Is The Economy Good or Bad?

Finance Gourmet on October 14, 2014

I occasionally get questions regarding the economy that sound frustrated in the inability to get a clear answer. That is understandable. The U.S. economy is getting better, but it isn’t really getting better fast enough for anyone to be able to benefit from the fact that it is getting better. Add in the fact that many news outlets have gone partisan and that their reporting is designed more to highlight certain aspects that make their guys look good and the other guys look bad, and you get a confusing picture about whether the economy is good or bad right now.

Doesn’t make much sense does it?

To really understand what is going on economically, it may help to read an article from The Economist. As an aside, whenever you really want a reasonable idea of what is happening in the U.S. it can be helpful to read non-U.S. publications such as The Economist, and to a lesser extent, the Guardian. The Economist leans toward the conservative side, but that doesn’t mean the same thing as it does here in the U.S. More specifically, the publication does not have an owner or readership with a dog in the hunt, so to speak, politically, so you’ll see less of the usual spin.

The article is title, When will they learn. It talks about the current problems the Fed is having regulating the U.S. economy. You see, the Great Recession was so deep and so widespread, that the Fed essentially fired every one of its usual weapons early on. That is, it reduced interest rates to essentially zero percent pretty much right away.

How fast is economy movingTo understand how interest rates work with the economy, an analogy is useful. Consider a very large truck. As the truck moves, interest rates are the brakes. Raising interest rates is applying more break, and reducing interest rates is applying less brake. However, there is a problem with only using breaks to control your speed, namely that once you have taken your foot all the way off of the brake, there is nothing more you can do to increase speed. You just have to wait for an incline, or a really strong gust of wind, or whatever.

Additionally, you don’t want to have to jam on the brakes very hard. The U.S. economy is a very large tractor trailer. Slamming on the brakes is seldom pleasant. Raising interest rates high and fast is similarly unpleasant for the economy. That means that as you take your foot off the brake to increase speed, you have to keep a wary on not letting too much speed build up.

If you’re wondering about the gas pedal in this analogy, then good for you. Traditionally, the gas for the economy come from Washington, where additional government spending is the usual gas for getting the economy back up to speed. In times past, the government could be counted on to argue over WHERE to spend the money, but not IF to spend the money to boost the economy. Unfortunately, now that Washington has broken down into nothing but a blame game and thoughts of next election’s strategy, there is no gas. In fact, the government is actually cutting spending, which is akin to taking your foot off both the accelerator and the brake at the same time, it doesn’t help you gain any speed.

The Fed is using unusual efforts to try and supply some gas, but none of them are the same as using the gas pedal. So, the problem with the economy is that absent any new gas, the truck can only pick up speed very slowly, and now the Fed is taking it’s pedal off it’s kind-of gas as well by ending it’s bond buying program.

The second problem is that certain people are always more concerned about applying the brakes rather than getting the truck moving. These people are called inflation hawks, and there are always several on the Fed board. This is good, but it may be premature in this case, where job growth is really just filling the hole from the last decade and there is little or no sign of coming inflation.

In other words, while it does seem that the U.S. economy truck has started rolling forward ever so slightly, no more gas is coming, and some people are already looking to re-apply the brakes. So, yes, the economy is good right now, but not good enough. More importantly, if the slightest thing happens to slow the economy back down, no one has any gas left to get it going again.

So, it’s a good time to be worried, but if everything keeps going the way it is, we’ll hopefully have that truck moving a little faster sometime next year.

For the quickest answer, look no further than holiday spending as reported by retailers. If you see stronger than last year, but still weak overall, that’s more of the same. Anything bleaker is trouble, anything better, might mean that truck has finally caught a bit of a hill.


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Finance Gourmet on October 3, 2014

Every time a jobs report, or other important economic numbers, come out politician run screaming into newsrooms across the country to spin it so that it says what they want it to say. If you want to know what economic data really mean, ignore the politicians. On Wall Street, investors put their money where there mouth is. Spinning for an investor is the same thing as deliberately losing money. While a politician is more than happy to say something that isn’t true, no investor is willing to throw away their cash for the sake of appearances.

