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No matter how you look at it, the cost of daycare represents a huge chunk of change. A recent study from Care.com estimated that, nationally, parents paid an average of $188 per week for center-based care for one child and $341 for two kids in 2015.
By and large, how much you’ll pay for daycare depends on where you live. In the expensive Northeast, Massachusetts residents fork over as much as $16,430 per year, or $1,369 per month, for center-based infant care for one child. And that extends all the way down to cheaper states like South Dakota where families pay just $6,071, or $505 per month.
Prices drop as children transition out of diapers, around ages three and four, and again once they reach school age. Eventually, daycare costs all but disappear.
Sadly, the savings many of us hope to gain disappear right along with it.
The Fluctuating Costs of Kids
My kids are ages six and four, which means I’ve been paying for some form of daycare or preschool for more than six years. As I went from one to two kids in full-time daycare, then down to one in preschool, my daycare bills have fluctuated. But no matter what, those bills always hurt.
A few months ago, my youngest started school. For the first time since I became a mother, I no longer have an $800 childcare bill siphoned off the top of my paycheck. And like many, I want to make sure that money doesn’t disappear into thin air – get rolled into our regular expenses somehow, or used to fuel stealth lifestyle inflation I wouldn’t notice until it was too late.
I want to put those dollars to work – to make them count before they are frittered away.
Unfortunately, it may not be that easy, says Shannon McLay, financial planner and founder of The Financial Gym.
According to McLay, the end of daycare never seems to translate into dollar-for-dollar savings because, “there always seems to be ongoing expenses where kids are concerned.”
Isn’t that the truth? I’ve noticed how the costs creep up with my oldest already. Although she’s only in second grade, I am bombarded with a barrage of book fees, school fundraisers, and other invitations designed to part me with my money on a monthly, if not weekly, basis.
Still, the savings are there for the taking. It’s up to me to decide how to put them to work. And if you find yourself in a similar situation, it’s up to you to put your dollars to work, too.
Financial Planning for Your Post-Daycare Reality
Although the end of daycare may put those bills behind you, for many people, that means the beginning of paying for before-and-after school care, along with lessons and activities galore.
Still, depending on how much you were paying before, there could be a huge chunk of money left over. Here are some ways to parlay those savings into long-term wealth, both for you – and for your children:
#1 Max out your tax-advantaged retirement accounts.
If you aren’t saving enough for retirement, now is the perfect time to beef your contributions up without really feeling the pain.
“Be sure to max out your retirement accounts with any surplus cash flow, making sure to take full advantage of a company match before considering a Roth IRA and other savings vehicles,” says Matthew A. Cosgriff, Certified Financial Planner (CFP) from Lifewise, a financial planning firm focused on helping young professionals.
“As day care expenses phase out, there may be a small window where expenses actually dip down before increasing again as kids get into sports and other costly activities,” he says. “Using the additional cash flow as an opportunity to fund retirement accounts will pay dividends down the road when cash flow begins to tighten up again.”
But don’t forget to make those contributions automatic, notes Katie Brewer, financial coach and CFP from Your Richest Life Planning.
“Remember that automating your retirement savings is the best way to ensure that you stick to it,” says Brewer. You can contribute up to $18,000 in an employer-sponsored plan (like a 401(k), 403(b) or 457) per IRS rules in 2017. If you are over 50, you can put an extra $6,000 a year into an employer-sponsored plan. “If you are self-employed and you don’t have a retirement plan in place, go ahead and put one in place this year,” she says.
#2 Contribute to an IRA.
As Cosgriff notes, paying special attention to your work-sponsored retirement account is a smart approach. In addition, you can also consider contributing to a traditional or Roth IRA.
The IRA contribution limit will stay the same at $5,500 in 2017, although workers age 50 and older can make catch-up contributions up to an additional $1,000. Your ability to make Roth IRA contributions changes slightly for 2017, and will begin phasing out for taxpayers whose adjusted gross income is between $118,000 and $133,000 for individuals and heads of household and $186,000 to $196,000 for married couples.
