What to do with your day care dollars when your child graduates
The summer is coming to an end, and you just made your final day care payment as your little one prepares to head off to kindergarten. It feels like you just received a midyear pay raise. You may want to use this as an opportunity to revisit your financial goals. Here are four things to consider.
Childcare is expensive—in dollars and opportunity cost
According to care.com’s 2022 “Cost of Care Survey,” childcare costs are taking a toll on families’ finances and career opportunities.
- 51% of respondents spend more than 20% of their income on childcare; 72% pay more than 10%
- 31% of parents took a second job to help manage increasing childcare costs, while 26% reduced hours and 21% left work entirely to help
- Sending an infant to day care costs an average of $979 per month; a second child—accounting for an average sibling discount of 10%—increases this cost to $1,859 per month, or over $22,000 per year!
Some parts of the country—Washington, D.C., California, Massachusetts, and Washington—pay at least 25% more than the national average for day care.
So, it can be a big deal for your finances when your child graduates from day care. Consider taking the opportunity to help advance some of your financial goals with the money you’re no longer using for day care.
1 Top off your emergency savings fund
When day care expenses are straining your finances, building your emergency savings fund may not be a priority. When your child graduates to kindergarten, you may find that you have extra dollars in your pocket—but before you increase your spending, consider taking this time to re-evaluate your finances and make a plan for those “extra” dollars.
Review your budget to see what your monthly expenses add up to. What’s your emergency fund ratio? In other words, how many months’ worth of bills do you have in an emergency savings fund? Experts generally recommend having three to six months of expenses set aside, but it’s ultimately up to you—you may want more or less, depending on your situation. Some things to consider may include the current job market, global economic conditions, whether or not you have dependents, and how much you may be able to reduce your monthly bills if needed.
Having an emergency fund can help turn a financial emergency into an inconvenience. Take some time to review your finances, and determine a budget for an emergency savings account you’re comfortable with.
2 Bump up your debt payments
Has your credit card balance been rising? Or are you using a home equity line of credit to get by? You’re not alone—53% of American workers say their level of debt is a problem.¹
Consider using your day care dollars to bump up your credit card and loan payments to help pay off your debt faster. There are a few strategies available to pay down your debt, including:
- Avalanche method—Focus on your highest-interest debts first
- Snowball method—Start with your smallest balances first
- Debt consolidation—Combine your higher-interest debts with your lower-interest ones to have one payment at the lowest interest rate possible
3 Start a college savings fund
Why not focus your extra cash flow where it was already going—to your child?
If you don’t already have a college savings account, such as a 529 plan, you may want to consider starting one. If you already have one, review your savings goal and progress. Are you on track to reach the amount you wanted your child to have? Consider adding to your regular contribution if not.
Roth IRAs—while not traditionally an education savings product—may be something to consider for your kids. And if your child pursues a life without college, they already have a leg up on their retirement savings.
4 Enhance your retirement savings strategy
If your retirement savings have taken a back seat while you’ve been raising babies and toddlers, now may be a good time to revisit your strategy. There are a few questions you should ask yourself:
- How much are you saving today? In 2023, you can put away up to $22,500 in a 401(k), 403(b), or 457 plan and $6,500 in an individual retirement account (IRA). These amounts can change annually, so check back next year to see if you can contribute more.
- What’s your company’s matching contribution, if any? Consider increasing your contribution until you receive the full match if you’re not already. There aren’t many opportunities to get paid to save money, but employer matching contributions are one of them.
- What are you investing in? Review your retirement plan investments to see if they still align with your goals and risk profile. Consider incorporating a mix of investments to balance the long-term growth potential with a level of risk you’re comfortable with.
- Are there plan features that can help you reach your goals? Things like automatic increase—which increases your savings rate once per year—rebalancing, and investment advice products can help in a variety of ways.
Day care graduation is a big step for your family—and your finances
Day care costs for some families are the same as their mortgage. When it’s no longer going to day care, it’s easy to just spend that money on the things you’ve been wanting but couldn’t quite afford. Before you do, take stock of your finances and see if you can make improvements to help make your financial situation more durable. These four tips may help you reach your goals on the timeline you want.
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1 In December 2022, John Hancock commissioned our ninth annual stress, finances, and well-being survey with the respected research firm Edelman Public Relations Worldwide Canada (Edelman). An online survey of 3,825 workers was conducted between 11/29/22 and 12/14/22 to learn more about individual stress levels, their causes and effects, and strategies for relief. John Hancock and Edelman are not affiliated, and neither is responsible for the liabilities of the other.
Important disclosures
The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made.