Childcare costs, or why money matters

Get Rich Slowly tackled one of my favorite topics this week: the economics of childcare. It’s not a favorite topic because it is fun. Far from it. Indeed, it’s often depressing. However, it can lead to a useful discussion of how choices need to be considered not just in the moment, but in the long term. (I’m quoted to this effect in the original post).

Here’s my starting assumption: staying home with your kids when they are little is a great choice. If you want to do that, more power to you. But what’s really great is when it is a free and unforced choice, one in which all the costs are understood and accepted, and one that is not made under duress because all the childcare options you can afford suck.

Childcare is expensive. This is just the nature of the beast. It is the quintessential “high touch” industry. A licensed facility has to maintain a certain staffing ratio. Let’s say it’s 4 kids to 1 adult (typical for babies). It can’t dip below this, so as people come in and out at different drop-off/pick-up times, maybe you average 7:2 over the day. Even if the fully-loaded cost of a worker was just $12/hour, that’s about $3.50/hour/kid. For a 9-hour day, that’s $31.50/day, or more than $150/week in labor costs alone. Add in the cost of heating and cooling the place, having some toys around, and keeping it clean, and you will top $200 for basics. Nicer places (better educated workers, well-maintained playgrounds, etc.) will come out over $300, and if you’re in a higher-cost city, you top $400/week (we did in NYC when my oldest was in daycare).

At $400/week, you’re looking at $20,000/year. Since much of this comes from after-tax income, this requires $30,000 gross to cover one kid. If you’ve got two, which is the modal number of children, you may get some discount, but paying $35,000 in childcare costs — or $35,000 to a nanny if you go that route — requires pre-tax income of over $50,000.

Then we get to the troublesome bit of logic that charges all of this against mom’s paycheck. I tend to think if you’ve got a co-parenting situation, this isn’t fair. It should be split against both. But in the “charge it to mom” mindset, the family looks at this situation and thinks wow, this is horribly expensive. Chances are, mom doesn’t earn over $50,000. Most young women don’t. If she does, she can still look at this situation and wonder why on earth she’s working so hard just to have every penny (or even 2 out of 3 pennies) of after-tax income go to childcare.

Most people also engage in a second bit of troublesome logic of looking at current earnings alone. I’d say that it’s not wise to do just a point-in-time analysis. If you take time out of the workforce, your earning potential will likely fall for the rest of your life (I cite Sylvia Ann Hewlett’s calculation of a 37 percent hair cut for 3 years out in the GRS post). If you stay in, eventually your income will rise and your childcare costs will fall. It should be viewed as an investment. It was for me. I had a lean year or two while writing 168 Hours and paying for full-time childcare (my husband earns a good living, which made this doable) but the opportunities that came from that now let me earn 6-figures pretty readily. However, I know most people look at just now, which is an easier calculation. Also, most people don’t like their work as much as I do, which makes it seem less worth it.

It is possible to pay less for childcare. Perhaps you can find some sitter or combo of different sitters who will work for around minimum wage, off-the-books. At $360/week for 45 hours, that  is certainly more doable for 2 or more kids, though it’s also illegal, and who knows how reliable. There are sketchy in-home daycares out there that somehow run their economics differently. It probably has something to do with bad staffing ratios. So people can go that route. Then something bad happens, and everyone is alarmed, and the best choice becomes for one parent to stay home. But this wasn’t a freely made choice. People facing this forced choice may then decide to take to forums to argue that staying home with kids is best and working parents don’t love their children, or whatever makes it feel more chosen, but economics played a big part.

So what’s to be done? Some societies have chosen to heavily subsidize childcare as part of nurturing human capital and supporting economic development. I’m fairly libertarian myself, but I’m also a realist. It seems hypocritical to call universal daycare for toddlers a communist plot when universal first grade seems OK to most people.

As part of being a realist, however, I also know that this isn’t likely to happen anytime soon. Which is why I really appreciated the part of Lean In when Sheryl Sandberg talks about the trade-offs young women don’t realize they’re making. We choose lower paying work because it’s more flexible and won’t involve travel or long hours. We think it will be more family-friendly. But then, when faced with the high costs of childcare, a lower salary makes staying in the workforce seem less worthwhile. As Sandberg puts it, “The irony — and, to me, the tragedy — is that women wind up leaving the workforce precisely because of things they did to stay in the workforce.”

It’s one thing, when you’re young, to think that money doesn’t matter. But later on, it often does.

19 thoughts on “Childcare costs, or why money matters

  1. It’s a similar argument to investing vs paying off debt. It might not make sense to invest at 8% when you’re paying on debt at 25% on a credit card. However, after the first year, you’re earning 8% on what you invested last year and this year, which is double what you made last year on your investment. Over time, it makes more sense to invest than to throw money at high interest debt (which should be avoided if at all possible anyway).
    That said, there is more than just money to consider when deciding whether to stay home with your children. But that’s a different conversation (that also isn’t always pleasant).

    1. Not quite the same, because the 25% also compounds if you let it. So it would be 25% on what you didn’t pay last year etc. Over time it always makes more sense to throw money at the high interest debt than to invest, unless you’re getting an employer match, because a 100% rate of return is difficult to beat.

    2. @Tana – true that there is more than just money to consider. But I do think that money often doesn’t get looked at comprehensively. And money probably figures into the decision more than many people talk about later when describing decisions.

  2. I think one important thing a woman who wants to remain in the workforce is the earning potential of their spouses. A woman’s career as a “loss-leader” only works when the family can survive on the salary equation of (spouse + spouse) – childcare. If this equation is less favorable than spouse – childcare then it will be very difficult to justify the maintenance of one spouse working, particularly if its not work that is loved.

