Podcast Summary
The Financial Impact of Raising a Family: Parents earning six figures may still struggle to save due to childcare expenses and supporting aging parents, but prioritizing savings and planning is crucial
Having children can significantly impact a family's financial situation, even for those who earn six figures and have help. Aspiring rich parents may find themselves spending a large portion of their income on childcare, which can leave them struggling to save for retirement or other expenses. According to research by Martin Browning and Thomas Crossley, families often save less during the "sandwich years," when they are financially supporting both their children and aging parents. Despite these challenges, it's important for families to prioritize saving and planning for the future. Our guest, Farnoosh Torabi, a financial writer and mother of two, will share her personal experiences and insights on this topic. Stay tuned for practical advice on how to navigate the financial complexities of raising a family.
Understanding the value of money in different life stages: Money's value and spending patterns change throughout life. Younger individuals may place more value on a million dollars compared to the elderly. Research shows households respond to income changes by spending above or below baseline.
The value of money and spending patterns can vary significantly throughout different stages of life. The concept of marginal utility suggests that the real value of money is different at different points in time, making it essential to consider the specific needs and priorities of various life stages. For instance, a million dollars may hold more value for a younger person compared to an elderly person. This idea is backed by research that shows spending tends to rise whenever income rises, and households often respond to their circumstances by spending above or below baseline. In summary, the smart and flexible American Express Business Gold Card can help businesses maximize their value from purchases, while understanding the dynamic nature of money and spending throughout the human lifespan is crucial for making financially sound decisions.
The middle-aged years see an increase in spending, followed by a decrease in later life: Despite an increase in spending during middle age, people saved enough to ensure income exceeded consumption throughout their lives.
There is a roughly 20-year period in the middle of one's life when spending tends to increase, while the second act of life sees a significant decrease in consumption. Economists are still debating the reasons behind this trend, which could be due to demographic changes, savings for retirement, or a shift in priorities. However, it's important to note that this data was collected during an economically prosperous period when the cost of necessities was relatively reasonable compared to today. The study also revealed that at no point during the time period did consumption surpass income, indicating that people were saving something even as their spending rose. This data may not be directly applicable to current economic conditions, but the life cycle consumption concept can still be useful for financial planning, particularly for those expecting significant expenses related to children or retirement. To effectively plan for these expenses, it's essential to factor them into savings goals and adjust savings rates accordingly.
Managing Finances During Significant Life Changes: During significant life changes and higher spending periods, maintaining a consistent save rate might not be feasible, but living beneath your means and acknowledging temporary higher expenses won't harm your long-term net worth goal.
Maintaining a consistent save rate during significant life changes and higher spending periods might not be feasible without an increase in income. The concept of consumption smoothing, or the life cycle model, suggests that this is theoretically acceptable, as long as you're living beneath your means. However, it's essential to acknowledge that there might be a period of approximately 20 years with higher expenses, which could impact your net worth goal. This temporary increase in spending doesn't necessarily harm your long-term financial situation, as it's not a perpetual requirement. To illustrate this, let's consider an example with a $115,000 pretax income, $5,000 monthly baseline expenses, and an additional $25,100 per month for 20 years due to kids' expenses. Although your save rate might be lower during this period, it won't harm your net worth goal as long as you're not sustaining these higher expenses indefinitely.
Saving and investing before expenses reduce time to financial independence: Aggressively saving and investing before significant expenses can save up to 7 years in reaching financial independence
Saving and investing aggressively before a period of higher expenses can significantly reduce the number of years it takes to reach financial independence. According to the discussion, if a couple invests $250,000 before their expenses increase, they could reach financial independence by the time their expenses drop back down. However, if they wait to save and invest until after their expenses increase, it may take an additional 7 years to reach financial independence. It's essential to consider saving and investing as much as possible before significant expenses, such as those related to starting a family, to minimize the impact on the timeline to financial independence. Additionally, the discussion highlighted the importance of assuming realistic income and expense growth rates and investment returns when planning for financial independence.
The importance of early income growth for families on their journey to financial independence: Prioritizing career growth and financial planning while recognizing the desire to be a parent can help families catch up more quickly on their journey to financial independence
Having a conscious focus on increasing income early on in a household's journey to financial independence can help families catch up more quickly. Farnoosh Torabi, a personal finance expert and mom of two, shares her experience as a breadwinner and discusses the importance of considering the long-term impact of time out of the workforce on earning potential. She emphasizes the importance of recognizing the desire to be a parent and making sacrifices to make it happen, while also prioritizing career growth and financial planning. The conversation highlights the importance of looking beyond the initial costs of having children and considering the bigger picture.
Build professional leverage before having children: Effectively balancing work and family requires building career advancement before expanding family obligations, and considering financial and logistical options for childcare and preschool expenses.
