Family Finances: Opportunity cost (dun dun dun)

You remember opportunity cost from economics class. It’s the idea that the cost of your decision is the thing you didn’t choose. We know your kids’ value can’t be measure in dollars, but here’s an interesting way to look at their impact on your finances.

February 26, 2015; 9:15 AM • by Amanda Gibson

Last month I described how my own estimates of our family’s expenses to raise a child to age 18 compare to the USDA’s estimates of the same expense for the average American family.¹ If you recall, I came out just over $8,000 to the good.I have a few other observations about the report that you might find interesting if you have kids. If you don’t have your own ankle biters, welcome to the cold shower of financial columns! I jest. (Not really.)

First, housing expenses were the largest bit of the $245,340 it takes to raise a baby to age 18. But this is also an excellent opportunity to save some cash! If you live in an area of the country where housing is cheap or if you are willing to live in a smaller house or a lower price neighborhood, you could find yourself substantially below average. (And you want to be below average here.) Additionally, economies of scale could help you save some major cash-per-kid in the housing department. I mentioned in last month’s column that I would have bought this same house whether I wanted two kids or three. That’s like saying the third kid stays free!

That was the good news, or could be good news if you have multiple children. In which case you need good news. I kid again! (Again, not really.) My second observation about the USDA’s estimate is that it uses the term “expenditures” instead of “costs” on purpose. That is because the report completely ignores the biggest, and most difficult to calculate, cost of all when it comes to having children. Yeah, that’s right, Opportunity Cost. DUN DUN DUN. You remember opportunity cost from economics class. It’s the idea that the cost of your decision is the thing you didn’t choose. Your opportunity cost of taking summer classes was the cash you could have made at a summer job. Your opportunity cost of marrying that hottie you call honey was sweet singlehood. Let’s talk for a moment about your opportunity costs for bringing junior into the world.

I myself would have probably spent my $245,340 traveling to increasingly fabulous and expensive places, renovating my house, and lining my retirement account. But it’s not just the income you channeled into the child at the expense of other needs and passions that we are talking about here. Lots of families give up the opportunity to make more income directly because of the kid. If one spouse leaves the workforce or shifts to a part time situation so that spouse can devote more time to raising the children, then the opportunity cost of having the kids is all the wages they would have made if they were still in the workforce. If you made $45,000 a year and quit your job to be a stay-at-home parent, the opportunity cost of having children includes $45,000/year that is not. even. in. the estimate.

It makes sense that the USDA didn’t include opportunity costs in their estimate because these costs are so difficult to quantify. But not including them can really skew the estimate. Back to my stay-at-home parent example, if one spouse gives up $810,000 in income to be at home for 18 years, it looks like they have saved $44,161 in child care and education expenditures. There is no accounting for the wages they gave up. Please understand I am not making any kind of value judgment here, I’m just saying that your expenses don’t always equal your cost.

One final observation I wanted to share is that even though $245,340 struck me as a lot of money, once I really looked at the categories and calculated my estimates, I had a hard time staying within those figures. I consider myself pretty average, but if you were paying attention to my last column (of course you were!) I only beat the USDA at their numbers game by assuming that I will have four children and taking advantage of the economies of scale of cramming bunches of kids into bedrooms, army bunkhouse style. If we stop having children at the two little angels of perfection we currently have, we can wave bye-bye to spending only $245,340 per kid. And if you decide to send your kids to private school, or you have a child with a condition that requires expensive medical care, you will also find it very difficult to stay within that figure. Don’t even get me started on the decisions low-income parents have to make. No wonder people say that having kids is expensive!

While I’m picking myself up off the floor, I should note that even if someone had shown me these estimates of expenditures and costs before I started down the parenthood road, I would still have welcomed my cuties with open arms. I couldn’t imagine life without them even before they were born. But I am curious about your thoughts on the opportunity costs of having children. Let me know what you think!  

Photo by: BullionVault

February 26, 2015 9:15 AM 1