When the pandemic hit, Danielle Goodman’s childcare situation went from acceptable to non-existent.
Like others in similar situations, the pandemic left her working from her home alongside her three-year-old daughter, Elle. Once daycare closed, Goodman got creative by paying a teenaged neighbor to play with Elle in the front yard as she and her husband worked indoors (and peered out of the window). For a while, the couple was actually saving money by not paying for daycare, which helped them purchase a home.
“We kind of had this new life from a finance perspective,” says Goodman, co-founder of a public relations firm in Los Angeles. “We weren’t spending as much money and were a little more resourceful.”
But it wasn’t sustainable.
With daycare and schools re-opening, the Goodmans were again forced to spend on childcare – now with the added stress of a new mortgage. To lessen the costs of full-time care, Goodman, who’s in her 30s, has signed up only for morning daycare, which she supplements with cheaper babysitting three times per week. On Fridays, Goodman and another working mother from the daycare meet to work on their laptops as their children play nearby. She estimates saving about $500 per month with the babysitting and daycare setup versus paying $2,500 per month for extended daycare hours.
“I’m nervous about Covid – and our budget,” she says.
As cities move to lessen pandemic-related restrictions and caretakers go back to work, childcare spending is top of mind for parents – especially the 12 million who have children under age 5 in the country today. The instability means many have had to cobble together costly plans and build complex backup scenarios to have enough coverage to continue their work. Additionally, many of their pre-pandemic setups are not viable due to school or daycare closings. “Families are stressed about childcare and having to go back to work,” says Andrew Laino, a Prudential financial planner in Jacksonville, FL. “It’s an issue of managing cash flow.”
The woes of childcare affordability aren’t new. Since the 1970s, childcare expenditures have appreciated at a significantly higher rate than wages. A 2012 study found that average spending per child was 25% of a family’s total expenditure in 2007 compared to 14% of total expenditure in 1972. That number has stayed steady and leaves many parents paying a higher share of their income toward childcare, says Laino.
Laino recommends parents try to pay no more than 10% of their wages toward child care. But that math doesn’t always add up. Today, it costs roughly $15,000 per year for infant child care across the U.S., according to 2018 data from the Center of American Progress.
According to 2019 research from ChildCare Aware of America, a nonprofit working to increase the quality of childcare, costs vary significantly by state. States on the East and West coast have a higher percentage of earnings going toward childcare. In Oregon, for example, parents can expect to spend 15.7% of their median income for childcare, compared to 7.6% in Mississippi. For some people, that provides an incentive to move to a more affordable state, says Laino.
Short and Long-Term Costs
Even as parents scramble and dip into their emergency savings, spending more on childcare now will impact their finances later, warn financial experts. Some are using funds earmarked for college, house down payments, and retirement savings. Many are hesitant to save money for later they need to use now.
“Due to childcare costs, many parents are not saving adequately for their own retirement by maxing out their 401(k) or IRA,” says Kamilah O’Brien, founder of Focused Spender based in New York.
Parents of younger students in public schools have had an especially difficult transition, says Tori Ulrich, founder of Super Screeners, a child care screening service based in Chicago. “In one afternoon, parents went from having full-time childcare to needing full-time child care, and that’s an increase in costs instantly,” she says.
Creating a mix of strategies is key, adds Ulrich. For one, entering a nanny share with another family can keep COVID-19 spread down but make in-home childcare more affordable. Others have turned to au pair options, which often require a yearlong contract along with providing room and board. Consider having loved ones, including grandparents, step in to commit to a day. Hiring tutors for the last part of a virtual school day can help children stay on task but keep costs down, too.
Tapping Into Financial Know-How
The CARES Act offers a few financial tools when it comes to emergency spending on childcare. For one, it’s possible to defer some mortgage payments for six months, and people can withdraw some funds from their 401(k) without penalties. Setting aside money in an FSA (flexible spending account) or HSA (health savings account), which allows you to pay for childcare needs pre-tax, allows you to reduce your taxable income, explains O’Brien.
Some two-parent families may face the difficult decision of whether one should leave the workforce to accommodate child care needs. Because men generally earn more than women, women face more pressure to suspend their careers. But years spent at home out of the workforce can equate to hundreds of thousands of dollars of lost income and retirement benefits, as well as time lost to career development.
All told, there are relatively few options for parents in this difficult time. Some lower-income families may qualify for subsidized child care through the Childcare and Development Fund or local state programs that vary by location.
In Goodman’s case, she is now getting more creative when it comes to stretching her childcare funds. Since spring, her daughter has started Zoom sessions with her grandparents in another state that can last up to two hours. “She loves it, and they do too,” she says.