The Surging Cost of Raising a Kid
May 31st 2012 2:53PM
Updated May 31st 2012 2:54PM
The average home sold in America last year went for $272,900. The estimated cost of raising a kid for 17 years in a middle-income household was about the same: $286,860.
The Department of Agriculture has kept track of the average cost of raising a kid from birth to age 17 for decades. Its latest report made waves a few weeks ago. "The cost of raising a child from birth to age 17 has surged 25 percent over the last 10 years, due largely to the rising cost of groceries and medical care," an analysis on CNBC noted. The article received almost 10,000 Facebook recommendations, showing how popular a topic this is.
The projections aren't discounted for inflation, so the totals in real terms aren't as bad as they look. In today's dollars, the estimated cost of raising a kid in a middle-income household for 17 years is now $227,000. And wages typically grow faster than inflation (though not lately), so the actual financial burden may even feel lower than that.
One huge disclaimer: None of this includes the cost of college. If you're interested in private school and want to pay your kids' way, you can probably safely double these figures.
A few parts of the report stuck out for me. To calculate the projected cost of raising a kid, the USDA uses a basket of components from the consumer price index -- things like housing costs, food, child care, health care, and clothing.
To add up future costs, it assumes a rate of inflation going forward will be the same as it was over the previous 20 years. That creates some weird assumptions because inflation over any given 20-year period differs wildly. For example, the 1995 report assumes future inflation of 5.4% a year. That's pretty high, because inflation in the preceding 20 years includes the inflation spike of the 1970s and '80s. By 2005 -- when a 20-year average doesn't include the 1970s or early '80s anymore -- the report assumed a future inflation rate of 3.04%. In the latest report, the assumed future inflation rate is just 2.6%. So in the course of 15 years, the report's assumed rate of future inflation more than halved, all because of past inflation trends. If that sounds suspicious to you, congratulations: You've realized how imprecise these projections are.
What I did find useful is this chart, showing how the cost of raising a kid has shifted over the past 50 years:
As a share of expenses, food and clothing have plunged, transportation has fallen a little, and health care and child care have gone through the roof. The big rise in child care isn't necessarily due to inflation; it's mostly a reflection that more women have entered the workforce rather than staying home to raise children. The labor force participation rate for women was 37% in 1960. Today, it's 58%.
Something else important: While (or because) the cost of raising a kid has gone up, we're having far fewer of them. This chart, from the United Nations, tells the story:
Source: UN. 2013 figures estimated.
This is clearly a long-term trend, but the recent recession put a big damper on birth rates. Despite a growing population, the number of births actually fell in 2008 -- something that rarely happens. And really interesting (if your life is dull enough to find this stuff interesting), the drop in birth rates is highly correlated with unemployment. As The Wall Street Journal reported last year:
The fertility drop was most pronounced in states where unemployment and income have taken big tumbles. Arizona, hard hit by the housing bust, saw the nation's largest decline in fertility rate between 2007 and 2009. Nevada -- whose 12.5% unemployment rate in 2009 was among the nation's highest -- had the second biggest drop. By contrast, North Dakota and Nebraska -- which had unemployment rates of 4.2% and 4.8% in 2009, respectively -- were two of just three states to see fertility increases over the recession period.
Has the recession changed your decision to have -- or how you currently raise -- kids? Sound off in the comment section below.
At the time this article was published Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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