September Jobs Report Is Good News

Jobs Numbers SeptemberThe stock market is up 206 points as I write this. No matter what some politician says, this was good news. In some places, they are calling this the “Goldilocks” jobs report. It was not too hot, and not too cool. The economy added 248,000 jobs and the unemployment rate dropped below 6 percent to 5.9 percent. Wall Street wants job growth; they need job growth. An economic recovery can’t go anywhere with too many people unemployed. However, job growth can mean inflation, and no one wants inflation. More accurately, no one wants the Fed to worry about inflation and start raising interest rates.

After the August jobs numbers came in with a surprising decline, an increase in hiring was just what the Wall Street doctor ordered. The unemployment rate even fell below 6.0%. (Don’t forget that the unemployment rate does not include people who have given up looking for work, so that 5.9 percent number is a little rosier than reality.) On the other hand, there is no indication wages are rising. That’s important because more people with MORE MONEY is really what drives inflation. Without an increase in wages, this jobs report means the economy is doing well, but not too well. In other words, the Fed doesn’t need to be in any hurry raise interest rates.

What this means for Main Street is that businesses may not be rushing out to hire new people, and they certainly are not having to fend off incoming job offers for most of their existing employees, but it does suggest that they are no longer afraid to hire. An economy where employers hire what they need, instead of making do with what they have, is a strong economy.

As I mentioned yesterday in our Fourth Quarter update, this is the last jobs number that really means anything, unless there is a MAJOR change next month or the month after. Anything resembling normal will be ignored as investor focus on something more important, holiday season sales.

For many companies, the fourth quarter makes the difference between profit or loss. More importantly, the holiday sales number will show us whether all of this jobs data shows a real recovery, or just a lingering drift toward slightly better. Do people finally have money to spend this year, or are they still pulling themselves back up?

We’ll find out when Target, Wal-Mart, Amazon, and so on start talking turkey… and Black Friday… and Cyber Monday and…

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Finance Gourmet on October 2, 2014

Welcome to the fourth quarter of 2014. It’s been an interesting year so far. Let’s jump right in.

First, if you own a small business, like me, your third quarter estimated tax payments are due to your buddies at the IRS by October 15. By now, you should start having a little bit of an idea how your income might go for the year. If you are doing more business than last year, consider bumping your payment to keep up with your higher income. On the other hand, if business is off, then back that withholding off a bit too.

Also, if you are a small business owner and you don’t get your health insurance through a spouse or other plan, don’t forget about the Obamacare open enrollment period for 2015, which runs from November 15, 2014 to February 15, 2015. You got an extra extension into April this year while the government worked out some bugs. That won’t necessarily be the case this year, so double-check your plan, or see what the new ones are. You can go to and they’ll redirect you to your state exchange if necessary.

September Jobs Number

The September labor report is due out from the government on Friday. Investors are looking for evidence that August was a fluke or reporting issue and that job growth is still continuing. If the September numbers look good, then we’re all set, economic reports wise anyway, until retailers start talking about how their sales numbers look for the holidays.

While you’re thinking about the holidays, start thinking about your charitable donations as well. Unpack that unused stuff from your garage and kid’s toy closets and get it donated before December 31, to take the tax deduction this year.

And, just for fun, reports say that there is a Lamborghini hybrid prototype that can do zero to 60 in 3 seconds, while getting 57 mpg. That has nothing to do with the fourth quarter, but it sure sounds awesome.

Happy Halloween!

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Finance Gourmet on September 26, 2014

Why Are There RMDs or Required Minimum Distributions?

Required minimum distributions, or RMD, is the minimum amount you must withdraw from certain retirement accounts each year. To understand why there are RMDs, it helps to look at things from the government’s perspective.

rmd rulesThe government runs by collecting tax dollars. However the government also encourages certain behaviors in its citizens and companies by permitting certain tax breaks. (One behavior this encourages is big donations to politicians by companies to get and preserve tax breaks, but that is a topic for another day.) One behavior the government tries to encourage is getting people to save for retirement. It does this by providing several tax-advantaged accounts taxpayers can use to save for retirement, including 401k plans, IRA accounts, and Roth IRA accounts.

