Tuesday, December 02, 2014

Who, When, and How to Stay Home

I saw an article today that claimed the average cost of childcare for a baby or toddler was over $11,000 per year for one child! I also saw an article talking about how dangerous it is to stay home with your children for your long-term career plans. Then, of course, there is Obama's now infamous comment of "That's not a choice we want Americans to make" regarding at-home parents. I think the most difficult thing to do is make a clearly rational and financial decision on this topic without making it all about dollars or desires. Here are my steps, when we found out we were pregnant with our first child.

  1. Crunch the numbers, how much will each parent bring home "net" after taxes, daycare, work-related expenses.
  2. Decide whether additional income can be made to bridge that "gap"
  3. Decide how much it is worth to you to know that you are the one raising your children.
  4. Look at long-term career path goals for both income earners prior to making a final decision.
Of course, the best option, would be if our country actually had a program for paid maternity leave. I think the ideal time period would be some type of multi-payer system (it could be adopted on a state-by-state basis, but I don't think any state would opt out). So employers and employees would pay in some type of "tax" and this would result in paid maternity leave. It probably should be rolled into OASDI, but nobody will be on board with that. My suggestion, for all the high-powered political pundits reading my blog would be up to 12 months at 50% of the previous 12 months wages per child. This could be maternity or paternity or some combination. It's pretty similar to what Canada offers, and I think it would be a huge benefit for working parents.

Since our country doesn't have paid maternity leave, here are some tips for crunching the numbers. First, if there is a two-income household and you already have a child (or more than one) - run the numbers to see how much net income each person would really "lose" in order to stay at home. Here's a step-by-step method so you don't leave anything out. I'll add in a "sample family calculation" too. Know your gross income - for my example person A makes $40,000 and person B makes $50,000. Figure out your tax "savings" - if you use an online tax preparer, you can usually do this anytime in their "planning section". If not, you can estimate based on your marginal tax rates. For instance, based on person A or B's income alone the marginal tax rate on each dollar of income would be 15%.

Don't forget to factor in state taxes, local taxes, and any additional costs of "working". So for instance, the net salary for person B would be $50,000 gross minus $13,600 taxes (15% marginal + 6% state + OASDI) minus $1200 per year commuting/parking minus $1,000 per year work entertainment (higher clothes, lunches out with co-workers, playing the lottery, etc.) So overall, person B makes $34,200 "net income". Now, if both parents are working, you have to factor in childcare costs as well. Let's say there is only one child at $180 per week. Now the "net" is closer to $25,000, and this is for the higher wage earner staying at home. If one or both parents do not have good benefits as far as insurance, this will need to be taken into account as well. However, most employer sponsored plans are not significantly more for spouse plus kids compared to self plus kids only.

Let's look at person B. We'll say that they have slightly lower commute and entertainment costs, since it's a lower paying job. $40,000 - $10,880 taxes - $1100 total commuting/parking/entertainment - $9,360 childcare comes out to $18,660 per year. Or just over $1,500 per month. With two kids in daycare at $150 a week each, it would end up at about $1,000 per month.

 Can you give up two brand new car payments and drive used for awhile? Can you downsize your house if you over-bought? What sacrifices are you willing to make? Another option is to consider what income can be earned by the "at home" parent. Is there one parent in a position to work from home at a reasonable wage? If you can earn $20 an hour for 20 hours a week, you've already overcome the majority of the "gap" caused by staying home. Is one parent in an industry where shift work is acceptable? Working three 12-hour shifts overnight or on weekends can easily more than make up the difference. Is the sole-income earner eligible for overtime or a second job? Is there part-time job the "stay at home" parent can go to with free childcare? Is the "at home" parent willing to put in the time and effort for other extra income (or savings) opportunities such as couponing, tutoring, babysitting, or direct selling?

Now, you have to compare whether that "net" salary is worth the cost of someone else raising your children 40-50 hours a week. If it's not, or if you aren't sure, it's time to look at which options will work best for you family and for how long. Maybe you say that the higher wage earner can work overtime but only for 6 months, then the lower wage earner will be able to find part-time employment at a preschool. Maybe you decide that you can lose the income for 5 years but then need to go back to work.

Maybe the numbers are roughly even for each parent, but one parent has a true desire to stay home and the other parent says "daycare is fine by me". Maybe one parent is stuck in a dead end job, or really want to change careers in the next few years. Maybe both parents are "upwardly mobile" and decide they want to work while they are a hot commodity and stay home with the kids later. These are all non-financial parts of a very difficult decision. It's important to be as realistic as possible. It's also important to keep in mind that the time period you are looking at will depend on how many children you have and how long you want to stay home with them. Staying home with one child for two years is a big commitment, but staying home until your youngest child starts Kindergarten may be a 10 year commitment if you have 3 or 4 children.

Make a financially-wise decision, and make a family-wise decision. These are your children we're talking about...
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