Daycare vs. stay-at-home parenting: Which is better for your finances?

A few months ago, my neighbors welcomed an adorable baby girl into the world. They were beyond excited, but also extremely nervous. They had good jobs, but with a three-year-old already in daycare, the couple’s childcare costs were about to double (in our area, the average cost of childcare for one infant is $12,568 per year).

Facing more than $2,000/month in daycare costs, they thought about having one parent stay home – probably dad, since mom made more – but their budget would be bursting at the seams. At one point, they even contemplated moving to a cheaper state, which would allow them to choose stay-at-home parenting vs. daycare. But that would have meant a complete career reboot when the primary caregiver was ready to return to work.

In the end, they opted to continue working and hired a nanny vs. sending both kids to daycare. 

This worked for them, but it got me thinking: Personal preferences aside, what do the numbers say? When you live in one of the most expensive states for childcare (hello, Illinois!), is it worth it for one person to stay home? 

If you’re in this pickle or soon will be, here are a few things to consider:

The lost salary vs. savings

“Going without one income is harder to do now because jobs don’t pay as well as they have in the past,” says Dr. Veronica Tichenor, Associate Professor of Sociology at the University of New York’s Polytechnic Institute. For some families, the reality of one parent staying home is impossible.

But for others, giving up one salary is a no-brainer – especially when one parent is well-paid and has good health benefits. While losing a salary is an initial blow to their household budget, having one parent stay home means one less person in the household commuting to and from work eating lunch out and buying new clothes for that next big client meeting. And, of course, there’s  the biggest savings of all: Not having to pay for childcare.

There’s also a chance you’ll save money on taxes, since the loss of one salary could push you into a lower tax bracket. 

Retirement 

Whether the stay-at-home parent is out of the workforce for two years or 20, those years at home = lower lifetime earnings, fewer contributions to a 401(k) and lower Social Security benefits. While the choice is still worth it for many parents, it could mean making adjustments in retirement. The parent who leaves the workforce should ask a financial planner about what to do with his or her current 401(k), and the working parent should ask about the benefits of a spousal IRA. 

Even if the stay-at-home parent plans to go back to work once junior gets older, that parent likely won’t re-enter the workforce at his or her previous salary. Be sure to adjust your long-term plans accordingly.

“You lose out in terms of networking opportunities and career development,” says Miranda Marquit, a financial journalist, professional blogger and parent. “And you miss out on promotions and raises.” Of course, for many parents, the time spent with their young children is more than worth it.

Long-term goals 

With one parent out of the workforce, it will be more of a challenge to save each month. The stay-at-home parent will no longer be contributing regularly to an emergency fund, and the money coming in will need to stretch a little further, making saving more difficult. That means it will take you more time to reach your savings goals, and you may have to put off large purchases longer than you’d like to. 

But adding to an emergency fund should still be a priority, and it’s not impossible. Remember all those things the stay-at-home spouse is no longer paying for (meals out, dry cleaning, gas, etc.)? If you can swing it, add that money to savings every month instead of spending it. You should also be sure to add any bonuses, tax refunds and other “extra” cash into your savings account.

Making the choice to have one parent stay home is deeply personal, but it’s important to also consider the financial impacts. When in doubt, consult with a financial planner about your options, and consider alternatives, such as working from home or working part-time.