Is Financial Independence possible with kids? I sure as hell hope so! Our family has doubled from 2 to 4 in an 18-month span and we are still deeply committed to achieving Financial Independence.
Whenever FIRE (Financial Independence Retire Early) gets some mainstream media attention, the number 1 naysayer comment I see is “Try doing this with kids”
Well, try we are and it is going well so far.
It is possible. Others have proved it. We will prove it.
Before going too deep into this, regardless of how much it will cost or the inevitable toll it will take on how fast we can achieve Financial Independence, we knew we wanted to have kids. Our kids and their safety are more important than anything else. I would rather work til 65 twice than not have the two we have. I can’t believe how much joy they have brought us in their short lives and it gets better every day. It is a deeply personal choice that needs to be respected and doesn’t need to be explained.
If you want more Financial Independence information check out my Financial Independence Action Series
For those that are Pursuing Financial Independence with Kids
FIRE fanatics with kids set themselves up for a unique challenge. You could make the argument that the cost associated with children comes straight off the top of what you are saving. If you want some ballpark figures, check out this information from the United States Department of Agriculture.
“For a middle-income family to raise a child born in 2015 through the age of 17, the cost of rearing a child has hit $233,610. The report classifies middle-class families as having a before-tax income of $59,200 to $107,000. Families with lower incomes are expected to spend $174,690, while families with higher incomes will likely spend $372,210.”
At the middle-income level that is $13,741 per year. That does not count the pregnancy, delivery or lost wages, which is a significant cost if someone has unpaid parental/maternity leave.
Breaking down the spending further into different categories:
“For married-couple households, spending in various regions of the country are examined. Housing (29 percent) and food (18 percent) account for the largest share of child-rearing expenses for middle-income, married-couple families, followed by childcare/education (16 percent), transportation (15 percent), and health care (9 percent). Clothing was the smallest expense, at 6 percent, and other miscellaneous child-rearing necessities from birth to age 18 accounted for 7 percent. This report does not include costs related to pregnancy or college costs.”
Not surprised to see housing and transportation on the high side, that is what trips up the average American family. The major unique challenges to kids alone are outlined below
Major Challenge 1: Childcare
This is cited as number 3 but it has had, by far, the biggest impact on our yearly spending and will continue to be number 1 for the next 5ish years.
What can you expect to spend on childcare? Here are some per state ballpark figures from the Economic Policy Institute
“Washington, D.C., is the most expensive, with annual child care costing $22,631, according to the latest report from think tank Economic Policy Institute. After the capital, the most expensive states (in descending order) are Massachusetts ($17,062), Minnesota ($14,366), New York ($14,144) and Maryland ($13,932)”
We get off “easy” at $18,000 per year for two kids (Seriously, if one more person tells me 18K for 2 kids is nothing I’m going to lose it – it’s LITERALLY $18,000, not $0). Depending on your location that cost can climb into the mid $20K range pretty easily if you go to a childcare center.
The pain is only for the first 5 years, Only 5 years. 5 years.
If you want some help figuring out the financial impacts of one person staying home, check out my post Can we afford to be a single income family
Major Challenge 2: Paying for College
Hot button topic, are you going to help pay for part or all of college? If so your hill just got a little tougher to climb. The average cost of college is skyrocketing.
“Since 1985, the overall consumer price index has risen 115% while the college education inflation rate has risen nearly 500%” –InflationDate.com
By the time our young kids are college-aged, we could be staring down a few hundred thousand dollars in college costs. We want to help them any way we can, but that is a daunting number for most families.
Achieving Financial Independence with Kids
With all the extra costs incurred by having kids, we need to optimize as much as we can. Here are some of the hacks and strategies we are using to offset the costs and keep that USDA number on the low side.
Maximize Tax Savings
Pregnancy/Delivery and ongoing health care is a significant cost. There are a few ways you can limit the impact by maximizing your tax savings (Bonus! One helps you pay for college).
Use FSA (Flexible Spending Account)
To offset the cost of delivery or doctor visits you can set aside money tax-free into an FSA account. Up to $2,650 per year can be allocated pre-tax. There are “use it or lose it rules” around FSA dollars so you need to plan out your expected medical costs before the beginning of the year and only set aside what you think you will spend.