In all three of these accounts, the interest, earnings, and capital gains are exempt from taxes each year so long as the money stays in the account. Not paying taxes is the incentive to save for retirement. If you do take the money out of the account before you turn 59 1/2 years old, then you have to pay a 10 percent tax penalty. That is the incentive to not take the money out for something besides retirement.

But, what about when you actually retire?

There is a lot of money out there in 401k plans and IRA accounts. Some estimates suggest that there is now, or will be soon, TRILLIONS of dollars in such accounts. The government wants you to save for retirement, but they don’t necessarily want to give up that much tax revenue either. So, when you do retire and start using that money, you pay taxes on the withdrawals.

However, there is a catch. If you happen to retire in a way that you don’t need the money in your IRA or 401k account, then you might not withdraw it at all. That means you wouldn’t pay taxes on that money, and with generous estate tax rules, and beneficiary rules for retirement accounts, the government might never get to tax that money. To prevent this scenario the IRS rules for required minimum distributions compel taxpayers to withdraw at least SOME money from these types of retirement accounts once they turn 70 1/2. That way, they get to start taxing at least some of the money.

The amount of RMD is based on actuarial tables, meaning you have to take a larger percentage each year as you get older.

Calculate RMD Amount

To calculate the RMD amount, you use tables in IRS Publication 590, which determine the percentage of required minimum distribution you must take. The IRA required minimum distribution table is the same as the 401k required minimum distribution table.

The easiest way to calculate, however, is to use an online RMD retirement calculator. To use the calculator, input your account balance from December 31st of the year you are calculating the RMD for. Then, input your age and you’ll get the required amount to withdraw.

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Finance Gourmet on September 23, 2014

Banks have long offered various types of checking accounts and savings accounts. Some of these accounts are actually fully developed products that are different from other offerings. Others are merely gimmicks, and some bank account types lie in between.

Youth Accounts Banking

One such niche account offered at many banks is a youth account. These accounts are typically broken up into youth savings accounts and youth checking accounts. Just what each account is, and how it differs from other accounts depends on the bank.

youth savings accountsFor the most part, special bank accounts for young people are joint accounts with limited access for one person. For most purposes, a person under the age of 18 cannot legally enter into a contract. No contract, or banking agreement, then no account, not even a kid bank account. Instead, in order to open a kid savings account or student checking account, the bank will require an adult’s signature. No matter what it gets called on the statement, what you have really just opened is a joint account with the child.

So, then what is the point of a youth accounts?

As an adult, you might not like the idea of joint account with your child. Maybe that sounds like “too much” or something “too formal.” A youth account, specially designed for a parent-child relationship (or grandparent-child, or any adult to child) just sounds better. But, make no mistake. In the end what you have is a joint savings account or joint checking account. If you read the fine print, all the window dressing in the world does not change the fact that you, the adult, are liable for the account and all activities within. That means you’ll need to control access to things like online banking passwords and the child account’s debit cards or ATM cards.

However, youth accounts are a good way for banks to both start creating mind share in future customers, as well as providing an inexpensive service to make parents happy. Youth accounts frequently have very low, or no minimum amounts to open or minimum balances to maintain. So, just the $20 bill from Grandma could be all it takes. Some banks offer other perks. Bellco Credit Union offers a higher interest rate on youth savings accounts, up to $500, and Beth Page Credit Union currently offers a whopping 3.0% interest on the first $1,000 in a youth account. This offers a great way for little Billy or Susie to learn about interest and what it can and can’t do. While 3.0% interest is way higher than you’ll get on any adult savings account, 3% on $1,000 is a mere $30, and you won’t keep getting 3.0% on the amounts over $1,000. This is a good time to teach youngsters about fine print, too.

Many banks and credit unions offer various educational tools or newsletters to account holders as well.

