What You Need To Know Now About Child Care And Finances

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Why do we need to pay more attention to childcare these days?

According to a new study by Care.com, the cost of childcare has gone up for the fifth year in a row. In fact, a division of real estate site Zillow analyzed the study and found that at $1,385 a month, the average cost of child care in the U.S. only slightly less than the median rent payment in America, which comes out at $1,500 a month. For families with young children who need childcare services, this is a huge financial burden.

Housing costs are usually one of the biggest expenses for Americans. What do rising childcare costs mean for American families?

It is really putting some families in a bind! The findings show that about 20% of US families spend at least 25% of their income on childcare, 33% spend at least 20% and over 7 in 10 families – a full 71% – spend at least 10%! When you consider the Department of Health and Human Services defines affordable childcare costs as 7% of household income, it becomes clear that these costs mean families are having to cut costs elsewhere. Oftentimes, this means not saving for the future – whether that means not investing for retirement, their children’s education, or to buy a home.

What is driving the high cost of childcare?

The key reason childcare is so expensive is that the barriers to entry are high. To open a childcare center, you have to deal with a number of regulations that are in place designed to ensure the safety and health of the children. For example, many states require a certain adult-to-children ratio, so once a center does open, labor costs are significant. In addition, some states require as certain number of square feet per child, which can drive up rental costs. Liability insurance can be expensive too. All of this means that it is difficult for supply to keep up with demand. And, as fewer families are able to turn to family members for care, demand is very high.

 How can people try to handle these costs?

There are a few options parents can consider to try to minimize the impact on your finances, but all of them require tough choices. First, you can try to reduce the amount of child care you need. Talk to your employer about working from home one or more days. While this arrangement can be difficult with young children, it can lower your childcare costs. Second, ask your employer about flexible spending accounts.

These mechanisms allow you to contribute up to $5,000 each year to a dependent care FSA on a pretax basis to help cover the cost of day care, preschool and other costs. By using these, you can save on some income taxes. There are also tax breaks in place for childcare costs.

Finally, you can weigh whether to take time off from your career to care for your child. Consider this option carefully after determining your net pay is similar to what you would pay for childcare and that you have an option for health insurance. Obviously, this is not an option for everyone, and there is a give and take here.

By taking time off, your lifetime earnings fall, which means less money in your retirement savings and a pause in contributions to Social Security. According to the Center for American Progress, if a 26-year-old woman earning $30,253 steps out of the labor market for 5 years, she ends up losing $467,000 over the course of her career. That is a big number to consider.

Is this simply a dollars and cents issue?

Absolutely not. As I mentioned, the financial pressure of childcare mean that many families are contributing less to retirement, and are unable to save to buy a house or save for their kids’ education. And the ripple effects of this trend could have huge societal consequences.

In fact, childcare it is especially important for people who are lower on the income ladder. A study by economist and Nobel laureate James Heckman of the University of Chicago found that access to free early child care results in better outcomes for both disadvantaged mothers and their children. Access to childcare has also been found to increase a mother’s salary.  Put simply, the rising cost of childcare is a trend that can affect a family’s financial health long after the little ones have their first day of kindergarten. Ultimately, addressing this multifaceted issue will require policy solutions that take a long-term view.

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