Women who want to balance work and family life effectively should aim to build professional leverage before having children. This means putting in the time and effort to advance in their careers before expanding their family obligations. This approach can lead to greater control and flexibility in managing both work and family responsibilities once children arrive. Additionally, it's important for families to consider their financial and logistical options for childcare and preschool expenses, as these can be significant costs during the first five years. Planning ahead and making clear decisions about family dynamics and nonnegotiables can help families create a solid financial and career blueprint that supports both parents' continued professional growth and family life.
Work-life balance and outsourcing responsibilities involve trade-offs: Understand your work schedule, negotiate with partner, outsource tasks to optimize productivity and family time, but be prepared for trial and error as circumstances change
Making decisions about work-life balance and outsourcing responsibilities involves trade-offs and requires ongoing communication with your partner. The speaker shared her personal experience of structuring her career and hiring help to enable working from home and being present for her children. She emphasized the importance of understanding your own work schedule and negotiating with your partner to optimize productivity and family time. The speaker also mentioned the importance of outsourcing tasks like meal preparation and house cleaning to save time and energy. However, it's important to note that what works best can change as family and career circumstances evolve, and it may require trial and error to find the right balance.
Investing in a clean and organized space: Investing in a clean and organized space, whether through outsourcing tasks or self-care, can lead to increased calm, productivity, and enjoyment, saving you more in the long run than the initial cost.
Investing in creating a clean and organized space, even if it means outsourcing domestic tasks, can lead to significant benefits such as increased calm, productivity, and enjoyment of one's home. While the financial cost may seem straightforward, the mental health toll of feeling overwhelmed and unable to ask for help can be much more costly in the long run. Using the speaker's example, someone earning $50,000 a year could calculate their hourly rate and consider the cost-benefit analysis of outsourcing tasks versus doing them themselves. However, it's important to remember that mental health and self-care are just as valuable investments as financial gains. By giving yourself permission to have free time and focusing on self-improvement, you can ultimately earn more and live a more fulfilling life.
Long-term financial planning involves considering expenses during income spikes: Consider long-term goals and individual circumstances when making financial decisions to ensure financial stability and fulfillment
While it may seem financially prudent to save money in the short term, long-term financial planning suggests that expenses often coincide with income spikes. This was particularly true for the speaker, who shared her experience of having higher expenses during her children's early years. She made a deliberate decision to move to a suburban area to better support her child's needs, which resulted in a significant increase in expenses but ultimately led to less financial stress and more fulfillment. This experience underscores the importance of considering long-term financial goals and making informed decisions based on individual circumstances and priorities.
Investing in your career during parenthood: Investing in career early in parenthood leads to greater flexibility and time for family later, an investment in self and family's future.
Investing in your career during the early stages of parenthood can lead to greater flexibility and time for your family later on. This can be seen as an investment in yourself and your family's future, similar to the concept of marginal utility of money. Fear and anxiety about financial decisions and career growth are natural, but they can be channeled positively. By recognizing the importance of addressing financial concerns and making proactive changes, individuals can ultimately create a better situation for themselves and their loved ones. The speaker's personal experience and advice from a parent highlight the potential benefits of staying committed to career goals during the early years of parenthood.
Understanding and Overcoming the Fear of Money: Recognize and question your fear of money to better understand your values and priorities, and devise a rational plan to address your concerns.
The fear of money is a personal and powerful emotion that can serve as a catalyst for financial growth and security. Instead of avoiding or suppressing this fear, it's essential to recognize and question it to better understand what you truly value and what security means to you. By reframing fear as an opportunity, you can devise a rational plan to address your concerns and prioritize your actions accordingly. This may involve educating yourself, creating a budget, or building an emergency fund. Ultimately, acknowledging and addressing your fear of money can help you take control of your financial situation and move closer to your goals.
Our experiences and perspectives shape our decisions, even in uncertain times: Experiences and perspectives influence decision-making, even during panic, and this framework continues to guide us.
Our experiences and perspectives shape our decision-making process, even during times of panic or uncertainty. This idea has been a constant theme in our lives and has not hindered us. As of October 3rd, we've experienced a healthy dose of panic, but we'll continue to make decisions based on this framework. For those interested in exploring this concept further, we'll link the related book in the show notes. We're grateful for our guest's unique perspective and insights, and we appreciate their time on the Money with Katie show. Our production team includes Henna Velez and Katie Gaddi Tassan, with audio engineering and sound design from Nick Torres. Devin Emery serves as our Chief Content Officer, and Kate Brandt provides fact-checking support. Tune in next week at the same time and place for another informative episode. The Money with Katie show is a production of Morning Brew.
