The average American family can buy their child’s retirement and make them a millionaire, if only they viewed their child-rearing spending differently. Here’s how to set your child up to be a millionaire – without spending more than you already do.
The USDA says the average cost of raising a child in the US is $233,610, and that’s only through the age of 18.
And college isn’t even included in that number.
Before I had my kid, I couldn’t believe the magnitude of that figure. Where were all those dollars going?
Now I completely understand.
There are sales pitches everywhere. They prey on our fears that we will fail in giving our kids a leg up in life.
Tutoring. Summer camps.
I thought I was safe for a few years, but even with an infant I’ve been inundated with several expensive decisions. For the moms in our area, the general thought is that a nanny who can provide 1:1 care to your child is a superior option to a daycare setting. It also happens to be probably $10k-$15k more expensive per year.
“Will this help my child reach their milestones faster?”
“I’m worried about them catching colds so young at daycare.”
I was talking with a good friend who also has a child under the age of 1. Their latest concern was whether to send their child to a mandarin immersion school to help their baby learn what they think will be a very valuable skill in the global economy. For them there’s no need for daycare – it’s primarily about the language exposure. The cost: $10k a year.
Do People Actually Spend This Much On Kids?
Yes. Yes, they do. From the USDA’s data:
- For a child in a two-child (the standard in the United States), married-couple family with before-tax income less than $59,200, annual expenses ranged from $9,330 to $9,980
- For the same type of households with before-tax income between $59,200 and $107,400, annual expenses ranged from $12,350 to $13,900
- For the same type of households with before-tax income over $107,400, annual expenses ranged from $19,380 to $23,380
And how exactly are those dollars spent by category?
Money Frittered Away
When you think about your own childhood, do you think it felt like $233,610 (inflation adjusted) of luxury? Somehow those dollars are slipping between our fingers without it feeling like we are getting a proportionate value from that spending.
If we recognize and accept this, we can deliberately revamp where those dollars go.
The New Strategy: Every Dollar Spent Is An Investment
As a new parent myself, I am committing to a new strategy: one in which I evaluate every dollar I spend on my kid as an investment.
So what is going to better your child’s life the most? A $20 cute romper, or that money tucked away in an account for them when they’re an adult, so they can give their dream career a chance even if it doesn’t pay much to start?
A Little For Today, A Little For Tomorrow
Perhaps the path forward is a happy compromise, where you allocate some dollars for your child today and some for your child tomorrow, just as you do for yourself. Maybe it’s not no summer camp at all but rather summer camp every other year, or a more inexpensive summer camp so you can tuck dollars away that will be enough to put a down payment on a house when they are older. Or savings which can help them pay for daycare when they want to start a family of their own and need help in those rough first years.
Spending $4,000 on a fancy summer camp for your kid every year from age 6 to 18 would be worth $487,000 for them at age 50 (taking into account inflation). So what would they find more valuable overall in life: summer camps or having half their retirement taken care of completely?
As a parent, you are the one who can allocate between investing those dollars into their childhood or their life as an adult. After all, your child does not have the capability to plan for their future. But you do.
When I think about how much I can spend on my kid in a given month, I’d like to take 30% and put it away for his future (college or retirement).
Think that’s too much?
Not at all.
I’ve talked about the ideal savings rates for early retirement, and 30% is on the low end. What better way to teach your child good financial habits than to model them yourself?
Challenge The Status Quo
How does this play out? Here are just a few examples:
- Your kids share a room instead of each getting their own. This allows you to rent/buy a smaller home, which results in a savings of $5,000 a year for 10 years. If you’d like, you can then move to a larger home just in time for adolescence, when they will be moody and want their own space. The smaller home will allow you to $500k in real dollars for them by the time they’re 50 years old.
- Private flute lessons cost $70 and happen once a week for 6 years. That’s $174k of value to them when they are 50 years old.
- Instead of paying for two fancy extracurriculars, have your child pick just one. Between fees, travel, equipment, etc. you will save thousands by eliminating a typical upper middle class youth sport. In fact, you might be surprised how much it adds up to over time: the average cost per year is $8k for lacrosse, $7k for hockey, $4k for baseball, and $3k for football. Over 6 years of middle school and high school, that’s easily $100k for your 50-year-old adult child.
If it feels impossible to think of large examples like this, there are plenty of small things that will stack up to a meaningful nest egg for a young adult:
- Since money’s tight, you encourage your kid to work part-time during their high school summers so they can bank money for their adult selves.
- At Christmas they get one gift instead of two, where the extra cash gets squirreled away for college.
- Your kids get only used, one-generation-old electronics. Or they get none at all and go to the library for internet access.
I don’t mean to suggest that this is easy or that everyone has a lot of fat to cut in their budget. But I think many of the things we purchase thinking they are needs are in fact luxuries, and identifying them as such gives us options where before they were simply a default we spent on but didn’t appreciate.
As an example, I don’t have very many friends who still lament the fact that they didn’t get the tea party set their friends had when they were seven. I do, however, have many friends who wish they could have pursued a different career but couldn’t because of student loans. I have friends slaving away in industries they despise because that’s how they see themselves providing for their future retirement, or the down payment on a home.
These are exactly the kinds of gifts you can give to your adult child. Maybe you didn’t think you had the disposable income to do so, but the USDA data has proven you wrong. Since the average American family is spending $233,610 per kid. And you as that family get to deploy those dollars more efficiently now that you are aware they are there and disappearing into $40 Christmas gifts and summer camps away from home.
The Math of Making Your Child A Millionaire.
- Let’s take that $233,610 and divide by 18. On average the typical American family is spending $12,978 per year for 18 years
- Find ways to save 30% of that spending – $3,893 per year – for their future selves. Less luxuries as a kid means safety, peace of mind, and freedom for them as an adult.
- That $3,893 each year compounds at an inflation-adjusted 6% by parking them in low-cost index funds
- By the time your child is 55, they are worth $1,039,146
How To Set Up Your Child’s Future Fund
Where do you stash the cash you are putting towards your kid’s future? It depends a little on what purpose you want it to serve. If you are trying to save for college, you will want to look at your 529 plan options.
If you aren’t sure and want a generalized account from which to grow those dollars, I’d recommend Ally for a brokerage account. They are a large, reputable company (they were formerly known as GMAC if that rings a bell) that I have savings accounts with. They currently offer the best cash bonuses for sign-up so you can bolster your kid’s nest egg funds – up to $3,500 in bonuses depending on the amount you place into the account. They also happen to be a good option for your own brokerage accounts – not just your kids’ – if you are looking for a place to put your money to work.
We all want to provide the best we can for our kids. And there’s good news: the average American family has a huge opportunity to set their kids up for future success.
By adopting the mindset of “a little for today, a little for tomorrow” for our kids, we can buy their adults selves a college education, a house, and even a full retirement well before their peers.
What better gift could you give your kid in an uncertain global economy besides capital? That capital can help them re-tool for a promising career, purchase a home for their family, lower their need for a high-paying job as it compounds to provide for their retirement…the list goes on. The tea sets, magic cards, and fancy sports equipment can wait.