Can You Afford to Stay Home With the Kids?

May 9 , 2003 -- Today, families face a myriad of financial concerns. One of the most important is whether or not mom or dad should forego a paycheck and stay home with the kids.

Although familial roles are constantly changing, providing adequately for your family while also creating a comfortable nest egg for retirement remains constant.

Because of that, there are a variety of issues to consider before deciding whether or not to stay home.

While women are still behind their male counterparts when it comes to equal wages, earning just 78 cents for every dollar earned by a male, they are continuing to move toward equality. In fact, one in three wives now out-earns her husband, and 20 percent more women than men are graduating from college.

According to a recent story in Newsweek, women made up 34 percent of high paying executive/management jobs in 1983, whereas in 2001, they accounted for almost 50 percent of these positions. Likewise, 60 percent of newly minted female MBAs earn 60 percent more than their husbands.

Does It Pay?

Although women are clearly making progress in the professional world, statistics from the 2000 Census indicate that more and more mothers are choosing to stay home, with the number of working mothers declining in 2000 for the first time since 1976.

Many parents struggle to decide whether one of them should stay home with the children, but the decision can be made easier with a few facts. Financial experts generally say that if the second income is less than $30,000 per year, it might make more sense for that parent to stay at home with the children. Here is the math to prove it:

Assume your federal income tax rate is 27 percent, meaning $8,100 of your $30,000 paycheck will go to the federal government. Then, factor in the following expenses:

Work clothes and dry cleaning: $1,200 ($100 per month) Meals out: $1,500 (three times per week at $10 per meal for 50 weeks) Daycare: $7,000 (According to the Children's Defense Fund, full-day childcare averages between $4,000 to $10,000 per year, and is generally higher in large metropolitan areas.) Home repairs/housekeeping: $3,100 Commuting: $2,500 (in parking fees, gas and higher car insurance) Cell phone/computer: $1,000

So, if you take your salary of $30,000 per year and subtract federal income taxes and the associated costs of working, you have $5,600 left. However, you still have to deduct money for state taxes, Medicare, FICA and other miscellaneous expenses, making the financial benefit to your family minimal.

The 'Mommy Tax'

When income for the second wage earner is more than $30,000, the decision to stay home becomes more complicated as the financial benefit of working can potentially enable your family to live in a nicer home, send your children to better schools and provide added financial security.

Additionally, by continuing to work, both parents are able to achieve professional advancement, as well as invest for their retirement through an employer-sponsored plan.

Another small benefit to dual income families is the child care tax benefit, which is not available to families where only one parent works. Parents who file jointly and earn $110,000 a year or less in adjusted gross income ($75,000 for single parents) can deduct $600 per child under the age of 17 as part of the Child Tax Credit. This credit provides a dollar-for-dollar reduction of the taxes you owe.

Lost wages, missed promotions and raises are not the only things that go away when mom takes time off work to raise children. A woman's retirement savings also takes a sabbatical — often indefinitely.

Why? When women leave the workforce, either temporarily or long-term, they lose out on any opportunity to contribute to their company's 401(k) plan or similar retirement savings vehicle as well face a significantly lower social security disbursement than if they continued to work without any time-off.

Therefore, women are more likely than men to face a retirement income shortfall. According to the Women's Institute for a Secure Retirement (WISER), three of every five elderly women face retirement without a husband and more than 20 percent of older single women live in poverty.

Making Smart Decisions

When deciding whether to stay home, besides weighing the benefits of time with your children, do the math with your family situation in mind. Be sure to consider factors such as each parent's income, the number and age of your children, your spending habits and financial goals.

If you decide to stay at home with your children, it is incredibly important to contribute to a retirement savings account such as a Traditional or Roth IRA if mom still generates an income from part-time employment or from some other source of revenue.

Additionally, mom should invest in a Spousal IRA — either a Roth IRA or a Traditional IRA — opened on her behalf by her husband. The maximum contribution to a Spousal IRA is $3,000, and total contributions for both the working and non-working spouse cannot exceed $6,000.