What Is Portfolio Management?
Portfolio management involves selecting and maintaining investments with a financial objective and risk tolerance in mind.
Read morePortfolio management involves selecting and maintaining investments with a financial objective and risk tolerance in mind.
Read moreAutomated investing is a type of investing that uses computer algorithms to generate tailored financial planning or retirement advice to individuals. Automated investing platforms, also known as robo advisors, tends to feature lower fees, lower minimum balances, digital applications, and a more hands-off approach to investing.
Because automated investing can be done with little or no direct human effort, it can be an ideal option for investors just starting their wealth-building journey. Automated investing may reduce the learning curve for some investors entering the financial markets, helping them start building and managing a portfolio to achieve their financial goals.
Automated investing uses computer algorithms to select and trade stocks, exchange-traded funds (ETFs), or other assets without the need for oversight by a human financial advisor.
Automated investing has changed the financial advisory game in fundamental ways. Like so much else that has happened during the digital revolution, automated investing has eliminated the middle man and is delivering a service directly to the client – you, the investor.
Investors who sign up for an automated investing platform usually take an online survey. This survey collects information about the investor’s financial situation, risk tolerance, and goals. The automated investing advisor then uses this data to recommend investments to the client that may help them meet their financial goals. Based on the investor’s input, the automated investing platform will recommend and manage a pre-determined portfolio for the investor using computer algorithms and other data.
Automated investing advisors may also handle portfolio rebalancing and tax-loss harvesting if the client chooses these services. (SoFi’s automated portfolio includes the above features, but not automated tax-loss harvesting.)
Most automated advisors use Modern Portfolio Theory (MPT) to create and manage a portfolio’s asset allocation. The idea is to decrease risk by diversifying a portfolio into many assets and not “put all your eggs in one basket.”
The automated investing industry is growing fast; client assets managed by automated advisors are estimated to be $2.76 trillion in 2023, up from about $19 billion in 2017, according to data from Statista.
Of course, the automated investing phenomenon is relatively new; its direct-to-investor services only began to be established in about 2009-2010, so it’s difficult to report a long-term, industry-wide track record.
Automated investing tools are sometimes referred to as robo advisors. Investors may see the terms automated investing and robo advisors used interchangeably to describe digital tools that use computer algorithms to manage a financial portfolio.
In reality, though, automated investing is a broader term that can refer to several aspects of today’s financial products and features.
• Using automatic transfers and contributions to investment portfolios and retirement plans is a form of automated investing.
• Target date funds, a type of mutual fund that rebalances over time to become less conservatively invested, uses a form of automated investing known as a glide path.
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There are several reasons why investors choose automated investing tools to help them manage an investment portfolio.
Automated investing advising generally costs less than traditional financial advisors. The reason the cost of automated advising is lower is because it relies on an algorithm, while the guidance of a live person can cost more.
Automated investment fees are usually a percentage of the assets under management (AUM). Typical fees are less than 0.5% of AUM annually. So if an investor puts $10,000 into an automated investing service, they generally pay less than $50 per year.
By comparison, a reasonable rate for a human financial advisor would be a 1% investment fee. On a 10,000 investment, that’s $100 a year just for the advisory fee. Investors may also have to pay fees on their investments and commissions for products the financial advisor sells.
However, automated investing services have additional fees as well. Robo advisors charge a brokerage fee, and the ETFs themselves typically generate management fees, taxes, and other costs for which the consumer is responsible.
Like many investment costs, however, these fees can be hard to track as they may simply be deducted from investor returns. That’s why it’s important to look beneath the hood, so to say, of any investment product to learn the exact costs.
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Many automated investing platforms have low minimum account requirements. And some platforms have no minimum initial investment requirements.
In contrast, some human financial advisors won’t take on a client unless they have more than $100,000. At the high end, private wealth managers could require minimums of $5 million.
Because of the lower initial investment required, younger consumers have turned to automated investing in planning for their financial future. Previously, high minimum balances had been headwinds to younger investors, preventing them from getting financial advice.
As younger investors, like Generation Z and millennials, start hitting life milestones like getting married and saving for a house, automated investing may be a good option for them to begin building wealth.
With traditional financial advisors, clients had limited access and had to work around the human advisor’s schedule. Automated advisors use digital platforms. This allows clients to ask questions and access help 24 hours, seven days a week, if needed.
Need to make a trade or a change? There is no need to call to schedule an appointment, fill out a physical form, meet with an advisor in person, or wait for office hours. Usually, a few button pushes can do the trick.
Lower fees and minimum balances have attracted younger investors to the automated investing industry. But the digital and mobile platforms these services offer have also made younger users turn to such automated services more.
Robo advisors do come with some downsides, however.
