The cost of daycare can be a financial burden for many families. According to a 2015 report from Care.com, parents on average paid $188 per week for daycare for one child and $341 for two children. These costs vary widely depending on your location, with families in expensive states like Massachusetts paying over $16,000 annually for infant care, while families in more affordable states like South Dakota paid about $6,000 per year.
While daycare expenses decrease significantly as children grow older, many parents find that the savings don’t always translate into extra cash. Instead, these savings often get absorbed by other unexpected costs that come with having kids.
The Shifting Costs of Raising Kids
My kids are six and four, and for the past several years, we’ve been paying for some form of daycare or preschool. Over time, our childcare expenses have fluctuated as we’ve moved from full-time daycare for both kids to preschool for the youngest and school for the oldest. Recently, for the first time in six years, I no longer have an $800 daycare bill each month. While this feels like a small win, I want to make sure that money doesn’t simply vanish into our regular expenses or inflate our lifestyle without us noticing.
Unfortunately, as financial planner Shannon McLay points out, the end of daycare doesn’t always result in direct savings because kids tend to bring ongoing costs. I’ve seen this firsthand with my older child, as new fees for school books, fundraisers, and activities seem to come up constantly. Still, there’s an opportunity to put that freed-up money to good use, and it’s essential to plan ahead.
How to Make the Most of Your Post-Daycare Dollars
When daycare expenses drop, there’s often a chance to reallocate that money into other areas that can benefit your long-term financial health. Here are some smart ways to put those extra dollars to work:
1. Max Out Retirement Contributions
If you’ve been putting off maximizing your retirement savings, now is a great time to catch up. Using the extra cash you were spending on daycare, consider contributing more to your retirement accounts. According to financial planner Matthew A. Cosgriff, it’s a smart strategy to beef up your 401(k) or other employer-sponsored retirement plans. You can contribute up to $18,000 per year in these plans, with an additional $6,000 if you’re over 50. This is a great way to take advantage of a temporary dip in expenses before your costs increase again as your kids get involved in more activities.
2. Contribute to an IRA
In addition to your employer-sponsored retirement accounts, consider putting some of the extra money into an Individual Retirement Account (IRA). In 2017, the contribution limit for IRAs is $5,500, with an additional $1,000 allowed for those over 50. Keep in mind that there are income limits for contributing to a Roth IRA, so it’s important to check if you qualify.
3. Save for College
Another great option is to put that extra money into a college savings account for your children. Financial planner Stuart Ritter recommends contributing to a 529 college savings plan, which can help ensure you’re prepared for future education costs. Many states offer tax benefits for contributions to these accounts, making it an even more attractive option. In some places, like Indiana, you can receive a 20% tax credit on contributions up to $5,000 per year, which can make a significant impact on your savings.
4. Increase Your Health Savings Account (HSA)
If you have access to a Health Savings Account (HSA), consider using some of the money from daycare savings to contribute. An HSA offers tax advantages and can help you prepare for future medical expenses, which are inevitable when you have children. For 2017, the contribution limits for HSAs are $3,400 for individuals and $6,750 for families. These funds can be used for healthcare expenses and can grow tax-free, making it a smart way to prepare for future needs.
5. Pay Down Debt
Once you’re on track with retirement and savings goals, consider using your extra money to pay off debt. Whether it’s student loans, credit card debt, or your mortgage, paying down debt can give you more financial freedom. As Cosgriff points out, even just an extra $600 to $1,200 per month can make a significant dent in your debt. Getting rid of debt not only reduces stress but also frees up more money for savings and other goals in the future.
6. Split Your Extra Funds Across Multiple Goals
If you can’t decide where to put your extra daycare money, you don’t have to choose just one option. Consider a multi-pronged approach, as financial writer Alaina Tweddale did when her twins moved from preschool to kindergarten. She and her husband used their newly freed-up $1,500 to cover part-time aftercare, contribute to their children’s 529 college savings accounts, and make extra payments on student loans. This approach allows you to work toward multiple financial goals at once, maximizing your resources.
Conclusion
The transition away from daycare can feel like a relief, but it’s important not to let that money slip away without a plan. By reallocating your daycare dollars into long-term savings, retirement contributions, debt reduction, and college savings, you can set your family up for future financial success. The key is to be proactive and intentional about how you use this newfound cash before it vanishes into your everyday spending.
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