July 2, 2012

It Doesn't Really Cost $287,000 to Raise a Child

I saw 2-3 blog articles lately about the government estimate on how much it costs to raise a child.

I found one article from CNBC titled The Inflation of Life - Cost of Raising a Child Has Soared discussed the topic.    The title says the cost has "soared" and the article explains that the cost cited has "surged 25 percent over the last 10 years".   Now I don't know about you but +25% in 10 years isn't exactly "soaring" inflation.   In fact just simple math tells us its no more than 2.5% a year on average.   Thats below what I'd expect for a normal inflation rate.   I have no idea how the author of that article thinks this is "soaring" prices.     But anyway thats a separate topic, the meat of the matter is the actual amount the government figures it costs to raise a kid.

For that they say :

"The government's most recent annual report reveals a middle-income family with a child born in 2010 can expect to spend roughly $227,000 for food, shelter and other expenses necessary to raise that child - $287,000 when you factor in projected inflation."

 $227,000 total over 17 years comes out to about $13,350 annually.    Thats a pretty hefty sum.   Must be a lot of diapers and texting plan charges.

That article was talking about the 2010 numbers from the 2010 report.   However the government just put out a 2011 report this month.    I first wrote up this article talking about the 2010 numbers cause I didn't see the 2011 data yet.  Then I found the 2011 data and had to rewrite bits.  So if I got some numbers mixed between 2010 and 2011 then thats probably the reason.

Where does this number come from??

For that we need to go to the source.   Who is in charge of determining how much children cost?   Why the U.S. Department of Agriculture of course!

"Spending" doesn't equal "Costs"

Looking at the 2010 report a couple points stick out ; 

1) "Child-rearing expenses vary considerably by household income level."
The range is pretty wide from as low as $8,480 among low income families up to to $23,690 for higher income folks.

2) "Since 1960, the first year USDA produced child-rearing expense estimates, the Consumer
Expenditure Survey (CE) has been used as the basis for the estimates."

The data they use is the Consumer Expenditure Survey.   Thats the BLS survey about how much households spend.     The data is really based on how much people spend rather than how much it costs.    How much people spend is not the same thing as how much something costs.

Consider these two questions :
a) How much does it cost to feed a person?
b) How much does an average American family spend on groceries and eating out?

Do you think those are the same question?   I do not.

I assume the answer to a) would be a more minimal or basic cost and the answer to b) would be a higher than required amount.    Our actual spending patterns include spending that is not necessary.   For this reason I don't equate average spending to cost.  

They also break down the spending of different income groups.   Lower income families spent $8,480 while more affluent families spent $23,690.    What we're actually getting is not the cost to raise a child but the average spending per child for a middle class family.

Where does the money go?

Here is a graph from the report indicating the % of total spending for each budget category from 2011.

Click image for full size

And here is how the amounts in each budget vary across the age of the child for 2011:

Here are the totals in table format for each category :

Age Housing Food Transportation
0-2 $3,920 $1,400 $1,690
3-5 3,920 1,490 1,740
6-8 3,920 2,100 1,860
9-11 3,920 2,400 1,870
12-14 3,920 2,580 1,990
15-17 3,920 2,570 2,150
Total $70,560 $37,620 $33,900

Age Cloting Health care Child care and education Misc.
0-2 $760 $850 $2,860 $890
3-5 610 800 2,740 1,090
6-8 680 940 1,680 1,110
9-11 710 1,000 2,110 1,100
12-14 840 1,410 1,910 1,170
15-17 900 1,330 2,400 1,050
Total $13,500 $18,990 $41,100 $19,230

and the totals are :

Age Total
0-2 $12,370
3-5 12,390
6-8 12,290
9-11 13,110
12-14 13,820
15-17 14,320
Total $234,900

Note that this is for the middle income family with before-tax income: $59,410 to $102,870 (Average = $79,940) and both parents present.

