Most parents take the responsibility of caring for their kids very seriously, but does care mean financial support and if so, how much?
Most parents love their kids. Most kids love their parents. Most parents take the responsibility of caring for their kids very seriously, but does care mean financial support and if so, how much?
It’s a financial question that people either strive to answer or choose to ignore. But since scary headlines tend to attract more attention than rosy ones, one has to wonder if all the talk of a retirement crisis is causing people who are otherwise financially independent and have enough to retire to delay retirement unnecessarily.
A Manitoba Agriculture study in 2004 estimated that the average cost to raise a child to age 18 was $166,761 at that time. A subsequent 2011 study by MoneySense pegged the cost at $243,660. Either way, it seems an annual average budget between $9,000 and $13,000 is a fair estimate. Those average costs tend to be higher in the earlier years (due to child care costs) and lower in the later years. Like many other family expenses, those with higher incomes tend to spend more on their children on average than those with lower incomes.
When it comes to spending, we all have our basic living expenses that need to be fulfilled – food, clothing, shelter and so on. We all also have discretionary spending, which may include spending on our children. This can include private school, activities, cars, post-secondary school, weddings and inheritances. How do you find the right balance?
One of the problems with committing to a certain lifestyle at a young age, whether it’s an expensive home or enrollment in private school is that you’re committing to a series of payments over a period of many years which can be quite a lot of money. These payments can also be difficult to extricate yourself from once a commitment has been made, for a variety of reasons.
What’s the difference between a $250,000 mortgage and a $500,000 mortgage over 25 years at 5% interest? About $436,205 in mortgage payments, let alone the higher property taxes, utilities and other costs with a larger home.
What’s the cost of a $20,000 per year private school from grades 1 through 12, factoring in inflation? That’s $243,374 in education costs, before a child even finishes high school.
If your income and other expenses are well-balanced so as not to forgo your own golden years in the process, expensive homes, private schools and discretionary spending may not be imprudent choices during your working years – just personal ones.
But I would suggest that parents should be very cognizant of arguably the most important expense they can incur on behalf of their children – post-secondary education. Annual university tuition and other compulsory fees in Canada were $6,348 in 2012-2013, having risen by an average annual increase of about 7% in the previous 20 years.
And given that the average age of a first-time mother is over 29 years old currently, most of today’s young people will be looking to fund post-secondary costs in their late 40s and early 50s, right around the time they’re probably trying to seriously ramp up their retirement savings and pay off their mortgage.
I’ve seen people get squeezed in their 50s when their second or third child is starting university and the challenge becomes whether or not to continue to flip the bill for the kids or to instead ensure they have saved enough by the time they retire to take care of themselves.
The key here is that if you want to fund the things that really matter for your kids, you need to start planning ahead at a young age to ensure you’re not going to over-commit and under-deliver. How much you want to provide for your children financially is a personal decision. But how you’re going to provide for yourself financially in retirement is a personal responsibility. Courtesy of Jason Heath from Financial Post.