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.
That’s right.
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.
Conclusion
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.
LOVED this! Thank you. We hope to have kids soon and those numbers can be quite scary when you multiply them by two, which is the number of children we hope to have. But the reality is that kids need very few things. The parents are the ones who make things so damn expensive!
I’m printing out your chart so that I can stick it up in the room that we hope will be a nursery down the road. It’s a good reminder that there are more important things than having an Instagram perfect childhood. The kids will likely ruin that $40 romper the first time they wear it anyway. Thanks for sharing!
100% agree that it’s the parents that make having kids expensive. Glad you enjoyed it! And speaking from the other side with a baby in the picture: yes, all the rompers and onesies end up ruined.
one of the best articles you have. I really enjoy it. I Will think about it. Contrata!!!!!
Glad it was helpful!
The inherent issue I see is when everyone uses the term “millionaire”, it comes from an accumulation mindset. This leads to scarcity thinking. We need to focus on a cashflow based mindset as that produces an abundance mentality. Yes you can go and try to make a child a millionaire via stock market investments but ultimately, that won’t happen if you don’t have downside protection. I have heard this talk about “the stock market produces average compounded returns of 10% a year”… but the caveat to that is “average”. There has never been such a time where the stock market returns 10% every single year with no downside. I don’t pray and hope for the best.
Hey Elan. You’re correct that in any single year there is no guarantee the stock market will return 10%. The theory behind investing for your child, though, is that you have a long time frame over which the money works for the child before they need to draw the money – we are talking 20-50 years. And in decades-long time frames, the compounded annual growth rate tends to approach that 10% figure you cite; said another way, in decades-long timeframe, it tends to be pretty reliable (at least for the past 80ish years of data). I agree with you that cash flow is definitely important once you are actually retired and drawing down every year. Once retired I generally prefer a different asset allocation than 100% stocks, and I talk about that here: https://www.themoneyhabit.org/demystified-stock-bond-allocation-stages-life/ Appreciate you furthering the dialogue on this point. It’s definitely an important distinction.
Are you opening this account in your name or your kids name?
No one answers where to stash money for children. UNLESS they have a job or there a model making money, I been asking for several years no one has a answer. If I could save for retirement for them I would but they are to Young to work. So I have to wait.
I am saving for college in 529s and interested in starting brokerage account for my kids, so they could use the money for something other than college. How does this work when it comes time to apply for financial aide? I know I won’t be able to afford all of college and they will either needs loans or aide. If I have a brokerage account in their name, will that hurt their aide qualification? I would like to leave something for them to get started after college. My kids are 2.5 yo.
Don’t forget that science is flooding us right now with messages that say, “STOP! Parents, pump your brakes!”
It turns out it is much better for kids to have time in free play pursuing their own interests versus living by a hectic schedule. They become more creative, independent adults. We’ve essentially broken a generation by pushing extracurriculars as a means to an Ivy League end, to the point where kids can’t make decisions on their own because they are so used to parents shuffling them through life.
The kids who will be running the world someday are the ones biking around the neighborhood with friends, digging in the dirt, and experimenting with whatever subject intrigues them. Not to mention contributing to the household with chores.
There’s a reason kids are more into cardboard boxes and sticks than any toy we can buy at the store. They’ve been telling us all along. The best childhood that will set your child up for true happiness is very inexpensive!
How much do parents spend on vacations to Disneyland or Hawaii? We we went to universal studios but my kids enjoyed our camping trip to Yellowstone better. And so did I! I think its important to spend as much time with your kids as possible but there are a lot of free and cheap things you can do that are a lot of fun.
Good post and good ideas, but it could be tougher to enact to get there. My neighbor had 8 kids when I was growing up, and their family was tight on how they managed their food. That is, they didn’t have any candy or sweets in their house. Consequently, I don’t remember any other kids who loved to scarf down candy as much as those kids. They would buy bags on the way home from delivering their newspapers. Each kid would have a secret stash somewhere. A pillowcase of Halloween candy would be gone in days, while mine would last until after Thanksgiving. In other words, sometimes being too lean in your provision can have the opposite effect.
I have 2 teens and a college grad. While they were growing up, we wanted to do as you suggest. Cell phones seem like an easy target to cut, but not so fast! Kids socialize by phone nowadays. If your kid doesn’t have one at some point, he/she is out of the loop. The spontaneous activities with the neighbor kids that I enjoyed(hey, we had 8 kids next door!) don’t happen so much these days. Sadly, this means more scheduled activities, like camps, lessons, and teams. And that means more money.
One of my favorite quotes about kids: Before I had kids, I had 5 theories on how I would raise my children. Now I have 5 children, and no theories.
I agree. I once read an article where parents were spending $20k per yr for extracurricular all in the sake of getting scholarships for college. This is backwards thinking to me. If you, put that same amount to work into a 529 and Roth IRA, you would have the funds to pay for college with cash. Just my 2 cents.
Thanks,
Miriam
I enjoyed reading that especially since my wife and I are going to try to have a child next year. My family is from China and the plan most of my family uses is buying real estate. My wife and I currently own 6 rental income properties that generates $3500.00/mo net profits. We are still paying off two condos and should be done within two years. We use the entire $3000.00 profit to pay off the HELOC debt we used to purchase the condos, and we use the money we earn from work to pay our monthly expenses and usually can still save $2500.00 a month.
We plan to save as much money as possible for our child, but we also have the option to sell our properties or take out a HELOC on them if we are in need of cash or pay for our child’s college education. I have a hard time understanding taxes, stocks, and other types of investments, but real estate has always been something my family was good at. I am a fan of your blog and will continue learning more strategies for investing.
is there a reason why you wouldn’t just continue to put this money into accounts in your own name and then just leave the money/give the money to your kid later on? I assume some potential tax benefits, but seems like a lot could go wrong if the funds are in the childs name. And how motivated will the child be if they grow up knowing they already have a nest egg?
Hey Patrick, you certainly can leave it in your name and transfer the assets in kind to your child at the appropriate juncture. IT will count against your lifetime estate exclusion, but at $10+ million per couple, that’s not a concern for basically anyone. I mentioned it in the post but it probably got lost in the flurry of text.