Paying for childcare or quitting my job? The true cost analysis. - The Family Money Mentor (2024)

This post on paying for childcare vs quitting working is part of a series. Be sure to bookmark this post or Pin it before you check out these other posts: Part 1-Gearing Up and Part 3-My Money Saving Diaper Strategy.

A common question for many expectant and new parents is whether to quit working to stay home with their new baby. I remember being asked this question several times when I was pregnant with our first, “Will you keep working?” I also remember that in the year we had our second baby, we spent $45,000 towards child care, which was 80% of my take home pay, so I get it!

As I’ve said before, I don’t believe any choice with money, including paying for childcare or quitting your job, is inherently good or bad. Some choices are more expensive than others, but if those choices are in line with your vision for your yourself and your family, then they are worth it! In my view, there are always ways to make the money part work. The more important thing is to make choices that are true to you, your purpose, and your vision for your family’s life.

Often, it seems the sticker shock of childcare costs coupled with a quick glance at current take-home pay often serves as the rationale for a new parent to quit working. If your pay rate is cut in half by paying for daycare, what’s the point for working for less than minimum wage, right? But it turns out when you do the math on this, childcare costs look like a bargain compared to leaving the workforce (spoiler alert: like $200,000 worth of a bargain!).

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Even highly reputed websites provide incredibly brief attention to this cost-benefit analysis. They note all your wages may be going to pay for childcare with no mention of how temporary that scenario may be. There is also lack of attention to what happens to your wages as your childcare costs reduce over time versus what happens to your wages if you quit. This incredibly short-sighted summary of the financials by financial professionals is maddening to me!!

The national average is around $11,000 per year for full time care (approx $215 per week). However, the discussion tends to hyperfocus on this “high” cost and very little on the temporary nature of paying for childcare in the grand scheme of raising kids, not to mention the real costs of avoiding childcare expenses by stopping working.

Don’t get me wrong- there are many reasons to quit your job (change career tracks, start a business, go back to school, etc.), but the math shows that the cost of childcare is just not one of those reasons for many who struggle with this question.

This post assesses the real cost of exiting the workforce compared to paying for childcare to help families make more informed choices. The thing is, childcare costs are both temporary and an investment. Making the choice to stay home or continue working should be considered a personal choice based on your plans and preferences for your family lifestyle, with an informed awareness of the financials.

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Paying for childcare is temporary

I lament that many parents, and predominantly women whose median income in the U.S. remains lower than for men, conclude their current pay compared to the cost of childcare makes their choice to quit and stay home inevitable. Too many parents make this life altering financial decision in the most intense (hello sleep deprivation!) and rapidly shifting season of life- welcoming home a newborn. But, of course, newborns don’t stay newborns. Very quickly they are off to kindergarten at public school when the childcare costs for the typical full-time worker drop by more than 60%.

And an oftenforgotten aspect of staying home to care for children is that even before entering public school, preschool costs for your 3- and 4-year old still apply. Unless you homeschool, even families with a stay-at-home parent generally send their children to preschool to prepare for kindergarten.

While stay-at-home parents have the flexibility to choose less expensive part-time preschool programs, they are still about 30% of the cost of the full-time program thata dual income family is affording. Therefore, just a few years in, the comparison cost of childcare vs. leaving work to stay home starts to shift.

How much will I spend paying for childcare if I keep working?

So, how much are we talking? For our family, living in a high cost of living major metropolitan suburb, the total annual cost of a high quality, licensed program is about $17,000 (300-350 per week). That is the cost applicable to the first three years… or roughly $50,000 in total from age 0 through 2 years.Hang with me!

For the preschool years (ages 3 and 4), as I mentioned, even the stay-at-home parent families are paying part of those costs, about 30% if you include some summer camps too.So the relevant number for weighing your options is theadditionalcost to families without a stay-at-home parent. For our area, this additionalcost is roughly $10,000 more per year for full-time preschool in our area. Do this for two years of preschool, and that’s $20,000.

So to get to the point of entering school, that’s$70,000 (50,000 for first 3 years + 20,000 for next two years) paid towards childcare and preschool per child.

But these are numbers from our high cost of living area. The national average would be about 2/3 of this – so more like $47,000 more spent over the course of 5 years by a dual working parent family, compared to a family with a stay-at-home parent. Personal choices in care can make this number range widely, but it gives us a number to put into a broader context, beyond the initial sticker shock of childcare costs.

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Paying for childcare is offset by wage growth

So, if dual working parents spend an average $47,000 more than families with a stay-at-home parent for 5 years of full-time childcare & preschool, where does that money come from? And how does it compare to the cost of quitting working?

Comparing your current salary (which is lower than it will be in the future) to full-time infant childcare costs (which are higher than they will be in the future) is the extreme comparison. Across the first five years that carries the weight of children’s care costs, your pay will likely increase about 15%, based on a 3% per year expected wage increase (the recent average observed growth in the U.S.). Hopefully in that time you may also receive one or two performance-based pay raises, promotions, or even move to a more lucrative position elsewhere because you are so awesome!

For example, let’s say your take-home pay is $30,000 annually ($2,500 per month) when you’re expecting your first baby. After five years it would grow to be almost $35,000, receiving a 3% increase each year. Choosing to exit the workforce at the point of $30,000 will lose you this growth, impacting your pay rate (when you want to get back into the job force) for the rest of your working life.

In fact, leaving your $30,000 per year job will end up costing your family $200,000 more than paying for full-time childcare after 10 years- and that’s including paying for all the care and preschool necessary for two kids up to fifth grade. Even though I have lived through paying for full-time care for two kids over the past nearly 7 years, laying out these numbers still surprised me!

