Does It Make Sense to Pay for Childcare?
When it comes to the cost of having a child, childcare is typically the largest expense. The average cost of a full-time childcare program in the U.S. is now $16,000 per year (per child). Depending on where you live, it can be much more.
This cost has risen dramatically in recent years. Since the 1990’s, the cost increases have doubled that of inflation, making it completely unaffordable for many families and a tremendous financial strain on others.
It makes sense that parents with two incomes question when it makes financial sense for one of them to take time away from their current job to work inside the home on childcare. Does it make financial sense to pay for childcare? Is the cost of childcare worth it?
Should you pay for childcare?
A few caveats:
Many people don’t have the privilege of making this decision. 27% of children in the US are raised by single parents, 61.7% of Black children are raised by one parent and 80% of Black women are the breadwinners in their homes. Childcare needs to become more accessible and affordable in the U.S. in order to remedy racial and gender inequities.
This is a very personal decision that goes far beyond finances. Some parents want to continue working and others want to work inside the home on childcare.
In this article, I’m going to stick with the financial implications of this decision, but it’s really important to consider the emotional well-being and fulfillment of the family, particularly the person whose current job is in question.
I personally find the term “stay at home parent” problematic and biased because working inside the home on childcare is so much more than staying at home - it’s the most demanding and challenging job out there. Ask any parent who has taken over this role during the pandemic!
Sarah Lux Lee, founder of CEO of Mindr, recommended using the phrase, “working inside the home,” which makes a lot more sense.
Raising the next generation of citizens is a job that should be compensated for, but that’s an article for a different day.
This decision has disproportionately fallen on women in the past and has only been exacerbated by the current pandemic. Women - and even more so women of color - are losing jobs at a higher rate than men, childcare has become unavailable, and a two-career home with kids feels almost impossible to manage.
While many of our circumstances have changed (drastically), the financial implications of full-time childcare still hinges on the same factors.
Many treat this decision as a simple calculation. Am I currently bringing home enough money to cover the cost of a childcare program or a nanny? But there’s actually a lot more to it than that. Here’s how to decide if it makes financial sense to pay for childcare.
Calculate your total lost income.
When considering the tradeoffs of paying for childcare, there’s a lot to consider. Although we may expect to lose income for the current year, our lost future earnings carry the biggest blow.
Research from The Center for American Progress shows that “workers can expect to lose up to three or four times their annual salary for each year out of the workforce. These losses add up because most parents have children when they are relatively young, so even a modest reduction in annual income can result in a very large lifetime earnings reduction over 30 years or more of work.”
The Center for American Progress put together a total lost income calculator to calculate what working inside the home on childcare would cause in lost wages given your current salary, age, benefits, and the amount of time you plan to take off.
This information is helpful to really gather a more complete picture of the financial trade-off of paying for childcare instead of providing it ourselves.
Factor in other benefits.
The above calculator takes into account lost retirement contributions that typically come with choosing to work inside the home vs paying for paying for childcare.
It’s also important to factor in any other benefits you might be receiving. Is your family using your healthcare or insurance plan provided by your employer? Do you receive discounts on your phone plan? Are you receiving tuition reimbursement towards a program or certification? Consider all of these benefits when determining your lost income.
Factor in career implications.
There are other costs associated with putting your career on pause. Taking time off impacts our future earnings for other reasons.
When parents choose to go back to their previous (or new) careers, unemployed candidates are often viewed as less desirable than those coming from another job.
Time frame matters. The longer you take off, the more your future earnings are impacted and the more challenging it can be to reenter the workforce. A worker who is unemployed for over a year suffers a 7.3 percent wage penalty.
Also, for some careers, the desired skills may have changed.
If you are a woman leaving a current job to work inside the home on childcare, you’ll suffer a motherhood penalty when coming back. In instances where job candidates were completely equal other than a subtle indication one candidate was a parent, being a mother reduces the likelihood you are going to be offered a job by 37%. That means when we’re explaining why there is a “gap” on our resume, we’re going to pay the unfair price.
This penalty is far worse for people of color who often are impacted by motherhood biases, unemployment biases, and racial biases throughout the entire hiring process.
The costs of having a job.
On the other side of the spectrum, there are costs to having a job, other than the cost of paying for childcare.
There’s the cost of your commute, work clothes, food expenses, etc.
Having the second income in your household might also cost you in extra taxes as it can put you in a higher tax bracket. We can make sure to factor these costs into the financial equation.
Summary: Should you pay for childcare?
The decision to pay for childcare or to provide your own childcare is a very personal decision that goes far beyond the numbers. Walking through these factors to calculate the financial tradeoff of your decision can help you feel more confident in the rest of your decision making process.
We often chalk up the financial tradeoff to one year’s missed salary but there is much more to consider when deciding whether or not to pay for childcare.