It’s not romantic but if we looked at having a baby as a business decision, it would provide information to make better choices. The business of babies.
As I sit down and attempt to write, my five-month old son is sound asleep in his bouncer and I suppose he is my inspiration for this article. The reason being is this little bundle of joy is expensive! Don’t get anything twisted.
I love him and his older brother with everything I have. I don’t regret knocking up my wife for an instant (despite the lack of practice now since the booger eater hogs all the attention). But that’s a different situation you’ll have to take into account when deciding to have a baby!
Diapers, formula, toys, clothes, car seats, strollers, and the most wallet draining cost of all, DAYCARE. That shit kills my wallet. Destroys it. I pay over $1,100 per month in day care fees. Yes, you read that right. Over a thousand dollars per month! This shit is crazy and I don’t even live in some rich ass area like Hoboken, just a small town south of Raleigh.
Enough with my sob story, let’s talk facts. The United States Department of Agriculture (USDA) estimates that it costs nearly a quarter of a million dollars to raise a child from birth to age 18. That tally does not include the cost of a college education.
The largest piece of that pie lies in housing and transportation at a whopping $107,000. Next you’ll factor in child care and education at $44,000. (See? I told you this shit is expensive).
Following that is clothing/miscellaneous and healthcare at $33,000 and $20,000 respectively. Let’s get crazy and add the cost of college into that number. Now we are easily pushing over $350,000 to raise one child. After all the cash I’m forking out I hope they take care of me in my dotage so I can recoup some of my “investment”.
Having kids is not a business decision for most people but it comes with many of the same considerations. There are no “one size fits all” decisions and time isn’t always on our side when a pregnancy happens.
Let’s look at some things to consider before embarking on what I called my new business and what you would probably call your family.
Start Up Capital
Before the little bundle of joy is welcomed into the world there are numerous expenses that need to be accounted for. The baby’s mother is your number one employee and you’ll need to protect her by all means necessary.
Protection includes things like proper nutrition, medical care, and maternity leave. All of these things have an associated cost. Where are the increased costs going to come from during the first nine months? Do you have insurance to cover medical expenses, investors (grandparents) willing to give or loan you money, enough savings to cover everything?
Before the new baby, or employee shows up for work, you need to have his work area prepped and ready. A crib, diapers, wipes, uniforms, toys, and lots of other stuff the baby industrial complex will tell you is required. The amount you purchase varies according your business wants and needs.
I bought a lot of stuff on Amazon which helped to keep costs down. Also look into purchasing some items used. Lots of people have clothes, toys and blankets they would be happy to get rid of. Some items though like cribs and car seats should be purchased new for safety reasons.
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Variable and Fixed Costs
After your new employee’s his first day on the job, the costs will keep rolling in. Until this point you’ve been a good business owner and have stocked up on inventory.
Before I brought my new employee home, we had about a thousand diapers in stock. A thousand diapers in your inventory will not last forever and FYI… new employees shit A LOT.
Remember all those items I previously listed? You are going to have to buy more of them and then add food on top of that. That new employee takes lunch at least five times a day, maybe more.
Formula is extremely, insanely, ridiculously expensive. So expensive that some stores keep it under lock and key to prevent theft! We make sure we always use a coupon to buy formula. Could you nurse versus buy formula? Sure, but in my situation, formula was the only option.
Break Even Analysis
In accounting, the phrase “break even analysis” is defined as the point at which revenue received equals the costs associated with receiving the revenue. Sounds more complicated than it is.
Let’s break it down: before we had our second son, my wife was working while my first son went to school. Since he was in school for the majority of the day, day care costs were minimal.
Now that we have our new little cash cow, decisions must be made. When we learned the day care costs were going to be $1,100 a month we had to decide. Do we put him in day care while my wife continues her career or does she quit her job and become a stay at home mom?
This is the never an easy decision and every family is different. We decided to put him in day care. I do not want to downplay the analysis though, because many business owners do this exact type of analysis on projects, contract requests, and procurement of inventory.
Our break even analysis is showed we are much better off in the long run going the day care route. So we are Investing $1,100 a month into my wife’s career, which is a good investment for our family.
Now you are beginning to see that starting a family is very similar to starting a business. And with any business decision there are financial statements. The P&L or Income statement is a total of how much you made or lost, (probably lost, when it comes to kids) throughout the year.
On your income statement there is a revenue section and a cost and liabilities section. You might call your income statement a budget. On your family’s income statements your income would be your salary and your liabilities would be all of your expenses.
Kids don’t make you any money unless your kid is the next Gerber baby or something and then good job. You hit the lottery! The Profit and Loss has an Earnings Before Interest and Taxes (EBIT).
One of the goals of any business is to get your tax rate down as low as possible to increase the amount of revenue you receive. Your family is no different. Kids help lower your tax rate because you can claim credits for them.
On my tax return, my five month old son is worth $2,587.50. We now fall under the income restrictions of the Child Tax Credit and we receive the entire $1,000. Next, I received a personal exemption of $3,950 (2014) for my son and that saved us about $987.50 in taxes. Lastly, we get about $600 in child and dependent care credit for him. If you were to ask me if I think my kid is worth about $2,587 I would say yes. But only on my tax return.
The beginning of this article stated the cost of raising a child from birth to age 18 is about $250,000. If you divide that over 18 years, it’s about $13,800 per year. That is $13,800 you are not putting in your 401K, Roth IRA, Traditional IRA, or brokerage account like Betterment.
That is an opportunity cost. That same $13,800 invested over 18 years at 7% annual return, compounded annually, equates to a half million dollars.
Business or Pleasure
Finance, accounting, and economics could be used in other areas of our lives. We have to become better at using available information to make informed decisions. I feel like I spend more time deciding where to eat lunch than some people spend deciding to bring another human being into the world.
Having a baby is an analogy I used to demonstrate a point. You can use this way of thinking for just about any big monetary decision in your life. So the next time you and your better-half are lying in bed and things are starting to get hot and heavy, just know those next two minutes of pleasure could cost your portfolio millions over your lifetime. So what are you in it for, business or pleasure? The business of babies.
As I finish this article as I’m making an extremely pricey mixed drink for my new employee, formula, shaken not stirred. I love my kids with all my heart, as does any good dad. I would never put a price tag on them but there are costs involved that must be considered.
Good luck to you and your future family. Or future early retirement.