Tax deduction rules for traditional IRAs also change slightly in 2017, with phase-outs starting at $62,000 and $72,000 for singles and heads of household and $99,000 to $119,000 for married couples when the contributing spouse also has access to a work-sponsored plan.
#3 Pour that money into college savings.
According to Stuart Ritter, CFP at T. Rowe Price, diverting your extra money to college savings might mean the difference between being able to pay for your children’s college – or coming up short. A recent estimate from T. Rowe Price showed that parents need to save $450 per month from the time their child is born to cover the total cost of a four-year, in-state public university. Obviously, the later you start, the more you’ll need to save.
If you want to pay for your children’s college education, pouring daycare dollars into college savings is an obvious choice. There may even be certain tax advantages depending on where you live. In my home state of Indiana, for example, we get a 20% tax credit on the first $5,000 we contribute to a 529 college savings account each year. That’s $1,000 right back into my pocket, and huge incentive for us to sock that money away all along.
#4 Beef up your HSA.
Another smart place to stash daycare dollars for later is your HSA, or health savings account.
“If clients are fortunate enough to access HSA’s or healthcare savings accounts, I suggest using childcare money in those to not only get tax and investing benefits but also prepare for the inevitable future healthcare expenses that come with having children,” says McLay.
For the 2017 tax year, HSAs are available for those with a qualified health plan with a deductible of at least $1,300 for individuals and $2,600 for families. Annual contributions in 2017 are capped at $3,400 and $6,750 for individuals and families, respectively, although those contributions are tax-advantaged.
#5 Pay down debt.
Another option, says Cosgriff, is to pay down those pesky debts once and for all – but you should only consider that route if you’ve already started saving for retirement, he says.
“If there is any credit card debt or student loans, consider throwing some of the surplus cash at those,” he says. “It is amazing how quickly loans can be paid off when you’re suddenly able to throw an extra $600 – $1,200 a month towards them.”
Jeff Rose, CFP and author of Soldier of Finance, suggests “annihilating all debts.”
Once daycare is out of the way, says Rose, it’s time to “roll up your sleeves.” Any and all debts should be marked for destruction, notes Rose, including high interest credit card debt, student loans, car notes, and your mortgage.
“If your debt payoff is on good trajectory, consider making additional payments to your mortgage to cut years and interest on the loan,” he says.
This move can even pay dividends down the road since becoming debt-free will free up even more money to use for other goals. “Eliminating debt gives individuals and couples significantly more financial flexibility on a month to month basis, which can help speed up when one can retire or simply provide additional freedom to take the extra family vacation,” says Cosgriff.
#6 Try a multi-pronged approach.
If you’re unable to decide where to divert your dollars, you don’t have to commit. Instead, you can divvy up your funds in a way that helps meet multiple goals.
That’s exactly what financial writer Alaina Tweddale did when her twins graduated from preschool and straight into kindergarten. All of a sudden, she and her husband had an extra $1,500 per month to play with.
“We wanted to put that freed up capital to good use,” says Alaina. Therefore, they split the money up as follows: $200 per month to pay for part-time aftercare at their public school, $500 per month into 529 accounts for the kids’ college funds, and the remaining $800 goes toward making a large extra payment on her husband’s student loan.
“When his loan is paid off, which should be within the next two years, we’ll split that payment so a portion goes toward even more 529 plan funding and a portion goes toward making an extra mortgage payment each month,” she says.
Alaina couldn’t decide which goal to prioritize, so she prioritized all of them. At the end of that day, that’s a pretty smart idea.
The Bottom Line
Saying goodbye to daycare might be bittersweet, depending on your outlook. On one hand, it means your precious child is growing up. But on the other, it could leave you with a whole lot more money in your pocket.
The key to making that money work is figuring out where you want it, then allocating it before it disappears. That’s exactly what did when our youngest started kindergarten, and I hope you will too – before it’s too late.
Did you experience a windfall when your children transitioned from daycare into school? What did you do with the money?