How having kids can make clients richer

Raising children is fulfilling in its own right, but it can also lead to improved financial behaviors.

The cost of raising a kid is more than a quarter of a million dollars — not including college — so it would seem to follow that parents are worse off financially than those who are child-free.

Not so, according to some data and evidence from researchers and financial advisors.

Having children forces people to confront their financial lives in ways they hadn’t before, and that usually translates into increases in saving and decreases in discretionary spending.

“Choosing to have a child is a really optimistic thing. What we hear from parents is that it really crystalizes that feeling of being responsible for someone else,” said Laura Varas, CEO of consumer research firm Hearts & Wallets.

Among people with children, the percentage of those saving 6% to 9% of their income is more than double that of those without kids, according to data the firm collected last year. The rates of those saving 10% are comparable across the two groups, as were the portions saving 1% to 5% of income. But people with children were much less likely to say they were spending more than they were saving or that they didn’t know if they were saving. Controlling for income level, the differences in savings behavior between parents and the child-free are consistent, according to Hearts & Wallets. Further, the bump in saving that parents experience doesn’t go away after the kids grow up and leave the nest — it appears to persist for the rest of their lives.

“It’s a counterintuitive finding, because of course [children] are really expensive,” Varas said.

Of course, children aren’t little ATMs — quite the opposite. Although parents benefit from tax breaks that childless households don’t, having kids simply costs more money. The reason why parents might end up being more secure financially is behavioral.

Parents of children under 21 are significantly more likely to have assets in an employer-sponsored retirement plan and on average allocate more of their money to those plans, at 26% versus 16%, according to Hearts & Wallets. Parents are also slightly more likely to have annuities, taxable brokerage accounts, health savings accounts, and — not surprisingly — college savings accounts.

Even so, people without kids tend to retire earlier than those with, Varas said.

“The parents tend to work longer. The cost of having a child is high,” even though income levels can be higher for parents, she said. Often, working longer is a necessity to help pay for college. Currently, the average cost of college tuition in the U.S. is over $36,000 a year and rising, according to the Education Data Initiative.

“We think that understanding the [financial differences between] parents and child-free people is really important for advisors,” Varas said. “The reality of getting to retirement is so different, and once you’re in retirement, it’s really different.”

RESULTS MAY VARY

Research published in 2018 by University of Alberta sociologist Michelle Maroto found that the wealth effect of having children is unequal across wealth levels.

“Among families at or below the median, children of all ages were associated with wealth declines, likely due to the costs of child-rearing. However, at the 75th percentile and above, wealth increased with the presence of younger children but decreased after those children reached age 18,” Maroto wrote in the paper.

While wealthier families typically benefited from increased saving and investing, families at or below the median wealth level did not. “For these families, the costs of raising children largely outweighed motivations for saving,” Maroto wrote.

WHAT ADVISORS SAY

Having kids often resets financial priorities, and that can lead to more wealth building.

“While the cost of raising kids is huge, the impact can actually be positive for many people when it comes to their financial situation and building their net worth as it creates a huge need to come up with a financial plan and to define and save for goals,” Carla Adams, founder of Ametrine Wealth, said in an email.

“Many of my clients, prior to having kids, get a lot of joy out of their income, spending it on travel, eating out and all sort of experiences, which is wonderful for the soul, but not necessarily great for building wealth,” she said. “Having kids can be a big reality check for many that they need to better plan for the future.”

Although much of the additional income or savings associated with having kids goes to raising them — daycare, dance lessons, higher grocery bills and college accounts — the wealth building extends beyond that, Adams said.

“Having kids also creates the need for many to invest in either buying a house rather continuing to rent or upsizing their house,” she said. The current housing market, with both near-record prices and relatively high interest rates, may be changing that, Adams noted. “However, when you spend more on housing, into an asset that you own and build equity in, it forces you to cut back in other areas.”

People often lean into the positive financial habits they already have when kids enter the picture, and that can also shift long-term planning, said Daniel Goodman, founder of Good Better Best Financial Planning.

“In many couples, one partner might be inclined to save, while the other leans toward investing. The arrival of a child often amplifies these tendencies, enhancing the focus on both saving and investing as a united front,” Goodman said in an email. “The key element here is the role of budgeting, not just as a financial tool, but as a medium for effective communication. The real value lies in its ability to foster discussions around financial strategies.”

TAKING CARE OF YOURSELF AS WELL

Advisors often note that while saving for college is a laudable goal, it shouldn’t come at the cost of retirement.

“You can get loans for college, but you can’t get loans for retirement,” Adams said.

But discussions about college savings can be a gateway to wider financial planning for clients who otherwise say they’re “too busy” to do so, she noted.

“When clients tell me they want to start saving for their kids’ college, I tell them that’s great, but we need to do a comprehensive financial plan, not just a college savings plan,” Adams said. “I want to make sure they’re fully on track for retirement before we start putting big bucks into 529 plans each year. When I put it in that context, they get it and are ready to focus in on their full financial picture — that’s really the key piece to building wealth.”