Housing is about 1/3

The 2011 report says : "As a proportion of total child-rearing expenses, housing accounted for the largest share across income groups, comprising 30 to 32 percent of total expenses on a child in a two-child, husband-wife family.."

Housing is a large portion of the cost to raise a child.  You may not think about this really since you have to have a house and adding a child to the family doesn't really  seem like it adds to your housing costs but it does.   With more children you need (or at least want) more bedrooms.   Those extra bedrooms require more space which costs more.   The larger house has higher utility costs, maintenance costs, etc.   It all adds up.  

They figure housing costs by the extra bedrooms required for children.   Plus they then add in any associated costs for that bedroom like extra utilities, etc.     They give a figure of $3,920 for middle income families.   That comes out to about $327 per month for housing.    That seems inflated to me.   I don't think that going from a 3 bedroom 1500 sq ft house to a 4 bedroom 1600 sq ft house would really add $327 to the monthly costs of that house.    Currently the median home price is around $160,000.   You can finance that for about $900-$1000 monthly PITI, plus add in maybe another $100 for repairs and $300 a month for household utilities and you get say $1400 per month total for housing.   In fact this is about the total housing spending for a middle income family according to CES.  Should one extra bedroom account for 23% of housing costs?  I don't think so.  I'd assume more like 10-15%.    Cut 1 bedroom and 100 sq ft out of a typical house and it won't cut your total costs by 23%.  Repairs and maintenance won't go down much and at worst would be proportional to the amount of square footage for a bedroom.   Same goes for utilities.  I think its more realistic to figure an incremental cost per bedroom of closer to 10% of household spending or about $140 per month.
I think the USDA probably overestimates the real incremental cost of housing a child by around 100%. 

Childcare and education seems high at older ages

Why does childcare and education cost $2,400 for your 15-17 year old kid?   I'm guessing this is mostly for education.   I know that there are some costs for k-12 education that parents carry like fees for sports or clubs, but I don't imagine the average runs north of $2000 a year for middle class families.    Yes I do realize some families do spend a lot of money on sports but that is not so common that the average would end up at $2400.   I suspect this may include the cost of private education spent by some families.  I assume that CES data would include that cost in family spending survey.

Food includes eating out and isn't frugal

About 40% of the food spending in the CES data is from eating out.   Otherwise families often aren't particularly frugal in their food spending.   I don't think that the figures cited are particularly high and I dont' doubt those are the typical averages, but they are higher than what is really necessary.

Does it Really cost $1690 a year to drive a baby around?

The USDA figured transportation costs for children as a % of total household transportation spending.   The 2010 report says "For a child in a two-child, husband-wife family, the per capita method (factoring in only family-related travel) resulted in approximately 15 percent of total transportation expenses being allocated to the child"    So roughly speaking they're assuming that if a family spends about $10,000 on transportation then 15% or $1690 of that is due to the child.    If you have to drive a baby across town to child care then I guess it could add up to that amount.   But I think this is a pretty inflated number that probably over states the amount children add to your transportation bill.  

Whats it really cost?

How much do you want to spend?     Seriously theres no single right answer to how much it costs to raise a child.    There are many variable expenses and some are optional entirely.    I don't think the USDA measure is really wrong, it is just answering a different question.   They answer the question asking "how much do average Americans spend".   Thats useful to know but its not really the same as answering "how much do children cost".   I think the USDA gives you a ballpark figure that is probably higher than necessary.   You can certainly raise children on much less than the $234,900 total they figured.   Poor people do it all the time.  

If I were to throw out a figure I would guess that the USDA number is probably inflated by around 50-66% give or take.   I think a figure of $8000 or $9000 per year is probably more realistic and reasonable for a fairly good baseline spending amount.   However this is just a pure guess on my part.   The amount you can spend varies greatly.   Past basic costs for food, clothing, shelter and medical care it truly does depend on how much you want to spend more than anything.

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