News flash …. HOT off the press …. And one that falls squarely into the laps of the Gen Y / Millennial generation!! Last week, the United States Department of Agriculture released its’ annual report that details the cost to raise a child from birth to the age of 18. YIKES!! This report doesn’t even cover the costs of them going to college or some other type of vocational school after high school graduation.
August 18, 2014 – Today, the U.S. Department of Agriculture (USDA) released its annual report, Expenditures on Children and Families, also known as the Cost of Raising a Child. The report shows that a middle-income family with a child born in 2013 can expect to spend about $245,340 ($304,480 adjusted for projected inflation*) for food, housing, childcare and education, and other child-rearing expenses up to age 18. Costs associated with pregnancy or expenses incurred after age 18, such as higher education, are not included.
For those interested in the gory details, here is the link … http://www.cnpp.usda.gov/. On a side note, the USDA’s Center for Nutrition Policy and Promotion also has information on how raise healthy children as well.
These are estimates of course. Your cost will vary, sometimes widely, depending on where you live. According to the USDA, it is more expensive to raise children in the Northeast and West Coast than is it is to raise a child in the South or Midwest. And within each regional demographic, it is less expensive to raise a child in a rural setting vs the city. See graphic below to get a good summarization of the USDA’s estimates. Now, these statistics are not reported to scare the heck out of parents. These estimates are used to set the standards that can be used to determine child-support levels and more. For the Millennial generation, these costs should be viewed as a wake-up call. Life is expensive. You may want to seriously consider putting together a financial plan that takes into consideration events that could derail your financial future.
I’ve heard it before. “I’m young and I’m busy. I don’t have time to create a plan”. Make no mistake, the time it takes to prepare and maintain a financial plan early in life will pay for itself many, many times over, not only from a financial standpoint but also from an emotional standpoint. Knowing that your child will have the option of attending the University of his or her choice as well as knowing you will be secure in retirement, will greatly alleviate the stresses that are associated with living a full and real life.
So, where should a millennial begin?
If you haven’t already done so, create a budget and the first step in creating a budget is to follow the money. Track your income and expenses for one or two months. Once you know where your money is being spent, you will realize which spending habits are required (e.g. mortgage and/or car payment, housing utilities, etc) and which can be cut back or cutout entirely (e.g. eating out every night, twice yearly vacations, etc). Next, what big plans do you have for the future? If it is having a child, then review the USDA’s graphic and understand the expenses you can expect for the next eighteen years. If it’s something else, such as buying a house, do some research and estimate the costs associated with that expenditure.
In the meantime, eliminate any credit card debt. From a purely financial standpoint, you will never get ahead if you can’t get rid of the high interest revolving credit card debt. Interest payments made to the credit card companies cost you big. Both in terms of how much you have to pay to the credit card company but also in how much it prevents you from using the money on things that are important to you. The best way to “find” the extra money to accomplish this is to review your spending habits. What expenses are required and which ones are “optional”? Anything that is non-essential, such as a gym membership, cable TV, dining out, etc., should be on the chopping block. Remember, the things that you sacrifice now will not be gone forever. Once you have your credit card spending under control, you can reintroduce that spending later.
Next, begin saving for your retirement if you haven’t already done so. When you are young, the greatest impact you can have on ensuring a secure retirement is to start saving as early and as much as possible. For example, let’s say you graduated in the spring of 2014 at the age of 22 with a degree in Communications. According to the National Association of Colleges and Employers, on average, you’ll make almost $44,000. You contribute 20% of your salary, say $685 per month, to your retirement plan and you do this for 20 years. Your employer kicks in 50% of the first 5% contributed. Since you are young, you can put all your money in a low fee S&P index fund that gets a 9% annualized average return. Then you stop contributing completely. By the age of 42, your retirement account will have grown to approximately $500,000. Diversifying your account, you now expect to get only 5% on average every year. By the time you retire at the age of 67, you will have almost $1,700,00 in your account. If you wait to start saving at the age of 42, saving $685/mo and your employer kicks in the same amount for the next 25 years, you will end up with only $400,000 at the age of 67. For the young, time is on your side. As you get older, you begin losing one of the most powerful concepts in finance; the power of compounding.
Obviously, not everyone just out of college can do that. There are student loans to pay off, apartments to rent, possibly car payments. At the very least, you should contribute to your employer sponsored retirement plan to the extent you get the full company match. Doing this has a couple of key benefits. First, the company match is free money. For every $1 you put in, your company gives you another buck. Second, the money is taken from your paycheck. This automatic savings feature, called Dollar Cost Averaging (DCA), makes the process of saving for retirement much easier and incorporates a key method in taking advantage of the ups and downs of the equity markets as well as negating the emotional aspects of investing in the stocks (for more info on DCA, see our blog, courtesy of Forefield, a Broadridge Financial company, regarding Dollar Cost Averaging). This approach will reduce your take home pay, so make sure you update the income part of your budget.
After taking care of your retirement needs, it is time to prioritize the rest of your spending. If you already have or are planning to have a child and you want to send them to college, then budgeting for a college education is in order. Using the USDA’s estimates, you create a college savings plan that should meet your child’s financial needs 18 years from now. For example, using the USDA’s estimates, the annual cost of going to college will be about $18,000 for a public college and $41,000 for a private college. Let’s assume you plan on opening open a 529 College Savings account and depositing an initial $1,000. (Not sure how to save $1,000, read our “How to Save $1000” blog). Then, every month, plan to make a $100 deposit. If you do this every month for the next 18 years, getting an average 8% tax free return on your investment, the account balance will grow to approximately $53,000. You will have contributed around $22,600 but your money will have more than doubled. Granted, the devil is in the details (e.g. adjusting for inflation), but the example does give you a general idea of how saving now will greatly benefit you many years hence. Once you determine how much money you want to save, update the “spending” part of your monthly budget. Do the numbers still make sense? What about a new car five years from now? Maybe a nice vacation every other year? Repeat this process until you are able to identify those expenditures you really value vs those you could live without.
To further illustrate the power of saving early, read Paul Merriman’s Sept 3rd, 2014 blog, “9 reasons why saving $1 a day builds fortunes” on Marketwatch. I love reading this type of information and my favorite part in his blog is a quote by Warren Buffet. “You only have to do a very few things right in your life so long as you don’t do too many things wrong”. One of those “very few things” is to start saving as early as possible. On a side note, the blog also contains a link to TransAmerica study entitled “Millennial Workers: An Emerging Generation of Super Savers”.
As you go about the process of prioritizing your spending, play with the numbers. Instead of a $50,000 new car every five years, how about a $8,000 used car every four years. Remember, this is an iterative process. One that you should revisit at least yearly to make sure you plan in on track and that the numbers continue to make sense for you. If you do this once and forget about it, well, good luck. That’s not planning
The final step of course is to implement the plan, review it, update it and stick to it. Cut up the credit cards, talk to your company’s human resource department, open a 529 account, whatever it is that you need to do in order to do those things that have a high priority in your life. It is your life. By creating a financial plan, you get and maintain control of your life and to live it confidently.