As the cost of raising a child rises, young parents wonder if their financial freedom is slipping away
Lane Gillespie
12 min read
Making it in Los Angeles doesn’t necessarily mean owning luxury goods or a home in Bel-Air. If you ask LA resident and mom-of-one Justine Nelson, the hottest status symbol in town is a minivan full of kids.
Though Nelson, the founder of personal finance site Debt Free Millennials, considers herself financially comfortable, the exorbitant cost of being a parent in LA — paying for child care in addition to sky-high rent — means her financial future is uncertain.
“I love being here in the LA area. We’re in a really family-friendly neighborhood. It’s just, how long can this last?” Nelson says. “I think every day: How is the cost of rent and day care impacting my likelihood of achieving financial freedom earlier? How is this impacting my goals?”
Nelson isn’t alone. Across the country, the costs of raising a child has hiked the cost of financial security for American parents. Compared to adults without children, U.S. parents of children under 18 would need nearly $25,000 more a year to feel financially secure, according to a Bankrate survey. Over half (56 percent) of U.S. parents with children under 18 say they would need to make at least $100,000 to feel financially comfortable. Only 41 percent of adults without children say they would need that much.
So long as Nelson and her husband live in LA, she’s uncertain if they can afford to buy a house or even have a second child. When a mortgage for an LA starter home costs at least $7,000 a month and she pays half her salary, or $6,400 a month, in rent and child care already, the math doesn’t add up.
Key Bankrate financial freedom insights
Dollar
Americans’ sense of financial comfort comes at a high price. U.S. adults, on average, say they would need roughly $233,000 a year to be financially comfortable.
Inflation is putting parents in a bind. 65% of parents or guardians who don’t feel financially secure, with children under 18, say high inflation is keeping them from feeling that way — compared to 59% of adults without children who don’t feel financially secure.
Parents are much more likely to improve their house with discretionary funds than childless adults. If given a raise, 40% of parents or guardians of children under 18 would spend the extra discretionary income on new furniture or appliances, compared to 28% of childless adults. Similarly, 28% of parents of children under 18 would spend the extra income on a nicer car, compared to 18% of childless adults.
Parents are more likely to feel financially secure than adults without children
Nearly one in three (30 percent) parents with children under 18 say they currently feel completely financially secure, according to Bankrate. When it costs an extra $25,000 a year for parents to feel financially secure, having children becomes easiest for those who already feel that security, including those who have paid off debt and progressed in their careers.
Marissa Lyda, an Oregon-based personal finance content creator and mom of two, had $87,000 in student loan debt between her and her husband after graduation. Lyda, who already knew she wanted to have children and be a stay-at-home mom when she married at 20, immediately began focusing on student loan repayment. She and her husband took entry-level accounting jobs while living in a small apartment, eating at home and taking public transportation.
Marissa Lyda headshot
As a result, Lyda paid off her debt in two and a half years, bought a house and was able to transition into motherhood without looming student loan debt. Though it allowed her that opportunity, she wonders, in retrospect, if being less strict with her budget would have allowed her to enjoy being a newlywed more, even if it meant paying her debt a little later.
“I just always dreamed of being a mom someday and had the desire to be able to be at home with kids in some capacity,” Lyda says. She quit her day job in accounting to focus on her online finance content, which she credits for allowing her to spend more time with her sons. “But let’s be honest, that’s not as financially feasible now as it was 30 years ago. We wanted to do everything we could to make that more of a possibility down the road when we were ready to have kids.”
Only 26 percent of childless adults say they feel financially secure, according to Bankrate. One in four (25 percent) say they believe they’re not financially secure and never will be, compared to 18 percent of parents with children under 18 who say the same:
Source: Bankrate survey, June 5-7, 2023
Nearly one-half (49 percent) of childless adults say they aren’t completely financially secure now, but will be someday. But if people are waiting for more financial stability before they take on the cost of raising children, they may need to wait a while, due to rising costs of child-raising.
The cost for a middle-income married family with two children to raise a child to 17 years old grew $26,011 more expensive between 2017 and 2022, according to a Brookings Institute report. The total cost rose from $284,594 in 2017 to $310,605 in 2022.
The idea of paying $300,000 to raise a child to 17, before factoring in college tuition and other costs for adult children, may make it seem impossible to have kids if you don’t have a six-figure income. But even a higher income doesn’t necessarily guarantee financial success for families, according to Mellissa Cox, a Dallas-based financial planner.
“I’ve worked with a few families that don’t struggle until they have children. For these families, it’s going to be important to stick to healthy financial habits that they may not have had in the first place and teach their children about healthy money habits,” Cox says.
Inflation is easing, but children’s goods and services haven’t grown more affordable
Around two-thirds (65 percent) of parents or guardians who don’t feel financially secure, with children under 18, say high inflation is keeping them from feeling financially secure, according to Bankrate. There is some relief for parents — though prices are still increasing, inflation fell to 3.2 percent year-over-year in July 2023, according to the Bureau of Labor Statistics (BLS). The price of children’s goods like baby food, formula and some apparel are no longer rising as dramatically as they did in 2022. However, other expenses are still seeing rising inflation.
