Laura Rowley Money & Happiness

Patrick, 32, and Suzy, 29, have been married for two years. He works in production for a publishing firm; she’s in medical administration. They bought a three-bedroom rambler a year ago in a Seattle suburb, and they’re fixing it up room by room. They’re ready to start a family, but they are daunted by the potential costs.

The couple has made smart financial moves. “Right before the wedding we went to a financial planner who had us lay out goals and help us establish a realistic budget,” says Patrick. They paid off $5,000 in credit card debt and ramped up their retirement savings (Suzy’s employer offers a 5 percent match). They have built up a $6,000 emergency fund -- about one month’s take-home pay. They track their budget using Mint.com and live modestly; the only vacation planned this year is a trip to Chicago to attend a friend’s wedding.

But they are struggling to make progress. Student loans from graduate school eat up $550 a month. The house is more costly than they expected -- everything from utilities to paint supplies. “When something big comes up, we have to take it out of savings,” says Patrick. “Suzy’s car muffler fell off a year ago and we went a year without fixing it, but it got to the point where you couldn’t drive it down the street, it was so loud. It cost $400 to replace, which is not the end of world. But when you can’t squeeze any more out of what you’re making, how do you start a family?”

Parents in Patrick and Suzy’s income bracket ($74,500 and above) will spend an estimated $300,000 raising a child born in 2007 through age 17 – not including college expenses, according to government figures. Add in the academic, athletic, and artistic enrichment that is commonplace in child-rearing today, and those costs can easily triple, according to one estimate.

Yes, Kids Are Expensive

“It’s sort of cold to think about kids in this financial sense, but it is a reality of modern life: It’s expensive to raise kids,” says Charles Farrell, attorney and financial planner with Northstar Financial Advisors in Denver. “One of the leading causes of divorce is financial stress and disagreement. They need to really be up to the challenge, or they may find that a situation they thought would enhance their marriage might create some serious problems.”

While every family budget is different, middle-income parents should expect costs for food, clothing, and other basic living expenses to rise about 20 percent to support two children in a household, says Farrell. The best way to prepare is to earmark one income to cover necessities and the other for discretionary costs such as cable, dining out, and vacations. Budget-minded parents can save at least half on necessities such as cribs and strollers by searching craigslist or handmedowns.com, a classified ad site for parents.

“They have to consider how they will get through a financially challenging period if one of them loses their job,” says Farrell. “If the funds are that tight, a short period of unemployment for just one of them may threaten their basic financial stability.”

In addition, they must grapple with the biggest expense -- daycare. Neither Patrick nor Suzy have family in the state to help out; her employer offers a daycare center that costs $1,300 a month. That’s roughly in line with national averages: Fees in licensed centers averaged $14,647 a year for infants in 2007, according to a study by the National Association of Child Care Resources and Referral Agencies. Annual child care costs now surpass the cost of food in every region of the U.S.

The Costs of Health Care, College

Health care costs could also increase. While Suzy has excellent coverage through her employer, she should research how the cost of her policy, co-pays, and deductibles would change if they added a child, says Farrell.  
 
Then there’s planning for the future -- specifically college savings. “If they want to fund a college education for their kids, the numbers are sobering,” says Farrell. “If you consider a basic, in-state tuition of say $15,000 a year, with education inflation running at a conservative assumption of 5 percent, and your investments returning 7 percent over 18 years, you would need to save about $300 per month per child.” Parents can open a 529 college savings plan in one of their names before a child is born and then simply switch the beneficiary. Check out your state plan first, which may offer a tax deduction. 

All of those expenses worry Patrick: “As much as we spend what we earn, we’re not buying DVDs and big screen TVs that people our age blow all their money on.”

What they are likely blowing their money on is simply a higher cost of living. For example, the authors of the recent book Spend ‘Til the End note that Cedar Rapids, Iowa, which has the cultural offerings of a major university (University of Iowa), provides a 78.4 percent higher standard of living than Seattle. The median home price in Seattle is more than twice the national average.

They love the town; as Suzy says, “The city, the landscape -- we go hiking, we love to go out and explore areas -- it’s perfect.”

But getting attached to a major city can be a life-altering experience. I am raising my three children just outside New York, and my family is in Chicago. My kids are growing up spending just a week or two a year with their grandmother and cousins. The older I get, the more painful that reality becomes.

The truth is that, after you have kids, you spend a lot less time exploring city culture and nightlife and a lot more playing with blocks on the floor and kicking balls around the park. It’s worth thinking deeply about moving to a smaller city -- ideally close to family -- if the job opportunities are equal. Smaller towns also typically mean shorter commutes, something that becomes critical when you have kids.  Patrick, for example, travels an hour and a half each way to his position at a publishing company; Suzy walks to the bus and has a 45-minute trip to and from the office.

The couple has no plans to move for now, but they are exploring ways to boost their income before they take the plunge into parenthood. Says Patrick, “Suzy and I have always talked about how you can’t have it all -- you have to figure out where the compromise is going to come.”