Intelligently Financing a Child

How to explain ERE, arranging family matters
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tylerrr
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Intelligently Financing a Child

Post by tylerrr » Tue Nov 29, 2016 10:31 am

Looking for feedback from my ERE Peeps.....

We can use this article as a "rough" guideline...

http://www.huffingtonpost.com/2014/08/1 ... 88179.html

It says it costs about 250k to raise a child until that child is 18.

I'm going to say it's about 1400.00 per month for that 18 years using the article's rough numbers.

QUESTIONS:

How would you manage your finances to finance this kid?

I could automatically save 1400.00 per month in a separate account for the kid for 18 years and just draw on that account whenever expenses come up?

Are there specific tax advantaged accounts I can use for raising a kid?

What about sticking a total of 250k into a separate account right from the beginning and just using that account for the kid's expenses over the entire 18 years? Would you put this 250k into an Index Fund? Or Just Cash?

How would you manage it?

thanks

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Dragline
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Re: Intelligently Financing a Child

Post by Dragline » Tue Nov 29, 2016 10:54 am

Well, its like anything -- you make a budget for projected expenses and adjust it as you go. From a financial perspective, there is no reason to treat this expense differently from any others or to segregate it from your other expenses.

Outside of 529s (education savings accounts) and the like, and an expanded HSA limit, there are no specific tax advantaged accounts to save money in for children. You might run into some gift tax problems if you put a lot of money in their name, though. If you were really wealthy up front, you might want to set up some kind of an irrevocable trust, too, but they are not worth the hassle for most people.

You'll also get some tax deductions and maybe a credit if you qualify. Consult irs.gov for that stuff.

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tylerrr
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Re: Intelligently Financing a Child

Post by tylerrr » Tue Nov 29, 2016 3:26 pm

@Dragline,

thanks for the info....If the money put away in the 529 is not needed for education down the line, do you know if there is a penalty for cashing it out and using it however we wish?

Same question for HSA too....

thanks

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fiby41
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Re: Intelligently Financing a Child

Post by fiby41 » Wed Nov 30, 2016 2:19 am

A PPF Public provident fund account can be created for a minor with a parent as joint account holder each. So 2 such accounts can be created, one for each child and parent.

This is transferred to the child's name when he turns 18. Yearly tax-free deposit allowed is Rs 1,50,000

1.5 lac*18 years=27 lacs
assuming CPI=interest rate

Specifically for education fees after 18, LIC Life Insurance Corporation offers SIP systematic investment plans, where you pay in monthly and get a lump sum amount/ or on a monthly living expense basis, at maturity of the plan.

You can use this however you want, but it's assumed you're responsible enough to use this to put the child thru college.

There are no penalties is you stop paying into it, but you still have to wait for child to complete 18 y/o age before payouts start.

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cmonkey
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Re: Intelligently Financing a Child

Post by cmonkey » Wed Nov 30, 2016 8:32 am

I see this figure pop up once in a while and I always think 250,000 to raise a child is a ridiculous amount of money. That would imply that I'm going to spend 14,000 annually on just a single child which is exactly how much DW and I spend on everything for ourselves today.

The only increases I am anticipating are food, clothing and healthcare which will be partially offset by an increased tax advantage (deductions). From an ERE perspective food and clothing are a couple of the lowest categories of expenses, so we might spend an additional 1000 annually per child.


Much of this 250,000 is for child care which is automatically eliminated by having a spouse stay home, or if you are both not working. The rest is just simply saying NO to a whiny child. :lol:

ffj
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Re: Intelligently Financing a Child

Post by ffj » Wed Nov 30, 2016 11:15 am

@monkey
I have two children and I can assure you these figures are nuts if you have healthy kids. Child care is expensive, but that's your largest expense and possibly health insurance for them. According to those numbers, I should have spent a half a million on my two kids before they take their first step on a college campus. It doesn't add up unless once again you are a mindless consumer without discretion in your life. Unfortunately, I have a lot of buddies who are divorced who actually pay these kind of amounts for their children based on what the courts decree their fair share constitutes. It's very disheartening on their part.

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Demosthenes
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Re: Intelligently Financing a Child

Post by Demosthenes » Wed Nov 30, 2016 2:01 pm

ffj wrote:I have two children and I can assure you these figures are nuts if you have healthy kids.
Perhaps these unrealistic figures are a good thing from an environmental perspective. Anyone in a low income bracket in their right mind would say no to kids after looking at those figures. Thus, publicizing these figures contributes to slowing population growth.

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Dragline
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Re: Intelligently Financing a Child

Post by Dragline » Wed Nov 30, 2016 2:40 pm

tylerrr wrote:@Dragline,

thanks for the info....If the money put away in the 529 is not needed for education down the line, do you know if there is a penalty for cashing it out and using it however we wish?

Same question for HSA too....

thanks
Yes, I believe there are penalties, although there are some ways around them. For example, a 529 can be transferred to you or almost anyone you are related to "downstream", and then used by that person. They could pay you back.

An HSA is pretty easy to use up yourself -- its a family plan, not associated with any one particular child. Eventually, you'll have enough health care expenses to use it.

I have not found either of these to be great investment vehicles due to limited investment options and fees associated with them (at least the ones I have dealt with). They are more useful for just saving on taxes to begin with.

George the original one
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Re: Intelligently Financing a Child

Post by George the original one » Thu Dec 01, 2016 7:24 pm

What about turning the offspring into little entrepreneurial units? Have them pay for themselves?

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tylerrr
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Re: Intelligently Financing a Child

Post by tylerrr » Fri Dec 02, 2016 12:35 am

I'm glad to see people with kids say those figures are way too much.

Yes, one of us could stay home with the kid.

So I guess the only other major possible expense is school. Kid would go under my health insurance.

