Shortly after your newborn arrives, one typically encounters a choice. Will one parent stop working, or will both continue to work? If both continue to work, will your little one go to a chain day care, religious preschool, a home day care, public preschool, a nanny, au pair, or if you’re lucky get a relative to help? This post is for all those unlucky enough to not have available relatives around, as my family was. It is about how to deal with child care costs.
The Frightening Truth about Child Care Costs
The first thing to understand is child care is expensive. Ultimately, day care will likely be your largest portion of your monthly spending, if you have more than one child, it will likely even exceed your mortgage. At the height of our child care expenditures we were spending $25K a year on 2 kids, or $12.5K per kid. The first thing you should do is check to see if you will make anything after your salary pays for daycare. Take your salary, and subtract your marginal tax rate plus your state tax rate for taxes and 7.65% for FICO. This reduction will net your take home of the additional person working at the most simple level. Please note this will not be exact because a portion of the second income could fall into a lower bracket, however this should give you a rudimentary understanding of the situation. If the remaining income is not greater then the cost of your day care provider you’re probably better off having the lower-income parent become a stay-at-home parent. There is one exception, if you have significant career progression capability it may be best to continue to work as becoming a stay-at-home parent can often times slow your progression.
Ways to Deal with Child Care Costs
Now let’s assume you still have quite a buffer after your salary pays for child care costs. That leaves you with multiple choices. The first is a nanny. Typically, this is the most expensive. You can lower the cost if you know someone else in your area who is interested in nanny childcare for their child(ren). Together you can share the nanny, lowering the cost. Otherwise, in my experience this is something I would only consider with multiple kids due to cost.
Another option is an Au Pair. The idea here is a young person from another country comes to your home and lives as a pseudo exchange student with you. During this time they provide 40-45 hours of childcare per week, while you provide room and board. This is typically cheaper than a nanny, but typically they only have the training that is provided through the au pair company as a sort of child care certification. We considered this as an option before our second child was born as it would have been cheaper than the daycare option, as well as providing more individualized attention to both of our children. Another benefit is that your children receive exposure to another culture, and sometimes language. However there are also some horror stories out there where the Au Pair does not work out, in which case your typically out a initial outlay.
Preschool versus Day Care, Home versus Chain
This leaves us with 2 types of day care and preschools. Of these, the chain will be the most expensive. The chain might be preferable over a home day care as they will have well published standards and more structured curriculum. Then again the home day care may be more your cup of tea because it is more like your child being at home. In my experience, home day cares cost approximately 80% of a chain.
The issue with preschools instead of day care is they typically do not start until age 3. In our case, only one of our children currently qualifies to attend a preschool due to age. A public preschool will be the cheapest if it exists. Depending upon where you live will determine the availability of these. Some public preschools are completely free, others may be available for a minimal cost. In our school district, the public preschool system for 3 & 4 year olds is inclusion based to meet the needs of children who have been identified to receive special education services – most commonly speech or occupational therapy. However, other children from the community are welcome as peer models. There is also a concurrently run program for 4 year olds that gives priority to Title 1 income families, but other families can apply to be on the wait list. Our oldest child is currently attending a public preschool, and we’re finding that he’s receiving more focused attention with a lower teacher to student ratio and better educational curriculum using this option.
Meanwhile the religious preschool tends to be somewhere between the public preschool and a daycare in cost. Typically, they do not indoctrinate your child into the religion if that’s a fear of yours. Many of them have really fantastic educational reputations. The biggest obstacle to using religious preschools is they typically have hours that do not match a working persons’ needs. Unless you’re lucky to find one with after care, the best I have seen are 9-3 programs with 9- noon more common. These may help if you work part time, but not be particularly productive for a full time employee. They tend to be measured in $200-300 dollars a month instead of the equivalent day care costs incurred per week.
The final option is the high end private preschool. These are quite expensive and tend to tout themselves as a great educational starter for your kids. I would recommend not pursuing this option. Studies have shown that while prekindergarten education does give children a leg up in their first few years of schooling, beyond that point results do not bear out. The costs you are incurring are likely not justified.
Early child care is as much a personal decision as it is a financial one. It seems fairly common for many to use a nanny or au pair when you have a young infant or baby to provide more 1:1 attention, and then transition to a day care/preschool setting once your children are older for social and educational reasons. My wife ultimately decided to stay at home not because of the financial impact, but because she felt she was missing out. Just remember as we discussed in the post, even if she works a full time job as a stay at home mom, there is always the possibility of a side hustle. When you start $25K ahead from not paying for day care, that side hustle may look more appealing.
Tax Advantages that Help with Child Care Costs
There are a few tax advantages that can help you with child care costs. Both typically require that both parents are working. The first is a dependent care flexible spending account. This account lets a household contribute up to 5K tax free into an account that must be used within that year for a qualified childcare or other dependent care cost. Your child must be under 13 and your employer must offer the account to be elligible. The key here is the care must be for the purposes of enabling you to work, hence you both must be employed. Part time can be accounted for via allocations of time and cost subject to IRS rules.
The second option for dealing with child care costs is the dependent care credit. Qualification for use of this credit is largely the same, the expense has to be for working and for a child under 13. You do not require an employer to offer you an account. The tax credit is based on a household expense amount, limited to 3k per child for a maximum of 6k. That credit is then reduced by a percent to determine your actual credit. This would typically be 80 percent if you make over 43K in income. I.E. the maximum for this over 43K income household is 1200 dollars in annual tax credit. These credits are not refundable which means they only work to offset a tax bill greater then 0. Note both tax credit and plan can be used for daycare but not against the same expenses.
How do or did you deal with child care?