It's natural for young families to face financial pressures as they juggle the cost of housing and kids.
But today, they live in a vise. On one side, a housing market that can be astronomically expensive for first-time buyers. On the other, daycare costs.
Daycare is the subject of a Globe and Mail series that began last Saturday and runs through this week. What becomes clear when you read it is that our thinking on personal finance for young families is out to lunch. Mea culpa. As a parent of older teenagers, I lost touch with daycare costs and failed to properly account for them in discussing matters such as housing affordability.
Daycare is the hidden menace, financially. It's amazing that such a massive cost gets so little mention outside gatherings of cash-poor parents. A study by the Organization for Economic Co-operation and Development indicates that upper-income Canadian families with two working parents pay the equivalent of 18 per cent of their net income, on average, for daycare. In a separate study, monthly average costs for infants range from $1,152 in Ontario to $631 in Manitoba. Quebec, the outlier, averages $152.
Imagine two spouses who both have incomes in the higher five-digit range and an average tax rate of 25 per cent. Another 35 per cent of their gross income goes to their mortgage and basic housing costs, plus a car loan or line of credit. Daycare costs might eat up another 13 per cent on a pre-tax basis (the OECD's estimate was for after-tax income).
Just 27 per cent of this couple's income is left over for day-to-day expenses, home maintenance, running the family cars (read more on car expenses), recreation, vacations and saving for the future. Here is fresh insight on why household debt has soared in recent years. It's not just about low interest rates – some people are borrowing to upgrade incomes that cover only the basics such as housing and daycare.
Through books and baby classes, our society does a good job of preparing parents to nurture kids. We completely blow it on the financial side, though. We act as if we still live in a world where everything – houses, vacations, cars and families – are entirely affordable if we all work hard and save our pennies.
With a good income and the potential for continuing raises, young families can still have it all. Others will struggle to find their way.
Consider the tradeoffs. Renting is fine for childless couples, but most parents want to raise their kids in a home they own. Waiting to buy a house sounds sensible on paper, but what if your prime parenting years are slipping by? Having a dad or mom stay home to look after the kids may help in the short term, but at what cost to his or her career and long-term earnings potential?
We could do a much better job of helping young couples understand what they're up against. Memo to those involved in financial literacy: How about some content on daycare and other costs of parenting? To financial planners: How about offering affordable plans to help people navigate the tight-money years of early parenthood? To personal finance writers and bloggers: Here, finally, is something you can write about without repeating what's been said one hundred times before.
I'm going to work on tweaking the total debt service and savings ratio (TDSS), which I presented in a column earlier this year to help first-time buyers see whether they can afford a house and have money left over for saving. We need affordability measures that reflect the cost of being a parent, not just a homeowner.
Finally, we may need young couples to lower the expectations they've absorbed from their parents' generation about owning big homes with all the trappings. Smaller homes, leaner lifestyles.
It's tempting when looking at high daycare costs to say parents have always faced challenges like these and found a way through. But this view is based on nostalgic ideas of rising prosperity, not today's economic realities.
On Wednesday, the Bank of Canada lowered its growth forecast for this year and next. Inflation, which can be seen as a measure of the economy's pulse, has been stuck at a feeble 1.1 per cent over the past couple of months. Incomes aren't keeping up with the costs of buying a house and raising a family. Such is life in the vise.
Average monthly fees, full-day daycare centres by age group in 2012
Source: Early Childhood Education and Care in Canada 2012