Dependent Care FSA
If you want to take some of the childcare pain away using the Dependent Care FSA is the easiest way to do it. You can withhold $5,000 per year pre-tax to pay for childcare costs ($208.33 per paycheck if you get paid twice a month).
This is a no-brainer if you incur child care costs during that calendar year.
Some states (Recently Minnesota!) offer income tax deductions for 529 contributions. If you are planning on taking on the college mountain this is a great strategy to save some cash on your state income tax.
Gains are not taxed in 529 accounts as long as they are used for education. Think of it as a Roth IRA for your kid’s education.
Check out this page from NerdWallet to see how your state handles 529 contributions
Increasing Income is Key
I have written extensively on increasing income and I think it is even more important when you have or are planning to have kids. You can’t frugal your way out an $18,000 childcare bill or a $3,000 delivery charge from the hospital. We have more than doubled our income in the last 7 years and it takes a lot of financial stress out of the equation.
Here is a list of all my income increasing hacks you can try to max your income. I am glad we hit our careers hard prior to having our kids, they take some serious time and energy.
Don’t Forget Your Benefits!!!
When I think about how expensive my healthcare premiums are, I take a look at how much my employer is contributing per year for our family plan. Hint – it is far more than I contribute. Over double actually.
Paid Maternity/Paternity leave/PTO should not be overlooked either. The ability to stay at home and bond with your kids while getting paid is priceless. Having PTO to take days off when they are sick or your provider is unavailable has come in handy multiple times per year already.
Dual Income Certainly helps
I would never tell someone not to stay home with their kids, that is a way too personal of a decision for anyone to advise on. This comes down to what you value, if that is staying home, then kudos to you for making that decision for your family.
From a purely financial perspective, the financial benefits of a second income can be massive and that is why I included it in this post. Even when we factored in the cost of daycare, we come out ahead significantly in the financial department. To the tune of over $40,000 per year (aided by above average income).
Smaller Homes Can Make a Big Impact
29% of the total cost going to housing kind of surprised me, we wouldn’t have bought any smaller of a house if we weren’t going to have kids so I don’t think a chunk of that cost applies to us.
Every dollar you save on your mortgage/rent can be used to offset the cost of raising a child or invested. Stay on the smaller side and remember that you have to make the payment every single month before you sign the paperwork.
Get rid of Debt Early
I can personally attest to how important freeing up cash is prior to paying for childcare. Between our first and second kid, we were able to pay off my student loans which freed up $1,000/month. Some of which is used to cover the cost of daycare for our second kid. Without freeing up that debt, we would have had to cut back our investing to get by each month.
Depending on when you decide to have children this may or may not be possible (ie if you decide to have kids right after college and have student loans its probably not going to happen).
Timelines and Balance Now
Before we had kids, I was in the “let’s get to Financial Independence as soon as we can” camp. After two kids in under two years, I am taking the slightly less fast, “enjoy the ride approach”
Since both of us are working, we spend the vast majority of our time outside of work with them. Nights (sometimes more of the night than we want), weekends and the bulk of our vacation time is family time. We take full advantage of the flexibility our employers give and are also more selective when trading time for money. Job changes and promotions are being vetted before we jump in or apply.
Time now is just as important as time later
Don’t Underestimate Frugality
The same frugal practices that worked before the kids work after, just on a larger scale.
Clothing and toy budgets can be dropped drastically by trading back and forth with friends and family. We save a lot on food by buying in bulk and doing our best to have our kids eat the same thing we are. I think we can figure out how to spend less than $45/per week on food per kid and cut that major cost drastically.
It’s a new and interesting challenge to figure out how we can drop the cost without sacrificing memories.
So Is Financial Independence with kids possible?
Absolutely. The principles don’t change. 25 times your yearly spending is still the goal. Your little ones just make it a little harder to achieve that. You will have to be more creative, earn more, or simply wait a few extra years to hit your magic numbers. Each person or family is on their own path!
More resources for people with kids that want to pursue Financial Independence
I put together a list of some of my favorite writers that are pursuing (or already there) Financial Independence with kids:
More to come!
Is Financial Independence with kids possible? Are you pursuing financial independence with kids?