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Should One of Us Be a Stay at Home Parent?

April 27, 2016

What should you know when considering to stay home with your child?

For many families, the expense of adding an additional member oftentimes brings up the question of whether or not it makes financial sense for one of the spouses to continue working or to stay at home to care for the children.  When both spouses make a high income, it usually makes sense for both spouses to work and utilize child care services because the lower earning spouse's income exceeds the cost of child care.  However, when one spouse doesn't make a high income, it's in your best interests to examine the trade off and determine if it makes sense for him/her to work or to stay at home.  

Consider this.  Your youngest child attends a daycare facility which charges $400 a week for childcare.  If we were to multiply this figure by 52 weeks in the year, that's a tad over $20,000 in after tax expenses.  If we were to factor in 25% for taxes (ie Social Security, Medicare, Fed Tax Withholding, State Tax Withholding, State Disability), the break-even point is roughly $28,000 per year, meaning if your spouse earns a pre-tax income of $28,000 or more annually, it makes sense for him/her to work.  If he/she is earning less than $28,000 per year, it makes more sense for her to stay at home (because the cost of child care is greater).  

What if you have two children in daycare?  The oldest attends pre-school at a rate of $1300 per month (or close to $16,000 per year) in after tax expenses.  If we were to factor that same 25% for taxes, your spouse needs to make an ADDITIONAL $21,000 per year in pre-tax income.  Adding up the two figures for both kids, your spouse would need to make an annual income of at least $49,000 for it to make financial sense for him/her to work.  An income less than $49,000 means that it costs you more to put both kids in child care.

Keep in mind this is only a starting point in determining whether or not it makes sense for a spouse to stay at home.  A stay-at-home parent can also mean additional expenses to feed and entertain the kids, costs which are already included in the child care expenses.  For some, the benefits of child care -- social interaction with other children, learning opportunities, time away from the child/children to decompress -- may far outweigh any financial costs.  In the end, you’ll want to do whatever is in your children’s best interests because the decision to stay at home is first and foremost, a decision based on your values.  Knowing the financial costs of a spouse working vs staying at home can help you make an informed decision while you work towards incorporating these values with your financial goals.

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Written by: Mike Loo

With over 20 years of experience in the financial services industry, Mike Loo has spent the majority of his time committed to learning all aspects of financial, tax, and estate planning, especially in the areas of wealth accumulation, distribution strategies and wealth transfer strategies.  In this very competitive industry, Mike helps clients understand that all financial areas are equally important to reaching their goals.  He believes in a complete overview approach for all of his clients.

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