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Pay It Forward

Take baby steps now to pay for childcare

About the author

Kate Ashford is a New York-based freelance journalist who writes about personal finance and health. She has written for Money, Real Simple and Redbook magazines.

A children's daycare centre in Pfungstadt, Germany (Getty Images)

A children's daycare centre in Pfungstadt, Germany (Getty Images)

When Katie Butterfield was pregnant with her first child, she started looking into child care costs — and was shocked by what she found.

“I anticipated child care [would] be expensive, but rates in New York City and Brooklyn were about twice my uneducated expectations,” said Butterfield, 34, who now lives just outside of New York City. “Getting quotes for daycare [nursery] was the first time I actually paused to question whether I could afford to have this baby.” 

She had already decided against a nanny, which can cost between $600 and $1,000 a week in New York City and a little more in London. In Sydney, AUD$20 to $30 ($19-$28) per hour is the going rate, and in Beijing, English-speaking Filipino nannies earn 4,000 yuan ($643) per month, on average. But even the nurseries or childcare centres Butterfield found in NYC were quoting her a fee of about $2,500 a month.

“That was more than my rent,” she said. “The whole process was definitely a rude awakening to the money pit that is parenthood.”

In fact, in the US, child care costs are almost a quarter of a family’s take-home income, according to the Paris-based Organisation for Economic Co-operation and Development. In the UK, that number is 27%, compared to just 10% in France. Japanese families spend 17% of their take-home income on child care. In Switzerland—hold on to your hats — child care costs an jaw-dropping 51% of take-home family income.

“When you start looking at your pie chart of expenses and where your money is going, and ‘child-related’ goes from zero to 35% of your total spending, that’s a huge amount of money that is no longer going to the fun things in life or savings,” said Katy Song, a financial planner in Mill Valley, California.

But there are ways to plan for and tackle this major expense.

What it will take: You’ll have to research your options extensively to ensure that you’re making the most informed decision about childcare, taking your income and preferences into account. In most countries, you’re going to have to whittle some significant expenses out of your income to cover the additional costs involved.

How long you need to prepare: As soon as you start planning to have a family, you should be thinking about childcare costs. At the very least, when you or a spouse is expecting a child, start doing some research. This is important not only so you can make the best decision financially and emotionally, but also because you may have to put your name on a waiting list if you’re trying to get a spot in a popular crèche, nursery or other facility.

Do it now: Get quotes. Child care costs vary widely depending on where you live. Hiring a nanny who comes to your home and watches only your child will likely be pricier than leaving your baby at a child minder’s home or in a formal nursery or day care centre. It’s impossible to make an educated decision until you have some pricing information.

Analyse your cash flow. “A lot of people who are dual income with no kids have a lot of fluff in their spending,” Song said. Add in $1,000 to $3,500 and “what does that do? Are you in the red or are you still in the black?” Song asked.

Ask yourself: Where can I cut back? And will I be making the same income once I have a child, or will you or a spouse reduce work hours to help care for the baby? Do you have savings that can cover a shortfall?

Start saving. You’re going to have less to live on once you start paying for childcare — so why not start now and practice living on less every month? You can find out whether your new budget works and put the money into savings — which can help you cover a shortfall later if childcare ends up being even more expensive than you bargained for. “I had one client who called it the Dream Fund,” Song said. “They saved $30,000.”

Find out about government assistance. Many countries offer subsidised childcare or tax credits or deductions that can be used to offset costs. “New Zealand has a benefit called Out of School Care and Recreation, or OSCAR,” said Rod Mudgway, a financial adviser with Brackenridge Financial Solutions in Auckland, New Zealand.

In France, there are a limited number of spots available in state and locally funded crèches for children between three months and three years of age, and the cost is based on what you can afford. In the UK, there are tax credits available to help pay for registered child care, depending on your income, and some employer-provided child care is tax free, according to Will Hadwen, an adviser with Working Families in London. A tax professional or financial adviser can help you navigate these waters.

Do it later: Consider asking your wider family to help. If you’re lucky enough to have family that lives nearby, ponder asking them to help with childcare one or two days a week, particularly when your child is an infant and care costs are highest.

“Grandparents are the cheapest and perhaps the most enriching solution,” said Victoria Lewis, a financial adviser with the Spectrum IFA Group in Paris.

Don’t shortchange your retirement. Steep child care costs may tempt you to scrimp on retirement savings indefinitely while you pay for it, but experts caution against it. Song warned that a lot of parents make the mistake of cutting their pension contributions without fully understanding the implication of compound interest on the pot. “You can’t sacrifice your biggest financial goal for short-term fees,” she said. Her advice: Keep saving for retirement, but skip the college savings until your child goes to primary school — unless you have cash left over after maxing out your retirement savings.

Do it smarter:  Be prepared to change your mind. Before you have a child, you may feel strongly about your childcare options — but your opinions after the baby is born may change.

 “With parents who haven’t had the child yet, they have preconceived notions of the type of child care they would want,” Song said. “Keep an open mind until you’ve had that baby and know when you’re going back to work and the disposition of the child.”

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Editor's Note: This story was updated to reflect a correction to Katie Butterfield's current residence.