Raising Kids These Days Ain’t Cheap

Kids these days! They can be so expensive!

Raising a child gets more expensive every year.

Not only does inflation take its toll, but there always seems to be another activity to do.

The older your children get, the more they are likely to cost (well, once you get them out of the initial “baby” stage where diapers can be a killer cost).

The USDA says that children are getting more expensive as well. I recently plugged my information into the Cost of Raising a Child Calculator offered by the USDA, and found that my 10-year-old son is expected to cost me $20,660 just this year.

We’re not on track to actually hit that mark so far this year, but the results have me thinking. I’m sure there are those in other places who spend that much on their kids — or spend even more — each year.

What Do You Provide for Your Children?

I  have two children still at home, and apparently that makes a difference. After playing around a little bit, I discovered that the average yearly cost for each child goes down when you have more kids. Probably because multiple children share the resources that you provide for them.

So, what are some of the amenities you provide to your children? Here are broad categories the USDA includes in the calculation:

• Housing
• Food
• Transportation
• Clothing
• Healthcare
• Childcare and education
• Other

On top of that, the USDA calculator takes into account where you live (regional) and how much money you make. At first, I thought it odd that how much money you make matters.

However, when I thought about it, I realized that many of those with higher incomes feel pressure to spend their money a certain way by doing things like sending their kids to private school, providing some sort of private lessons, and by buying more expensive clothes. Just where you live and the car you drive as a person with a higher income can influence the average cost of the activities your child is involved with.

For most families, the cost is going to be somewhere closer to $13,000 a year.

How Can You Reduce the Costs of Raising a Child?

Of course, the calculator just offers an average. Many people get away with spending a lot less on their children each year. I’ve performed the calculation on my son, and I’m below average in some of the categories and above on others.

A lot of the price reduction comes from figuring out ways to reduce the costs associated with raising a child, and not falling prey to the “expectations” of your income group.

Some of the costs, like being careful with what you spend on clothing, and taking the time to shop carefully, using coupons and sales, for groceries, can be cut just by being savvy.

Additionally, if you are a family that is more interested in financial freedom than keeping up with the Joneses, you can reduce all of your costs (including those that deal with raising kids) with a modest home and modest cars. If you have a partner, and can swing the one-income thing, you save on childcare costs just by having one parent stay at home.

Finally, limiting your children’s activities can save you a great deal of money. After all, do you really need to pay for your kids to do four or five extracurricular activities? You run the risk of burning them out. Instead, consider limiting them to two activities. You’ll save money, and your kids won’t run the risk of becoming too stressed.

What do you think? Does it cost so much to raise a child? How do you save money?

5 Bad Money Decisions You've Made {But Might Not Admit It}

If you ever took a traditional economics course, you learned that human beings make rational decisions about their finances, and choose things that are in their best interests.

But you only have to look around you to find evidence that human beings are far from rational, particularly when it comes to finances.

We all consistently make irrational and stupid choices that cost us more, both in the short and the long run, because we are not always capable of deciding what is in our best interests.

This understanding of how real people make real financial decisions comes from the (relatively) new field of Behavioral Economics. This discipline looks at the intersection of psychology and economic theory, and it paints the human animal as a far more irrational creature than Adam Smith ever imagined.
 

Check out these five ways that humans make poor money decisions, and see if you can recognize any of your past blunders

1. Seeing a High Price Can Make us Pay More

We like to think that we know a fair price when we see one, but the truth is that we’re remarkably suggestible. For instance, take a look for the most expensive wine on the menu the next time you are out to a nice dinner. Often, you will see a single bottle listed at $100 or even more, while the rest of the wines are listed at about $25-$50 per bottle. That one expensive bottle is listed on the menu to make the $50 bottles seem much cheaper in comparison.

Many restaurants literally only keep one bottle of the expensive stuff, because they don’t intend for anyone to actually buy it. It’s there to sell the $50 wine, which would have otherwise seemed far too expensive compared the other options.

What’s happening here is something Behavioral Economists describe as anchoring. Once we have a number in our heads, it anchors our expectations for price. Dan Ariely, in his book Predictably Irrational tells how Williams-Sonoma was frustrated at poor sales of its bread machine, priced at $275. The solution they came up with was to offer another model—one that was larger and priced at $400.

Suddenly, sales of the cheaper model rose, while no one bothered with the spendy version. This was because shoppers suddenly had something to compare the original to, and $275 no longer seemed like too much to spend—at least not compared to $400.

2. We Hate to Lose, Even When we Already Have

If you've ever held onto a tanking stock because it’s “sure to regain its value,” then you have been a victim of loss aversion. Loss aversion is psychological quirk that makes us work much harder to avoid a loss than we will to achieve a gain. In terms of the stock market, once a stock starts doing poorly, we think of the money we have already lost, and we fear further losses. But instead of cutting our losses, and accepting the fact that the money we've already spent is a sunk cost, we hold onto those stocks in the hope that they’ll pick back up again.