While some automated services may offer investors the ability to contact a live advisor or representative, not all of them do. And even when that’s available, your access may depend on how much money you have invested.
In any case, if you have pressing questions or an investing dilemma, it’s likely it will be up to you to figure out the right steps to take.
It’s true that a robo advisor is designed to offer a range of pre-set portfolios, one of which will hopefully meet an investor’s needs. But automated platforms don’t have the flexibility to offer each person a fully customizable portfolio — for that they would need to craft their own or work with a professional.
By the same token, if your personal circumstances changed in such a way that your investment strategy also shifted, it’s unlikely that you’d be able to adjust an automated portfolio except in terms of its basic asset allocation.
Most robo advisors use a mix of ETFs and low-cost index funds. ETFs hold a basket of stocks or bonds and the vast majority of these funds are passively managed, i.e. they are built to mirror an index, such as the S&P 500. ETFs differ from index mutual funds in that they are traded throughout the day on an exchange, similar to stocks.
ETFs come with certain risk factors. Because ETF shares are traded throughout the day, they’re bought and sold at the market price, which may or may not reflect the fund’s net asset value or NAV. Thus, an ETF’s performance is subject to market volatility. In addition there can be tax consequences, owing to the trading of shares.
If you’re interested in opening an automated investing account, there are several factors you may want to consider before deciding if automating investing is right for you.
As mentioned above, automated investing fees are generally lower than traditional financial advisors. However, you still want to compare the fees of the various automated investing platforms on the market.
Some platforms charge a flat fee, while others charge a percentage of your assets under management. In addition, some platforms charge fees for specific services, such as tax preparation or additional investment advice.
Some automated investment platforms require a minimum investment to open an account. You’ll want to understand any minimum investment requirements before opening an account. For example, some automated investing platforms may offer a $0 account minimum, but that might not include certain robo advisory services you’re looking for.
The investment options offered by automated investment platforms vary. Some platforms offer a limited selection of investment options, while others offer a wide range of investments. You want to ensure the automated investing platform you choose offers investment options that meet your needs.
Usually, robo advisors only invest in ETFs and mutual funds, so you’ll want to see if the services offer a range of funds, from international equities to domestic corporate bonds. Knowing what investment options a robo advisor provides may help you ensure that you may end up with a diversified portfolio that aligns with your goals.
Generally, a robo advisor will make automated investments based on your risk tolerance and financial goals. These services will create a portfolio of a certain percentage of stock ETFs and bonds ETFs based on risk tolerance. But you want to check that the automated investing services will rebalance your portfolio to maintain that percentage of stocks and bonds.
For example, an investor with a more aggressive risk tolerance may have a portfolio with an asset allocation of 80 percent stocks and 20 percent bonds. With time, the portfolio may change and knock that ratio off balance — too much of one and not enough of the other. An automated investor can automatically rebalance your account to its original 80/20 ratio. No human interaction is needed; the rebalance happens through the automated investing algorithm.
Some automated investing services may give investors access to human financial professionals, which can be helpful for investors who need to ask questions, discuss goals, and plan for the future. Automated investing services might charge for this service, but it could be helpful to have this option.
Automated investing may be a good option for people who want to invest for the long term but do not want to manage their own portfolios or pay high fees for a traditional financial advisor. It can also be a good option for people who want to invest in various asset classes, but don’t have the time or expertise to do so themselves.
That doesn’t mean auto investing is right for everyone. For those who aren’t particularly tech savvy or comfortable with automated platforms, using a robo advisor might not make sense. Again, it’s important to be comfortable with the investments offered in these pre-determined portfolios, as well as the risks and costs associated with these products.
As noted above, many younger investors have begun using robo advisors to create portfolios and make automated investment decisions. This may allow younger investors to build up experience in the financial markets while using a pre-set portfolio. As they build wealth and expertise, younger investors may decide to make investment decisions on their own or hire a traditional financial advisor to help manage their financial goals.
An automated investing platform can be ideal for many investors, particularly regarding affordability, convenience, and avoiding potential human errors. This investment tool allows investors to use a hands-off approach, which many people may prefer over the time-consuming research and management required for picking and choosing stocks, bonds, and other assets to build and manage a portfolio.
If you’re interested in opening an automated investing account, SoFi can help. With SoFi Invest® automated investing, we recommend a portfolio of stock and bond funds for you based on your goals and risk tolerance. And SoFi doesn’t charge a management fee.
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1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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Does it seem like your student loan balance never gets any smaller? This may ring true if you’re one of the 60% of borrowers who stopped making payments on their federal student loans during the Covid-19-related payment pause. (The moratorium also set the interest rate at 0%.)