Another difference comes from limiting the actions the child can take. Theoretically, as a person on a regular joint account the child would have access to all the funds. Practically, however, until the child has ID such access would be difficult at best. No teller will hand over a fifty dollar bill to an 8-year old without a nod (and ID) from a parent first. However, a child account typically formalizes this, restricting all withdrawals to require parental consent.

Youth Checking Accounts

As the child approaches 15 or 16, the option of a youth checking account opens up. Obviously, the point of a checking account involves more potential for spending money. Again, for contract and liability purposes, this is a joint account. If your teen is bouncing checks, you are responsible for any fees and debits. Make sure you are getting real free checking with your youth checking account, or another account (or another bank) is probably a better option.

These days, the better route for many teens is to have a debit card associated with the account that is not setup to allow overdrafts. In this case, just like with an adult debit card, the merchant swipes the card and verifies sufficient funds before completing the transaction. In this way, kids learn about managing money and balancing their checking account (it’s still embarrassing to be declined, even as a kid), without the possibility of getting under water and racking up bounced check fees or other debts. Even if you are protecting them from money problems with this account, take the time to explain the importance of good credit and maintaining a clean credit report.

Again, the best youth checking accounts offer low, or no, minimum balance and no monthly fees.

Youth accounts are a great way to prepare kids for a financial future, and an important step in getting them used to dealing with financial institutions, especially high schoolers who will be turning 18 and getting into the world as adults on their own very soon.

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Finance Gourmet on September 20, 2014

Fall is

OK, it’s not as dramatic as winter is coming, but let’s be honest. It’s season 4 of the TV show, and Book 6 in the series, and winter still hasn’t actually come. Fall will be here much sooner as the yellow leaves on the trees out front can attest.

Let’s get down to some personal finance. Coming this fall on FinanceGourmet, we have some interesting topics, some misunderstood topics, and a look at whatever financial news or economic data come out.

We’ll take a look at different types of bank accounts and whether any of them are worth anything, or if they are just banking marketing gimmicks. Do you need a Christmas club account, a youth account, or other niche banking accounts. We’ll take a look at what they have to offer and if they actually have any advantages.

Also soon we’ll start a roundup of free credit score services like Credit Karma, Credit Sesame, and Credit Check Total to see what is new, and if one of these free credit score services is better than the other. We’ll also look at other options for getting a credit score for free including how some credit cards now offer a monthly credit score right on your statement.

As the fourth quarter approaches, it makes sense to start looking at your taxes and what you can do to save money on taxes this year. If you’re self-employed, creating tax deductions is easier, but there are plenty of ways to reduce your regular income taxes as well. One of those ways is with payroll deductions to your 401k plan. Now is a good time to review where your taxes and contributions will shake out as the year comes to an end. There are still three months to make an adjustment in. Getting that right could be all you need.

We’ll also look at 2014 tax numbers such as IRA contribution limits, 529 plan contributions limits and Roth IRA limits.

Of course, there will be plenty more as well. Grab the RSS feed so you don’t miss anything.

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Finance Gourmet on September 15, 2014

The real information about the possible impact on Apple stock from the iPhone 6 and iPhone 6 plus is in last week’s article, but since Apple released some new data, I’ll do a little update here. In particular, I’m going to a take a look at how some of what is “out there” applies to the things we wanted to watch for to see what, if any, impact the new iPhones have Apple stock. If this doesn’t make sense, it’s because you didn’t read the earlier article about whether now is a good time to invest in Apple stock. Go ahead, click the link, read it, and then hit the back button. We aren’t going anywhere :)

apple stock price iphone 6

It’s only been a few days for Apple stock investors after the iPhone 6 announcement

The original “Apple Event” where the new iPhones, Apple Watch, and Pay Now were announced was September 9th.