You can see loss aversion in nearly every aspect of life. This is the reason why we keep those bread machines we spent nearly $300 on, even though we never make bread in them—and we could certainly get something for them at a garage sale. The simple fact that we will never see that $300 again is enough reason to let the machine gather dust, because we’ll kick ourselves for “only” getting 10 bucks on a resale.

Loss aversion is also why we are so unwilling to cancel memberships to gyms we don’t attend, clubs we don’t go to, and cable packages we don’t use. We think about how much it will cost to rejoin if we were to quit—forgetting that every month we’re allowing more money to go down the drain for fear of “losing” the original enrollment fee.

It’s very difficult for us to remember that that money is already gone.

3. We Overvalue Free Things

How many times have you ordered a book that you’re not entirely certain you want, just to make sure you qualify for free shipping from Amazon?

When you do that (and we all do), you end up paying more money overall and end up with an unwanted item, to boot.

This is clearly irrational.

For some reason, the word “free” seems to scramble our brains. When we are offered a free item or service, we forget what other costs there might be to that item or service because we are so focused on the fact that we’re not paying money. What’s really interesting is that we are willing to pay more in order to get something free. That’s why Amazon offers free shipping for orders over $25, and why many marketers and retailers give out free gifts with purchase.

4. Future Needs Vs. Today’s Wants

We think things in the future are less important than things happening now. Human beings have a very hard time planning for the future. Apparently, 75% of Americans nearing retirement in 2010 had less than $30,000 saved which is a pretty horrifying statistic. But before we write off three-quarters of the retiring population as irresponsible laggards, we should look at our own behavior.

• How many times have you bought something with a credit card without a specific plan to pay it off?
• How often have you promised yourself you’d diet only to be tempted off the path the moment you see a box of donuts?
• How many times have you left work for yourself to do in the morning, only to curse yourself the next day?

What’s going on here is something called hyperbolic discounting. That’s a 50¢ word for our unconscious feeling that now matters more than later. We know that we ought to put money aside for retirement, but man is that far away! And the money is here now. So, we tend to think that retirement will take care of itself, while the money can be put to “good use” now.

5. We Overestimate the Possibility of Unlikely Things Occurring.

Our brains are wired to think that things we can easily come up with an example of are likely to happen.  This is something called the availability heuristic. What that means is that we think we’re much more likely to win the lottery or win big in Vegas than is statistically possible just because we can think of examples of people who have won.

Since we can think of those examples, we think the outcome is more likely. And every time you read a news story or see a movie about such winners, your brain believes that you winning is even more probable.

Even if you are able to sidestep the availability heuristic, you may still fall victim to the similar gambler’s fallacy. This is when you believe that something is “due” to happen because it hasn't for quite some time. For example, you might bet on a coin coming up heads on the 21^st toss after it has come up tails every time for 20 tosses. It seems as though the coin is “due” to come up heads, but it’s still only 50/50 odds.

Otherwise rational investors may find themselves following the gambler’s fallacy by avoiding buying stocks that are going gangbusters, for fear that there has to be a fall eventually. Statistics may show a general regression toward the mean (i.e.—everything evens out eventually), but general statistics are meaningless when talking about individual events.

Irrational Money Decisions Affecting Your Life

Approaching all of our financial decisions rationally is remarkably difficult to do. It pays to think about the money choices we make, and try to figure out what our motivation is each time. A little mindfulness and self-knowledge can do wonders for combating irrational decisions.

Freedom During Retirement

The very essence of retirement is freedom:

• freedom to travel
• freedom to pursue activities one did not have time for while working
• freedom to go where one wants and when one wants

   These perks of retirement would appeal to anyone. In fact, approximately 40 percent of working Americans envision retiring at or before age 65. However, consider the following results of a survey by the Employer Benefit Research Institute in Washington D.C. Only 24 percent of workers are very confident that they will have enough money to live comfortably throughout retirement; 38 percent of those surveyed admitted that they are either not too confident or not confident at all.

• Only 13 percent of workers are very confident that they will have enough money to live comfortably throughout their retirement years, and only 27 percent feel very confident about having enough money to pay for medical expenses.
• About 30 percent of workers believe they need to save less than $250,000 to achieve a comfortable retirement. The majority of those did not undertake any kind of retirement needs calculation.

These statistics, though compelling, are not surprising. Americans have not been very diligent in developing sound retirement savings plans. Despite the fact that most individuals cite retirement as their primary savings goal, they have difficulty juggling their many financial obligations. They view retirement as a distant point in the future. As such, people find it easy to set aside the goal of retirement in favor of current financial demands: a new home, college educations for the children, vacations, medical expenses, a new car, or daily living expenses.

Yet the reality is that retirement planning cannot be reserved for tomorrow or perceived as optional. Retirement planning cannot consist of putting aside the dollars that remain after all other obligations have been paid for. Rather, retirement planning takes a conscientious and strategic effort to ensure that you can sufficiently provide for your retirement.

 

Mortgage Rates hit Recent Highs