Are 2 incomes necessary?
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Common misconception – 2 incomes are
necessary to live on in today’s society
On average, a 2nd income needs to be
$25,000 a year to break even
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assuming $500 a month in day care costs and
increased expenses for commuting, meals out, dry
cleaning, clothing, and etc.
2nd income calculator (linked on webCT – Pearls of
Wisdom):
http://moneycentral.msn.com/investor/calcs/n_spwk/main.asp
• This site says: You might be surprised at how little extra
income your family gets when both spouses work. To
determine whether it's worthwhile,
What does it cost to work?

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Opportunity cost
Out-of-pocket costs
 Day care or care for a dependent relative
 Taxes
 Retirement plans
 Union or professional dues
 Office collections
 Added household expenses
 Health insurance
 Transportation
 Clothing and personal care
 Meals & coffee breaks at work
 Others?
Parental Investments in
Children
Extensive marginal investment - expanding a
household’s investment in children by having
an additional child, holding other resource
allocations constant.
 Intensive marginal investment - expanding a
household’s investment in children by devoting
more resources to the children in the
household, holding numbers constant.

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Watch “William Tell Overture”
Trends in U.S. Fertility Over Time
Kids
are
fun!
Today, Intensive
Investments in Children
Take Many Forms...
Direct money expenditures designed
to enhance their human capital (e.g.,
food, clothing, braces)
 Expenditures of time and energy
directed at enhancing their human
capital (e.g., child care time, helping
with homework, coaching soccer)

Total Direct Expenditures on
One Child, 0-17
(USDA, 2006– Study based on Husband/Wife hhs with 2 children
-- Highest Income Group; Middle Inc Grp; Lowest Inc Grp)
$381,050
Total $
Expenditures
$260,700
$190,050
$0
Highest
Middle
Lowest
$100,000 $200,000 $300,000 $400,000 $500,000
http://www.cnpp.usda.gov/Pu
blications/CRC/crc2006.pdf
Adjustments for different
numbers of children...
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These estimates are for the younger child of a 2
child family.
Costs are 24% higher for families with one child.
Costs are 23% less per child for families with 3+
children
THESE ADJUSTMENTS REFLECT ECONOMIES
OF SCALE!
These expenditure
estimates do not account
for...
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Post-secondary education expenditures
Investments in children made by other family
members outside of the immediate household
Government expenditures on children
Opportunity costs of these investments
Time-related investments in children
Implications...

Family sizes have fallen over the past 60 years,
while direct or primary child care time has
increased.

This implies a huge increase in investments in
children at the intensive margin.

But, is direct child care time, the only investment
time?
Saving For a Child’s
Education
Is it possible?
How can I/we do it?
Estimate Cost

Current estimates are about $100,000
for 4 years of education in 18 years
for public schools, and $200,000 for
private

Assumes 5% annual inflation
• Realistic?
How to finance?
Bottom line  START NOW!
 Only have 18 years, so an aggressive
stance is vital
 Take advantage of investing with tax
breaks

Financing Alternatives

Roth IRA
 Can withdraw earnings tax-free, if have
held account for 5 years
 Can use money in your Roth for yourself,
your spouse, your child, or your grandchild
 Downside?

Coverdell Education Savings Account
(ESA)

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Tax-free earnings, $2000 maximum
contribution per year, per child, with
$220,000 max income for married parents,
$110,000 for single parents
Do an FVA with $2000 a year for 18 years,
with 5% interest
• Try again with 7% interest
• Enough?

At age 30, you may rollover any unused
amount to another family member, including
your own child, or take a 10% penalty

State 529 plans (or state college
saving plans)

Contributions are tax-deferred, and
when used to finance education, are
taxed at student’s tax rate
• New law: Tax-free if withdrawn before
2010
If money is not used for college
expenses, penalties are up to 15% of
the earnings, or 1% of the total
balance
 Utah’s plan  info available at
www.uesp.org or by calling 800-4182551

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Upromise.com

Series EE government savings bonds

Interest is tax-free if used to pay for
college
• Have to buy the bond in your name, not
your child’s
• Full deduction up to income of $81,100
for joint filers
• Parent must be at least 24 years old at
time of purchase

Invest in your child’s name

Under age 14:
• $750 a year in interest income is earned
tax-free
• Next $750 in earned interest is taxed at
child’s tax rate (10%)
• Over $1500 is taxed at parent’s rate

Over 14:
• Income up to $5250 = 10%
• Income up to $27,050 = 15%