  • iPhone Supply – So, we talked about sales of the iPhone. There wasn’t anybody who thought that Apple would sell anything less that “millions” of iPhone 6 and iPhone 6 Plus. The company released data showing just that on Monday. So, how is the supply of iPhones working out? There’s conservative, there’s underestimated, and there’s artificially creating an iPhone shortage. Which one is is? Apple says it sold 4 million iPhone and iPhone 6 Plus on Friday, the first day of sales. It also says that iPhone 6 Plus sold out “in hours.” So, if you are looking at your iPhone investment, here is what you want to be thinking:
    • Is this a “real” shortage? Did Apple really think it would only sell 4 million iPhones or did it do this on purpose to have a “sell out?” As long as there are plenty of iPhones coming fast enough, the artificial shortage is actually smart marketing. It creates more of that “can’t wait” demand.
    • Is there a shortage of iPhone 6 (basic)? The company did not break out sales of the iPhone 6 versus the Plus. Steve Jobs never believed in a bigger iPhone, and Apple stood pat on its size for the iPhone 5. Did the company underestimate how much demand there was for a bigger iPhone? That is, does the company have piles of iPhone 6 not-plus laying around because of no demand? That probably wouldn’t hurt too much as long as 6 plus sales stay robust.
    • Why only Friday numbers? Traditionally, Apple tells us how much the first weekend sales were. Any particular reason only Friday numbers were released? Did the Saturday and Sunday numbers drop off so much that a report of the weekend numbers would have been disappointing?

Clearly, not enough customers have iPhones in their hands to report on how they are being received, so we can’t evaluate our second thing to watch. However, while no one seems disappointed in the sales numbers, no one seems particularly impressed either.

Knowing Apple no more details will be forthcoming until the next quarter. Will iPhone sales be enough to convince investors that the company has more mojo going forward? Is this stock priced to perfection? That is, how much of a not-amazing quarter can the company have without a big stock slide? Or, is there so much pent up demand for Apple stock that whatever comes out this quarter will be enough to start the next big move up for Apple stock?

Is now the right time to invest in Apple?

It all comes down to whether that 4 million orders was the start of something big, or the only bang we’ll see from this line of products.

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Finance Gourmet on September 12, 2014

I wasn’t going to write this post, but I’ve gotten just enough emails and messages on the subject of what the new iPhone 6 and iPhone 6 Plus means for Apple stock that I thought I’d post some quick thoughts for readers here.

First, the old saying in investing is to buy the rumor and sell the news. As with all Wall Street wisdom, this is a gross oversimplification and only partially true. However, consider that the time to buy the POTENTIAL of the new iPhone and Apple Watch was BEFORE the big event. The risk, of course, was that if the information was disappointing, the stock would have likely taken a  downturn. As it was, people, and analysts, seemed pleased with what they saw, and the stock has already reacted positively. What this means, is that if you wanted to invest for the short-term based on the fact that felt Apple’s new technology would be good, you are too late.

Now, if you are looking to invest in Apple NOW, for the short-term, your investment will depend on:

  • a) How well the products are received by the real consumer. – Potential risks here involve a new “antenna-gate” type of thing, or that the phones just really aren’t that good, or aren’t perceived as “Apple enough” or are seen as not as good, or only as good as current Android phones.
  • b) Can Apple handle the demand –  Has Apple correctly ordered, stocked, and positioned enough phones to capitalize on demand? Does it have the right mix of iPhone 6 and iPhone 6 Plus?

Before you answer YES to both questions and rush out to buy Apple stock, consider that the consensus is also a resounding YES. In other words, people are expecting this to go well, and to go big. In other words, there is a lot more potential for downside than upside. Four or five million sold isn’t hitting it out of the park, it’s expected. Which means you need crazy gangbusters to surprise on the upside.

This does not mean the stock price will not go up. In fact, barring any sort of calamity, it’s almost certain Apple’s stock price will rise with the wave of iPhone 6 popularity, especially if the market in general keeps moving upward. Remember, last time Apple released a major new upgrade, its stock raced up to $800 a share, pre-split, before finally taking a breath. The trick isn’t riding the wave, it’s getting off. As a popular, household name, many people buy Apple stock because they “believe” in the company and it’s future. This is not a bad thing, but especially over the next few months, any big moves up are more likely to be a popularity contest vote than investors taking an in-depth look at the stock. Stick to your plan, whatever it is. Don’t get caught up in “me too” buying.