Laura Ingalls
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Re: Intelligently Financing a Child

Post by Laura Ingalls » Fri Dec 02, 2016 9:07 pm

I would also chime in that kids are not $250k each, although a lot of expenses are hard to measure. I buy and cook food, but I really don't calculate who eats what. I also don't know how they impact utilities.

We did have childcare earlier but at it always stayed under four figures a year ( with a low six figure income.

Having typically developing kids without health concerns helps a lot. So far no orthodontic treatment in this house, but DS2 is a "late exfolator" and still has lots of baby teeth left.

SavingWithBabies
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Re: Intelligently Financing a Child

Post by SavingWithBabies » Sat Dec 03, 2016 3:55 am

I think it all comes down to choices and planning. I went to a private school. I want to send my kids to that same private school. My wife was becoming a public school teacher when we met. Now she is certified to teach in that private school system. Faculty get free tuition for their dependents. That is how we will be able to send our kids to a private school while attempting to ER.

While I don't understand the $250k figure, my wife and I have talked some about if we are going to save for our kids future college costs. And if so, what does that mean? In state tuition? In state tuition and room and board? Something more? And will college even be the same thing it is today or will it be completely different? For now, I decided to just not worry about it. By attempting to ER, we'll be saving as much as we can. So if we ratchet up the total amount, it's just more time later so no need to worry about it now.

Lucky C
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Re: Intelligently Financing a Child

Post by Lucky C » Sat Dec 03, 2016 6:24 am

tylerrr wrote:It says it costs about 250k to raise a child until that child is 18.
The article says that's what a child costs, but it's based on a survey of average expenditures. Not the same thing. If I made my budget based on average expenditures I'd need to add a whole bunch of stuff, like $300/yr for lottery tickets...

I don't have kids yet but I am personally financially independent and currently working toward family-level FI. This next level will cover everything needed by me, wifey, and nominally two kids. I'm treating it as one pool of money for family-level expenses, not as separate accounts. This money pool will be diversified (stocks, P2P lending, bonds, etc.) and money for everybody's use will be taken from whichever assets make sense in terms of portfolio theory/rebalancing.

I've been meaning to add more fidelity to my budget anyway, so let's go straight to the source of the data, and I will comment with my thoughts. I'm between MMM and ERE on the FI spectrum - closer to MMM spending (for now), but closer to ERE philosophically - so adjust accordingly.

Figure 1 shows that families in the lowest income group (<$61,530/yr) spend about $10k/yr per child. So right off the bat I can give you a ROM estimate that since we spend much less than 50% of what normal people spend on things, our per kid budget add-on should be under $5k/yr or a bit more than $400/mo. vs. the "average" $1400/mo.

Figure 2 shows the percentage breakdown for each category so I'll go through each of those based on the $10k number.
Housing, 30%: $3000. We will already have a house with enough bedrooms so additional costs (utilities) should be more like $300.
Food, 16%: $1600. Little kids don't eat much and we can cook and grow food, so more like $1000.
Transportation, 14%: $1400. We are budgeted for one car already and won't be driving kids to day care, school, etc... say $200?
Clothing, 6%: $600. Thrift shops, hand me downs, gifts... say $300.
Health care, 8%: $800. Depends on what happens to ACA. I'll just leave this at $800.
Child care & education, 18%: $1800. Stay-at-home mom and some combination of home school and public school. Still gotta get books and supplies though... $500.
Miscellaneous, 8%: $800. Personal care items, entertainment, etc... again I'll say half, $400.

Total: $3500 per year per kid. I'll figure $4k in my budget to have some wiggle room.
Sound reasonable?

Laura Ingalls
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Re: Intelligently Financing a Child

Post by Laura Ingalls » Sat Dec 03, 2016 10:17 pm

@ Lucky C
Your budget might be fine for little kids. Not teenager compatible. ;) It wouldn't cover food. (I garden and dumpster dive BTW) Forget about adult sized shoes and a smartphone.

George the original one
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Re: Intelligently Financing a Child

Post by George the original one » Sun Dec 04, 2016 6:24 pm

Just to throw some numbers out that show why $250k is an average rather than a certainty, I'll mention that an ex-girlfriend is spending $200k on her kid just for high school by sending the kid to a private boarding school.

No, not wealthy, very average in fact. Possibly on schedule to retire age 58-60 with federal pension at 20+ years service, though there's a good likelihood she'll need to persevere to age 65-67 if she can't control other expenses.

ShriekingFeralHatred
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Re: Intelligently Financing a Child

Post by ShriekingFeralHatred » Thu Dec 22, 2016 10:56 am

blah
Last edited by ShriekingFeralHatred on Thu Dec 22, 2016 6:47 pm, edited 1 time in total.

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Demosthenes
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Re: Intelligently Financing a Child

Post by Demosthenes » Thu Dec 22, 2016 11:38 am

Hell, if you just saved that money on their behalf, invested it and put it in a trust, that kid would be set long before he was old enough to think about it.
This is an interesting thought experiment. If you saved say 30,000 for the kid's schooling, but instead they either finance their own way or don't go to school at all. If they manage to scrape by, you could instead save that sum for their retirement. Assuming a doubling rate of 10 years, after 40 years they would have 480,000*. Many here have retired on less than that. Sure this is incredibly speculative...

ffj
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Re: Intelligently Financing a Child

Post by ffj » Thu Dec 22, 2016 12:17 pm

@Demo
That is something I thought about years ago but it is contingent on having a child who plans and thinks like you do. Imagine having $50,00 turned over to you at 18 and then told that it isn't to be touched until your retirement. Unlikely, plus it disincentives a young person to become more independent for most kids. The math is pretty though.

Most wealth is squandered by the third generation anyway.

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