    In all honesty, it may be an argument for marrying an older man— he will be at a higher earning stage and more likely able to subsidise the cost if care than a couple of mid-twentysomethings who are both at the beginning of careers but want to have a family.

    1. @Calee – older, or high-earning. Either way. If the woman is the massively high-earning one it often seems there isn’t as much pressure on the guy to stay home, interestingly. Sometimes this may be about earning potential. We have friends where the mom was working an intense job while husband was in residency and their nanny outearned him for a few years. Looking at that, one could say that, point-in-time, he should have stayed home with their kids instead of training to be a doctor. Obviously, long term, his job and earning prospects were good. While other careers don’t have the same assumed pay off, I’d argue that more do than people think do.

  3. Here’s us with a full analysis: http://nicoleandmaggie.wordpress.com/2011/11/21/the-wohsah-decision-finances/
    *
    As a note, in the GRS comments a lot of people suggested two parents working part-time instead of one working full-time and the other staying at home (assuming that 168 hours/week isn’t enough to both work and see the kids). We know a couple that did that, but they’re in-demand workers in Silicon Valley. And they didn’t feel the need to do it as much when their second kid was born, even though they could have.

    1. @Nicoleandmaggie – yes, thanks for bringing the 168 Hours part up in the GRS comments. I don’t know why people seem to think that if you work 40 hours of 168 you’ll never see your kids so why bother having them. At least the comments were mostly tame until about #50 or so!

      1. Usually the “baby farm” and “someone else raising your kids” comments come earlier on GRS. What gets me is that so many women believe them and feel bad about themselves for not being SAHM (or are miserable as SAHM). I was blessed to come from a long line of highly confident working moms so it would never occur to me that my working would harm my children in any way. I’m a living counter-example (as is my husband… as is every single person with two working parents that I’ve ever met) and I expect my children will be as well.

    2. I actually hated that idea. Part of the reason I love working the same shift as my husband and sending the kids to daycare is because it makes it so easy for us to have quality family time in the evenings. I would hate it if my husband were always gone when I was home. I know one couple that splits shifts like that so one of them can stay with the kids and, from my understanding, they both feel like a single parent.

      1. @Holly – I just got back from a reunion for my oldest son’s daycare. It’s been 3 years since he went there, but we still had so much fun hanging out with the parents and the kids played so well together. He learned so much while he was there. It is just a reminder to me that the default assumption these extreme split shifts are built on — namely, that daycare is inherently bad for kids — is just wrong. I mean, if a family wants to each stagger shifts because each really wants to spend solo time with the kids, or if both really want to work but don’t earn enough to afford quality childcare, that’s one thing. But good care can add a lot to the equation, not subtract from it.

  4. Also, I think I’d start with a different starting assumption. I can’t tell if that one’s neutral or not. Different people have different utility functions, so some people will get more utility spending those 40-50 hours at work and some people will get more utility spending those 40-50 hours in the company of adults or by themselves or whatever.
    *
    What we’ve done in our blog post model is to put utility of staying home in there and utility of going to work in there (or, if negative, disutilities). Some jobs bring happiness, some bring unhappiness. Some people love staying home with small children, others have difficulty. Only an individual person can knows whether absent of any financial considerations if staying home 24/7is a great choice for that person.
    *
    And in terms of what the research says on optimizing kids… if it’s poor quality homelife then high quality daycare is good. If it’s high quality homelife and poor quality daycare, then homelife is good. If it’s high quality both, then there’s no difference in anything (except parental perceptions of always agreeing with the parents being higher with SAHP than with daycares).

    1. I think that’s the going rate for 40ish per week in my part of the country. When we were contemplating a nanny, I think we calculated 55K for 60h per week (we actually need more coverage than that though). Also, I doubt the 35K includes taxes. One of my friends pays their nanny 25K per year, which just sounds ridiculously low.

      1. @omdg – yeah, 35k would be low. Of course, given that 91% of families are paying cash, this is the equivalent of low/mid 40s of normal salary, which is probably more in line with what a number of districts hire entry-level teachers at (although teachers get better benefits).

  5. THANK YOU SO MUCH for this article! I’m in my first year of practicing primary care medicine, and if I boil down my income to what we pay the nanny, it’s not much more, given the hours primary care medicine demands. It sometimes feels like we’d be better off financially if I stayed home with my kids! I was really encouraged by your noting that paying for childcare early in your career (that’s where I am) is an investment in your future career.

    1. @Dr. Archer – thanks for your comment! You won’t need full time care forever, but the time spent investing in your career now will continue to generate returns 10, 20 years from now. Whereas if you quit, it’s hard to get back in.

  6. I think this is an especially hard issue to look at from a purely financial perspective (if one has the luxury to choose).

    I never did understand the “calculation” of daycare against one person’s salary as in my experience *everything* changes when one person chooses to work or not work. Everything is (supposedly) a shared effort in marriage, right? Chore breakdown changes, kid duty during non-working hours changes, etc depending on who in the house is working (based on my experience, anyway). So it seems reasonable to spread out the childcare expense over both salaries.

    I think this is one of those things where people have a gut feeling about which they’d rather do, and then use whatever “calculations” to justify it.

    I mean, my clothing expenses didn’t go WAY down when I stopped working – I still like to look nice and most people in our city DO NOT wear anything fancier than business casual to work, and many get away with T-shirts and shorts. My gas $ did go up quite a bit because we were doing all sorts of stuff all over town vs me just driving to/from work and daycare which were relatively close.

    That said, I’d love to see universal high quality daycare as an option, or more childcare being tax-deductible, or SOMETHING.

  7. Thank you for writing this. People ask me all the time why don’t I just stay home, since I barely make enough to cover our childcare expenses. Like you said, it’s an investment!

    1. @omdg – Thanks! I may start considering my early time after the book-writing career pivot to be my “residency years.”

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