Wednesday, October 21, 2015

Cost of having a child is way overblown !

A few prominent bloggers like Budget Babe have started talking about the costs of having a child. Quite intimidating for married couples planning to have kids and singles is the infographic of the price-tag of $1,000,000 to have a child.

I think this number is blown out of proportion, even if empirically true, the $1,000,000 payment does not happen up front but over the the life of the child but it creates an illusion that $1,000,000 is a pre-requisite to being a parent.

I am pretty sure that our birthrate would be zero in such a case.

Let's mathematically perform a very crude  net present value analysis on the cost of having a child :

Based on the infographic :

Maternity ward expenses : $7,000 - $24,000 [ But can take from Medisave ]
Age 0 - 6 : $1,200 - $1,700 per month - Average of $1,500
Age 6 - 12 : $100 - $3,500 per month - Average $1,600
Age 12 - 18 : $500 - $1,300 per month - Average $900

I've projected up to age 18 because beyond this age, the child get a loan to get a degree.

( A problem occurs when he can't get into a local degree program, then it's up to the parents to determine whether it makes sense to put their kids into Australia. I think by then ASPIRE would have been refined to make this unnecessary and an Australian qualification by then may actually send bad signals to HR anyway.  )

If you observe this analysis, the most expenditure occurs at ages 6-12 which is $1,600.

If you go by my 8% portfolio yield idea, an investor who invests at a yield of 8% would need only $240,000 invested in the markets to completely cover the costs of having a average child from ages 6-12. That is interesting because the yields from this portfolio covers all child expenses on its own without requiring the parents to dig into their earned income, freeing them to save more money or pay for their mortgage.

I think this information is a lot more valuable for couple who want to do some family planning before having kids. Suppose you are a married couple and both husband and wife are working. If you can commit to saving $40,000 a year together, 6 years of savings can fully support one child and maintain your previous life as a dual income couple with no loss of quality of life. Based on my previous blog postings, another $300,000 may even allow mum to stay at home and be a full time mom.

Of course, real couple will never be so deliberate when it comes to family planning but prudent individuals should have some savings before getting married. No point blowing everything on an event you wouldn't even care about 20 years down the road.

This number is also useful for getting the right perspective when planning wedding expenses. Best approach is to keep everything low key and ensure that the couple can keep $240,000 after the wedding is over if they want to have kids immediately, otherwise they can always hold their horses until the finance is right.

Of course, by following the advice from this blog you would always be erring on the conservative side, but having kids which are free and paid by dividends is something every parent should give it a try every now and then. ( Just don't start naming your kids Croesus or Sabana because of that. )


Frugal Daddy said...

Hi Christopher

Good moderation and sharing from your yield perspective. I would like to add in the "human" part that is not mentioned.

Many couples will take decades to save $240,000 and they may not be fertile anymore. Many 20s graduates only earning 30k thereabout. Maybe they can save 10k for the first few years before their salary goes exponential. Although it is common to have ladies getting pregnant at their 30s now, it is considered high risk pregnancy if the lady is over 35 years old. There is a biological reason why puberty start at certain age and why birthrate was higher in the part. Now, how often we see couples looking for solution on infertility, as early as 20s/30s. I am not encouraging irresponsible finance behaviour but i think you know what i mean.

No right or wrong, but if we are to have children and income is not so ideal to build up the asset you mentioned, then live frugally. I seriously doubt we need $1,500-$1,600 a month for a child. I spent about $1,000 a month for my child and 70% is because of infant care. Frankly, if you go for the extreme way, a child can cost zero, not considering manpower. cloth diaper, breastmilk if they have, etc. creative thinking.

SS said...

Hello Christopher,

Thank you for sharing your post and moderating the "scare" factor of having a child. I agree with Frugal Daddy that it is tough for a couple to have accumulated $240,000 before they decide to have a child. In fact, those who did it seem to be the exception than the norm.

There are many unknowns that a couple takes on when they decide to have a child. But I trust that the couple would have taken their unique circumstances into consideration, one of which would be their future earned income to help support the family.

I have a little concern about the 8% return assumption, which seems rather high. I believe you are looking at total return, rather than yield from dividends. In this case, I would be cautious to note that the capital will be eroded over time should the couple chooses to cash out the capital appreciation of their portfolio.

Christopher Ng Wai Chung said...

Thanks for the effort in making the replies here !

You are all correct. I think the problem is that parenting is simply not viewed as a financial problem and we don't really teach the economics of having kids even in most economic classes.

If we confine the idea of having kids as a purely human and emotional problem, then we will become easily intimidated by an infographic that makes bold claims on costs. This fear spreads until you realise that many couples have 6 or more kids with an income bordering on poverty levels.

My example from an investor's perspective is generally not done in real life. However, if parents followed my prescription - kids would be free.

Yes, most of us have a small window of fertility to have kids which may make accumulating $240,000 a challenge but even making it halfway would really help with living expenses and it's hardly $1,000,000.

But it is possible.

The ability to save $20,000 a year was attempted and succeeded by Budget Babe in one of her blog postings. Bloggers like AK71 often share tips on how to achieve 8% yield on his blog.

Anyway, if Frugal Daddy is correct, then the portfolio to automatically pay for your kid's expenses drops to only $150,000.

Not hard at all if you start when you are single.

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