The table below illustrates the example of how pay increases but childcare costs dramatically decrease over early childhood. If you added a second child into the mix in the third year, you can see how the proportion of your pay going to combined childcare expenses jumps.

However, you can also see how when your oldest is entering fifth grade, you will have earned about $344,000, while paying for childcare up to fifth grade for two children cost only $144,00 of that. Therefore, the real financial concern that deserves more attention may not be the cost of childcare, but rather the cost of parents leaving the workforce. To get a more customized example which includes costs on your retirement savings, visit this nifty calculator that aligns well with the numbers as I have laid them out.

In that first 5 years of parenthood, just the growth on your pay above $30,000 would have accumulated to over $9,000. That $9,000 accumulated gain in your earnings is nearly a year’s worth of childcare cost all by itself!

Over the following 5 years, your salary would reach over $39,000 and would have accumulated another $34,500(!) more in pay over and above the $30,000 take home pay rate you have now. And now you earn, and are marketable at, $39,000 instead of $30,000.

In other words, you will spend a lot of money from year 1 to 5 paying for childcare, but the growth in your earnings up to year 10 ($43,500 in total for our example) are substantial. That $43,500 just in wage growth alone takes an enormous bite out of the money you shelled out for childcare.

Don’t forget childcare tax breaks

Another frequently ignored piece of the pie is potential employer benefits for paying for childcare, usually in the form of a tax-free flexible spending account (FSA) for dependentcare. You can shift $5,000 of your pay per year to this tax free account. If your effective tax rate is 15%, that is a savings of $750 each year.

Another tax benefit to be considered in your new life as a parent is that you will get a Child Tax Credit and, if an FSA isn’t available from your employer, you will likely receive some level of the Child and Dependent Care Tax Credit. In combination, these benefits will reduce the total cost by a couple thousand dollars or so saved in taxes each year.

Putting childcare costs in context

As another point of reference to frame consideration of this question, consider your home and cars. These items are leading costs to families’ budgets. We finance hundreds of thousands of dollars in total for our home and cars. If you enjoy your work life, is supporting your ability to earn in a job you enjoy, in combination with receiving safe, quality enrichment for your child’s early development not worth just as much?

I think one of the reasons we finance homes for 30 years (at enormous total cost!) and finance vehicles over 5 and sometimes even 7 years, is that there are financial products all over the market selling us on these ideas. They are now normal.

If every daycare center also had the financing office to handle your standard childcare loan (much like the financial aid office of every college!), I suspect people would dive right into debt for this too (because it’s actually worth it for your earning power’s sake!). If the cost of $47,000 for five years of full-time childcare were a low interest, 10-year student loan, it would be about $400 per month and no one would think twice about it.

But for whatever reason, a financing office at the daycare center is not a common thing. When I’m in a pessimistic mood, I suspect this lack of a market to support paying for childcare the American way (by financing… unfortunately) is a systematic lack of support for working parents that disproportionately affects women. But let’s set that aside. Ultimately we don’t need another mechanism of tying families down with easy debt anyway!

If continuing in your career is your goal, the key is to find ways to make those initial expensive years work, and you will then find yourself with a higher salary, lower care costs, and all kinds of new space in your money picture after a few short years.

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Delay decision making

If leaving your job to be home with your baby is on the table for you financially and is a potentially preferred choice, consider some other options to give yourself maximum flexibility and time to make your choice. Making such decisions in the thick of early parenthood is a tricky thing considering the level of sleep deprivation you are or will be feeling!

If you are a mom and like your current position, you might consider negotiating a 6- or even 12-month leave of absence, even if it’s unpaid, instead of the more standard 8-12 weeks of maternity leave or in addition to it. This will give you some time away from working during the most intense mother-infant parenting period without committing so soon to such a substantial income loss for the long run. In other words, it buys you time before making a more permanent decision.

In workplaces with paternity leave coverage, dads could do something similar, or could stack their paternity time off to be used partly after mom goes back to work. This strategy can ease the transition while sleep and feeding schedules are still a bit much to juggle along with runs to daycare. Again, this buys more time before either parent needs to make a permanent decision about working vs. staying home.

In conclusion…

Childcare costs are an investment in your ongoing and future earning potential. Leaving a job because childcare is too expensive compared to your current pay just isn’t supported by the math for the average person. Raising a family should not be a reason to abandon your work if it is something fulfilling to you (or maybe if you’re paying student loans for that degree!).

Today we live in a world with choices. With 168 hours in a week, choosing to spend 40 away from your little one may be a welcome (and profitable) reprieve, even with the added complications working parenthood brings. Likewise, transitioning to be a stay-at-home parent comes with it’s own brand of difficulty and complications. Neither path is easy (or inexpensive as we have now seen), just different!

How to rejig your finances to pay for quality child care that you feel awesome about or to afford leaving your job to be a stay-at-home parent is a topic unto itself, but can be done with the many strategies here at The Family Money Mentor. I hope this post, however, helps expand your financial thinking when evaluating this next stage of family life and whether paying for childcare is worth it for YOU.

In sum, use this information to make your financial comparison fairly as you reflect on your vision for your life and how these next steps fit into that vision and financial plan. There are always ways to make the money part work; make choices that are true to you, your purpose, and your vision for your family’s life.

So, did I miss anything? What are your thoughts? What were the main factors in your decision making if you are a parent who has been through this decision process? Please share in the comments below!

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