As anyone with kids will tell you – raising children can be expensive. However, what is the impact on long-term wealth?
Why we Raise Children
Nobody has kids to turn a profit (although lockdown may have made it more tempting to sell one!). We start families for a whole range of reasons, including:
Wanting to create a family with your significant other
To carry on the family name and values
To provide meaning in life
Social pressure and expectations, which often come from family members
It’s human nature
Children Aren’t Cheap
There are many reasons to start a family, but we might not always consider the monetary costs. Plunket, in conjunction with BNZ has estimated that having children can cost as much as $16,000 per year. Assuming you support your child for 18 years, that’s a whopping $288,000. Many of us will support our kids beyond 18 as they venture into university, buy a car, or rely on help from ‘The Bank of Mum and Dad’ to get into their first home.
Additionally, there are other costs we might not consider, such as owning or renting a bigger home. Another is the ‘stay at home penalty’ – missing out on earning an income as a stay at home parent and also missing out on career progression (even including employee KiwiSaver contributions).
A solution may be to try and earn more, progress in your career as soon as possible, or have kids later in life. However, the more money you have or earn, the more you typically spend on your kids. For example, as you earn more you might spend more on:
Costlier hobbies or sports such as music lessons, skiing, swimming,
Private health insurance
But everything is not about money, so does having kids make us happier?
Do Children Make Us Happy
Most parents will tell you that having kids makes them happier. However, research suggests that this claim isn’t necessarily true. New Zealand has one of the largest ‘happiness gaps (7.8%)’ between parents & non-parents, that is, childless Kiwis are happier. Conversely, other countries such as Portugal and those in Scandinavia have a positive happiness gap i.e., those with kids report to be happier than those without kids.
It may be the differences come down to whether a nation has plenty of social policies that help parents face the challenges of balancing paid work with the responsibilities of child-rearing. Countries, such as those in Scandinavia where parents are happier than non-parents, tend to have family-friendly policies, including paid parental leave, affordable and subsidised childcare, more government-protected paid vacation and sick days, and greater work schedule flexibility.
New Zealand has its own policies that help offset the cost of having kids, including:
Taxpayer subsidies for government-approved childcare facilities
A childcare taxpayer subsidy for children aged 3 to 5, known as 20 free hours
Although these policies may provide some relief, it could be argued they do not alleviate a number of factors todays’ young parents have to deal with such as high rent costs, overpriced groceries and the financial pressure of trying to save a deposit for their first home – which may seem like an impossible dream.
As mentioned earlier, supporting your child for 18 years might cost somewhere in the vicinity of $288,000. So, if have a couple of children, that's a total of $576,000.
Now that we have established that having a couple of kids could cost you over half a million dollars and might not make you happier, should we be throwing the baby out with the bathwater, if we want to build long-term wealth?
No, not necessarily. Research out of Australia suggests that having children has a very small impact on wealth accumulation relative to the cost implied. The evidence presented suggested that the wealth of a couple was reduced by around AU$2,000 per year for each dependent child. This is relatively inconsequential and surprisingly low compared to the cost of a child ($16,000 per year).
The conclusion that the cost of children has little to no impact on net wealth has been replicated in several studies and although it is difficult to conclude exactly why this is, the authors have implied that children will often have positive effects on the income side of the equation, notably through welfare payments and tax concessions. Additionally, one may argue that those with kids may be more motivated and have the necessity to increase their income to cover the cost of kids. Therefore, somewhat offsetting the effect on net wealth.
The Bottom Line
Although kids may cost more than we think, there seems to be little evidence that they have a significant impact on long-term wealth.
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