Of course, I never recommend market-timing or stock-timing. If you get into Apple stock here for the short-term, you need to ask what your goal is. If you do buy, and if the stock does race ahead, consider when you want to take some profits off the table, or sell altogether. In other words, have a plan and stick to it. Don’t get caught up in the idea that it can’t go too high. It can, and it probably will, eventually. Know what you are going to do (when/if to sell) BEFORE you buy.

If you are looking at a long-term investment, things are a lot easier. Assuming these phones are a hit, they are solid profit generators for the company for the next few years. The new Apple Watch gives the company a shot at “the next big thing.” Almost forgotten, but maybe even more important is the Apple Pay technology. If that were to catch on, the company may have a whole new revenue stream. And, just as important, even with this uptick in price, Apple still pays nearly a 2% dividend. All things considered, you could find a lot more risk in a stock paying 2%.

This blog is about personal finance and smart investment. I don’t pick stocks. I never have. This is just some thoughts on where things stand after the press event.

This is not a recommendation or offer to buy or sell securities. I currently own Apple stock, although that could change at any time without any notice.

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Finance Gourmet on September 8, 2014

In all my years as a financial planner, I never met someone who had “enough” money to retire when they were in their 40s or even 50s. Yet, every year, I saw clients who either were already retired, or were retiring. The interesting part was that they didn’t have “enough” money to retire either, no matter how much money they were stuffing into a 401k plan or IRA account. The glitch in this system is the assumption about how much money you’ll need and where it will come from.

How Much to Retire

Determining how much money you need to retire, which in some circles is getting called, your magic number for retirement, is just two calculations, but the data is filled in with several guesses. The only math comes in the form of a time value of money calculation in order to reach a single number that is calculated form a present value calculation. Simple right, well it would be, if we knew:

  • How much money you’ll spend each year in retirement
  • How long you will live

Unfortunately, we don’t know either of those two things, so we guess.

retirement planning how muchGuessing doesn’t sound very like something an advisor or planner would do, so instead you’ll hear the word assumptions, but it’s nothing more than a guess based upon what data you have today about what your future will look like. Of course, a good advisor will review your plan every year, or so, and revise those assumptions as needed. In other words, those wild guesses will get more an more refined as you get closer to actually retiring. However, if you saved your financial plans from your 20s or 30s, you’d find many of your assumptions laughable by the time you turned 55, or even 60.

Why You Need Less to Retire

As it turns out, most people need far less money to retire than they projected. Why is that?

The answer is that the assumptions that you make for the retirement you want are typically very rosy, which if you think about it, is sort of the worst-case scenario for your retirement plan. Here are some of the assumptions you’ll be making when making your retirement plan, and why they will lead you to overestimate how much money you actually need to retire.

  1. You’ll live a long time – Nobody wants to run out of money, so your retirement plan most likely doesn’t have you dying anytime before 85 or 90. Truth is that while more of us are living longer, it still isn’t exactly rare to die in your 70s. If you’re planning as a couple, it’s even less likely that you’ll both make it to 85 or 90.
  2. You’ll be active and spending money at the same rate your whole retirement - Even if you and your spouse both live a long time, how much money do you think the average 83 year old spends? While you might be a golfing, traveling, eating out, whirlwind when you first retire, that generally slows down as you age. Seriously, go ask any 80+ year old you know what they do in an average month, and you’re probably going to find some very low monthly expenses.
  3. Lifestyle - Golfing, fishing, traveling. These can be expensive pursuits. You are right to want to save as much as possible. On the other hand, in between those things, you’ll have a regular, every day life. Will that be as expensive as you think? Turns out most clients spend LESS money in retirement, and often by a LOT. You’ve probably never thought of how much of your expenses in life are tied to you working, or being a parent.
  4. Social Security - We often asked clients if they wanted to include Social Security in their retirement plan. Almost everyone said no, then followed up with a comment about how it won’t be there when they retire. My dad has been saying that since he was 40-something. In a few years when he retires, he’ll finally be proven wrong. Chances are Social Security will look different when you make it to retirement age, but chances are slim it will be gone completely.
  5. When You Retire – Most people’s retirement plans have them retiring relatively early. This is a good thing. You don’t have full control over your employment. On the other hand, many people like what they do, and they have no intention of running out the door the second they turn 65.

