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Are 2 incomes necessary?

Are 2 incomes necessary?. Common misconception – 2 incomes are necessary to live on in today’s society On average, a 2nd income needs to be $25,000 a year to break even assuming $500 a month in day care costs and increased expenses for commuting, meals out, dry cleaning, clothing, and etc.

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Are 2 incomes necessary?

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  1. Are 2 incomes necessary? • Common misconception – 2 incomes are necessary to live on in today’s society • On average, a 2nd income needs to be $25,000 a year to break even • assuming $500 a month in day care costs and increased expenses for commuting, meals out, dry cleaning, clothing, and etc. • 2nd income calculator (linked on webCT – Pearls of Wisdom): • http://moneycentral.msn.com/investor/calcs/n_spwk/main.asp • This site says: You might be surprised at how little extra income your family gets when both spouses work. To determine whether it's worthwhile,

  2. What does it cost to work? • Opportunity cost • Out-of-pocket costs • Day care or care for a dependent relative • Taxes • Retirement plans • Union or professional dues • Office collections • Added household expenses • Health insurance • Transportation • Clothing and personal care • Meals & coffee breaks at work • Others?

  3. Parental Investments in Children • Extensive marginal investment - expanding a household’s investment in children by having an additional child, holding other resource allocations constant. • Intensive marginal investment - expanding a household’s investment in children by devoting more resources to the children in the household, holding numbers constant. • Watch “William Tell Overture”

  4. Trends in U.S. Fertility Over Time

  5. Kids are fun!

  6. Today, Intensive Investments in Children Take Many Forms... • Direct money expenditures designed to enhance their human capital (e.g., food, clothing, braces) • Expenditures of time and energy directed at enhancing their human capital (e.g., child care time, helping with homework, coaching soccer)

  7. Total Direct Expenditures on One Child, 0-17 (USDA, 2006– Study based on Husband/Wife hhs with 2 children-- Highest Income Group; Middle Inc Grp; Lowest Inc Grp) http://www.cnpp.usda.gov/Publications/CRC/crc2006.pdf

  8. Adjustments for different numbers of children... • These estimates are for the younger child of a 2 child family. • Costs are 24% higher for families with one child. • Costs are 23% less per child for families with 3+ children • THESE ADJUSTMENTS REFLECT ECONOMIES OF SCALE!

  9. These expenditure estimates do not account for... • Post-secondary education expenditures • Investments in children made by other family members outside of the immediate household • Government expenditures on children • Opportunity costs of these investments • Time-related investments in children

  10. Implications... • Family sizes have fallen over the past 60 years, while direct or primary child care time has increased. • This implies a huge increase in investments in children at the intensive margin. • But, is direct child care time, the only investment time?

  11. Saving For a Child’s Education Is it possible? How can I/we do it?

  12. Estimate Cost • Current estimates are about $100,000 for 4 years of education in 18 years for public schools, and $200,000 for private • Assumes 5% annual inflation • Realistic?

  13. How to finance? • Bottom line  START NOW! • Only have 18 years, so an aggressive stance is vital • Take advantage of investing with tax breaks

  14. Financing Alternatives • Roth IRA • Can withdraw earnings tax-free, if have held account for 5 years • Can use money in your Roth for yourself, your spouse, your child, or your grandchild • Downside?

  15. Coverdell Education Savings Account (ESA) • Tax-free earnings, $2000 maximum contribution per year, per child, with $220,000 max income for married parents, $110,000 for single parents • Do an FVA with $2000 a year for 18 years, with 5% interest • Try again with 7% interest • Enough? • At age 30, you may rollover any unused amount to another family member, including your own child, or take a 10% penalty

  16. State 529 plans (or state college saving plans) • Contributions are tax-deferred, and when used to finance education, are taxed at student’s tax rate • New law: Tax-free if withdrawn before 2010 • If money is not used for college expenses, penalties are up to 15% of the earnings, or 1% of the total balance • Utah’s plan  info available at www.uesp.org or by calling 800-418-2551 • Upromise.com

  17. Series EE government savings bonds • Interest is tax-free if used to pay for college • Have to buy the bond in your name, not your child’s • Full deduction up to income of $81,100 for joint filers • Parent must be at least 24 years old at time of purchase

  18. Invest in your child’s name • Under age 14: • $750 a year in interest income is earned tax-free • Next $750 in earned interest is taxed at child’s tax rate (10%) • Over $1500 is taxed at parent’s rate • Over 14: • Income up to $5250 = 10% • Income up to $27,050 = 15%

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