Typically, parents wish to see their children find their way and succeed in adult life. Today’s article points to ways of saving on the high cost of raising children and furthermore, how parents can invest such savings in propelling the child’s successful graduation into young adulthood.
The major expense in raising children is usually housing. Thus, the first way of saving on this cost is for the prospective parents to be extra modest in purchasing the family home. The lower the cost of the selected home, the lower will be the allocated cost per bedroom or per child for the children of that home. Given the size of the planned family, there should be no extra bedrooms and where a large family is planned, children should be encouraged to share bedrooms.
Saving on housing is the single most significant saving a family can make in raising children. It is important to point this out, especially if the savings on the resulting lower mortgage interest is of the order of $200 per month or more. For example, the savings of $200 per month amounts to saving $2 400 per year, and $2 400 invested at compound interest of five per cent per annum will generate over $67 000 in an 18-year period.
The saving on the mortgage payment may be used to further repay the mortgage. Yet it must also be pointed out that the choice of a modest home may generate more than a $200 per month saving, and that mortgage rates tend to exceed five per cent. However, a conservative estimate at five per cent is made considering the alternative of investing the savings in a separate vehicle which earns a minimum five per cent return after tax.
A separate fund allows the parents to access the funds directly without having to take a home equity loan or to remortgage the home. Such funds will be handy in the event that the parents would like to assist the adult child with his tertiary education and/or establishing his own home.
This is the most magnified example of how significant savings in raising children can redound to the benefit of the child or the parents. To the extent that the children developed independence and do not need as much support, the funds are available to the parent, knowing that they have completed a major function in their children’s life.
The critical point of this strategy is to recognise that overspending on children may compromise the parent’s ability to support themselves or their children later in life. It makes no sense to overindulge the child with what the parent never had and then be financially stressed in finding the funds to support the child’s opportunity to attend a highly rated educational institution. Even small savings during the child-rearing years set aside and invested, magnify in returns over an extended period of compound interest growth.
With this idea in mind, there are additional ways of conserving cash that can be invested. For example, rather than buying a brand new car that depreciates deeply in value from the moment it is driven out the showroom, seek out a used car in good condition; using hand-me-down clothes or home-made clothes; buying ground provisions, fresh vegetables and fruit from farmers; staying with having one car in the family as far as possible by carpooling with neighbours or friends; and having granny or granny’s friend and contemporary assist with child care.
Once parents have locked into the idea than the span of their children’s life is a time to save and invest in furthering their own and their children’s lives, the opportunities will be more and more apparent.
Louise Fairsave is a personal financial management adviser, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances. This column is sponsored by the Barbados Workers’ Union Co-op Credit Union Ltd.