s almost paid off or you’re at the tail end of student loans. You might be able to free up additional money once those other obligations end.
- Whether your income might increase. Do your current jobs pose an opportunity for increasing your income? If you’re increasing your earnings and the cost of daycare stays relatively fixed, you’re building a healthy gap over time that will ease the burden.
- Whether you need to reduce contributions to savings and investments. If the previous strategies don’t yield enough to cover daycare, you may need to lower your contributions to savings or investments, for example, from 10% to 6%. As long as you continue to make contributions, albeit smaller ones, you’re still setting yourself up to take advantage of compounding new dollars.
The key is to see if you can make room for the cost within your own spending before cutting or reducing the elements that are critical to the health of your financial future—savings, investments, and debt payments.
Pitfall #2: Believing You’re “In The Money” When Daycare Ends
Picture this: Your last child is about to leave daycare and you’re envisioning having $2,000 or more a month to play with again… it’s an exciting thought! But the reality is this: You’re much more likely to end up recouping less than half of that money because now you need to fill in the gaps for childcare year-round as you continue to work.
A six-year-old is done with kindergarten by June; what will you do for the summer months? Summer camps or childcare professionals are the likely answer, and these options are also not low-cost. You’ll also need to start incorporating after-school care into your budget, as well as school closings and the cost of various sports and activities.
Don’t fall into the trap of believing that when daycare’s done, you’ll have money to spare. Most of the time, it just starts to find other places on its own. If the daycare years were really tight for you, don’t loosen the reins too much; stick to your budget and put that money to good financial use. That may mean investing more to make up for lost time or doubling down on debt payments—or redirecting the money to a college savings plan.
Just like anything else in financial planning, it’s about understanding the bigger picture. Make the best plan for your money before it frees up, keeping in mind the need to secure your own financial future while continuing to pay for childcare.
Manage Daycare Costs Without Derailing Your Financial Future
The daycare years can be tough financially, but it’s like everything else in financial planning: You need to keep the bigger picture in mind. Where and how you spend money will change during the various phases of life, but if you have a plan and goals, you’ll continue to take steps in the right direction—even if those steps get smaller at some points. Being intentional about your finances helps you avoid the “drift” of letting your money inadvertently go where it wants rather than the other way around.
If you need help crafting a big-picture plan for your financial life—one that will get you through all the phases, from the daycare years to the retirement years—get in touch! We’d love to get to know you and your goals, and build a strategy that grows with you every step of the way.