The truth is that when it comes to retirement planning, you are taking a shot in the dark at important variables. That isn’t how other things typically work. If you are doing a college savings plan, for example, you know exactly when your kids turn college age. Planning for four or five years of college is a very solid bet. The only variable is the actual cost, and that can be projected reasonably well. So, opening a 529 savings plan is a solid bet with reasonably estimated costs. It’s also one reason why fewer doomsday articles about not having enough money for send your kids to college exist.

So, how much do you really need to retire?

Up next, we’ll take a look at where those numbers come from, and then I’ll tell you the secret to really having enough money when you retire.



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Finance Gourmet on September 4, 2014

Every year, the United States Department of Agriculture publishes a report about how much it costs to raise a child until age 18 in America. Of course, the information is only an average, and even then, to make any sort of calculation, a lot of assumptions have to be made. After all, raising a child is a very personal experience and the cost varies a lot based on the choices you make, not to mention variations based on where you live. It obviously takes a lot of time to compile all the necessary data, so the report with numbers for 2013, was just released here in fall of 2014.

You can find the full-report, or cute graphics containing the official report’s details at the USDA’s website.

Raising A Child Costs Money

cost of kidsIt’s no surprise to any parent that kids can be expensive. Of course, there is food and clothing. Then, there is education, insurance, school supplies, birthday parties, and so on and so on. So, how much does it cost to raise a child from birth to 18? The report breaks out various categories, but the quick version is this:

  • Urban West $261,330
  • Urban Midwest $240,570
  • Urban Northeast $282,480
  • Urban South $230,610
  • Rural $193,590

That last number is low because housing is typically much lower in rural areas.

So, what goes into that number?

  • Housing 30%
  • Food 16%
  • Transportation 14%
  • Clothing 6%
  • Health Care 8%
  • Child Care & Education 18%
  • Miscellaneous 8%

The odd part of all this is that housing number. Assuming that you already have to live somewhere. And, assuming that you didn’t have to specifically buy a larger house just for your kids, then that number is more of an accounting figure than a real cost.

For example, my wife and I bought a nice little house with three bedrooms and a basement a handful of years before our kids were born. That mortgage payment did not increase when we had children. So, while technically, some of that payment is “for” them, in reality, it isn’t really an additional cost. Likewise, while there are some additional lights, the real utility cost for most houses is heating and cooling, which — with the exception of some left open doors — doesn’t really change based on how many people are in the house. And, since housing is by far, the biggest contributing factor to the cost of raising a child, the actual cost in reality is probably far lower.

Of course, if you bought a bigger house to contain a larger family, or if you had to rent a larger apartment, that could be directly pinned on those little ones.

On the other hand, one of the expenses most parents worry about is not included in the above totals, the cost of sending your kids to college.

Technically, this makes sense because the numbers are only for under age 18, and most kids don’t go to college during that time. However, saving ahead for college is a smart move, and no matter what the accounting rules say, those 529 contributions do come out of your income while you are making them. So, don’t forget to add $41,000 for private colleges, or $18,000 for public universities.

What’s the Point?

Of course, chances are there is actually little to nothing you can do with this information. The Cost of Raising a Child Calculator says that you can create an annual cost to help you plan for overall expenses. Again, I’m not really sure how this helps. If you already have kids, the cost of them is irrelevant. Your budget is your budget, it doesn’t matter how much goes to you, your spouse, or your children. There is the issue about buying life insurance, but for the most part, you don’t buy life insurance based on a calculation for how much your kids cost, so much as how much of your income you want to replace.

In other words, I have no idea why the government creates this report other than it gives the media a news story for a week or two.

If you want to see how much your kids cost you, just check your budget.

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