“Cooling inflation is helping families catch up to expensive food and utility costs, but there’s less hope for reversing the longer-run trend of rising child care, housing and education costs,” Bankrate U.S. Economy Reporter Sarah Foster said. “It’s a concern policymakers may be forced to address for the toll to the human experience alone, but especially for the economic consequences if raising children becomes more and more exclusive.”
The inflation rate of baby food, for example, decreased from 15 percent in July 2022 to 5.9 percent in July 2023, according to the BLS. Similarly, boys’ apparel fell from 4.8 percent to 3.4 percent. Infants’ and toddlers’ apparel fell from 8.2 percent to 5.7 percent in the same time period:
Inflation rates of child care expenses
Expense
Unadjusted percentage change between July 2022 and July 2023
Unadjusted percentage change between July 2021 and July 2022
*The inflation rate in July 2022 only included baby food, not formula.
The inflation rate of some goods and services increased year-over-year, however, especially for child care, one of the largest expenses for many new parents. The cost of day care rose 6 percent since 2022, up from a 3.2 percent increase the year before, according to the BLS.
Mounting financial pressures will create future challenges for millennial parents
Kevin Mahoney, a Washington, D.C.-based financial planner specializing in millennial parents, says financial anxieties for new parents tend to not only include the short-term issues of finding adequate housing and child care, but also long-term issues, like paying for college in the future.
“Parents must deal with the same stressful economic and financial realities as everyone else,” Mahoney says. “And then on top of that, they’re also facing the spending and savings challenges associated with child-specific financial decisions, such as child care, future college tuition and after-school activities. Each of these considerations adds another financial burden.”
In LA, Nelson sees starter homes selling for $1.2 million, and with interest rates rising, she compares it to her home state of Kansas. In the Midwest, five-bedroom homes can go for under $500,000. Though she loves the beaches, diversity and culture in LA, Nelson and her husband are considering moving out of California, possibly to Colorado or somewhere closer to her family, who could provide support for their daughter.
“That looks a little bit better for my family, being able to have the space that I’ve always wanted. We’ve seen baby boomers achieve [that] very early, in their 20s, [to] have the kid and have the home,” Nelson says. “Now, it’s just getting even more unobtainable for millennials.”
Young family taking a casual portrait
4 financial steps to make before starting a family
Whether you’ve been planning to have kids for a while, or you suddenly realized you need to start planning, a lot of budgeting goes into preparing to have a baby. Nelson pulled the receipts from the birth of her daughter, and now recommends the following steps for first-time parents:
1. Self-employed? Pay yourself parental leave.
Paid parental leave, or any paid leave, isn’t required in the U.S. Nelson, who is self-employed, did the math on what she needed for six months of income in advance and used extra funds from flush months to save for a maternity leave. For W-2 workers, she suggests looking into ways to supplement your income while on leave so that you can take additional unpaid time off.
2. Research birthing costs.
Whether you give birth at a hospital, birthing center or at home, try to research costs ahead of time. Keep in mind it may be difficult to get exact costs from a hospital, which will have wildly varying costs due to insurance. Nelson had a high-deductible health plan with a health savings account when she had her daughter. Her total cost, including separate room and board for both her and her daughter, was $43,000. After insurance, she had to pay $6,000 out of pocket. Nelson called the hospital and offered to pay the bill that same day in exchange for a discount, and ended up only paying 70 percent of her out-of-pocket costs. However, keep in mind that your hospital may not offer that option. If so, Nelson warns that you will need to be prepared to pay the entire amount.
3. Sign up for a day care waitlist. Yes, now.
Before looking up paint colors for the nursery, look up child care options and costs in your area. In LA, Nelson’s daughter was accepted for day care after being on a waitlist for three months, which she says was fortunately quick. She pays $2,200 a month for day care. Before that, she hired a nanny when her daughter was six months old. The nanny was a 1099 employee, paid $3,200 a month with paid sick leave and vacation days. Though she says the cost was worth it, it’s still a big expense that new parents may not immediately think about.
4. Budget for the future.
Now that you have a better idea of what you’ll pay for parental leave, health care and child care, refine your budget for your growing family. Plan to allocate more funds for food, clothing and other baby needs. Then, consider your priorities for your child’s future, like if you’d like to enroll your child in extracurricular activities or travel with your family frequently. You’ll also need to consider how to save, especially for college. A 529 college savings plan is one savings option that allows you to invest in your child’s future education. You need a Social Security number to open a 529, but you don’t need to wait until your child is born to open an account. You can open a 529 account before your child is born by naming yourself the beneficiary, Nelson advises. You can move it to your child when they receive a Social Security number without penalty, allowing more time to let the money grow.
Methodology
Bankrate commissioned YouGov Plc to conduct the survey on financial security. All figures, unless otherwise stated, are from YouGov Plc. Total sample size was 2,521 U.S. adults. Fieldwork was undertaken June 5-7, 2023. The survey was carried out online and meets rigorous quality standards. It employed a non-probability-based sample using both quotas upfront during collection and then a weighting scheme on the back end designed and proven to provide nationally representative results.