But even when you start making monthly payments again, or if you graduated during the pandemic and are new to making payments, it still may seem like your loan balance isn’t budging much. Where do your payments go if not to the principal? The short answer: interest.
Understanding how and when student loans accrue interest can help you make smart choices about paying off your balance faster.
Table of Contents
Key Points
• Student loan balances may seem stagnant due to the significant portion of payments going towards interest rather than the principal.
• Initially, a larger share of a student loan payment is allocated to interest, with a smaller amount reducing the principal.
• Over time, the portion of the payment reducing the principal increases as the interest portion decreases.
• Income-based repayment plans might result in payments that only cover part of the monthly interest, potentially causing the loan balance to grow.
• The suspension of federal student loan payments during the pandemic halted the accrual of interest, effectively freezing loan balances.
Your student loan balance is made up of two parts: the amount you borrowed plus any origination fees (the principal) and what the lender charges you to borrow it (interest).
Once you receive your loan, interest begins to accrue. If it’s a Direct Subsidized loan, the federal government typically pays the interest while you’re in school and for the first six months after you graduate. After that, the borrower is responsible for paying the interest.
If the loan is a Direct Unsubsidized loan or a private student loan, the borrower is solely responsible for accrued interest.
Most people pay a fixed monthly payment to their lender. That payment includes the principal and the interest. At the beginning of a loan term, a larger portion of your payment goes toward paying interest, and a smaller portion goes to the principal. But the ratio of interest to principal gradually changes so that by the end of the loan term, your payment is mostly going toward the principal.
Things are a little different if you’re making payments under an income-based repayment plan. Your payments are tied to your income and shouldn’t exceed a certain percentage of your salary. The interest, however, doesn’t change based on your income.
This means there may be situations where your monthly payment doesn’t fully cover the interest charges for that month, much less contribute to your principal. In fact, your student loan balance may actually grow over time, despite the payments you make.
When the government suspended payments on federal student loans, they also hit the pause button on interest accrual. Essentially, the debt has been frozen in time since March 2020. When the moratorium ends, interest will likely start accruing again.
Note that the payment pause didn’t include private student loans. For a refresher on the balance and interest rates on private loans, contact your loan servicer. Be sure the company has your most up-to-date contact information on file, so you don’t miss out on important information about your loans.
Your student loan servicer may have changed since the last time you made a payment. To find out which company is handling your federal student loans, log on to the Federal Student Aid website; the information will be listed in your dashboard. You can also call the Federal Student Aid Information Center at 800-433-3243.
To find out which company is handling your private student loans, contact the lender listed on your monthly statement and find out if they still handle your loan. More often than not, they will. If your loan servicer has changed, the lender can give you the new company’s contact information.
When it comes to repaying student loans, the key is to find an approach you’ll stick with. One way to tackle the debt is by making extra payments toward the principal. Even a little bit can help bring down the loan balance.
Another approach is to refinance to a lower interest rate. Or you could refinance to a shorter loan term. Or you could do both. Your payments may be higher, particularly if you switch to a shorter loan term, but you will be finished paying off the debt sooner. (Please note that if you refinance a federal student loan, you will lose access to federal protections and programs such as the Covid-related payment pause, the Public Service Loan Forgiveness program, and income-driven repayment plans.)
The way loan payment schedules are set up is likely why your regular payments don’t seem to be making much of a dent to your balance or loan principal. Initially, more of your payment goes toward paying interest and less toward the principal. But gradually that changes so that by the end of the loan term, most of your payment is going toward the principal.
If you want to pay off your loan faster or generally pay less interest over the life of your loan, one strategy is to refinance student loans to a lower interest rate and/or a shorter loan term. If you decide refinancing makes sense for you, it might be beneficial to look for a refinancing lender that offers extras. SoFi members, for instance, can qualify for rate discounts and have access to career services, financial advisors, networking events, and more — at no extra cost.
SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.
For millions of students, pursuing a college degree means taking on some amount of debt. That’s because college costs have risen much faster than wages, and the average cost of a four-year degree has far outpaced the rate of inflation in the past 15 or so years.
Today, a typical student borrows around $30,000 to pursue a bachelor’s degree. That amount can be even higher for students pursuing a degree needed for higher-paying jobs, such as those in medicine or law.
Here are the professions whose graduates, on average, owe the most. This list is not exhaustive, and rankings can change based on different data sets.
While it’s true that jobs for people with higher degrees can pay in the six figures, student loan debt can make a significant cut into earnings. Considering student loan debt, along with salary, can give a more complete picture of what kind of financial future many graduates face.
Even with a relatively high salary, oral surgeons typically graduate with a large student loan burden. The debt has a significant effect on their professional and personal decisions for decades to come, according to the American Association of Oral and Maxillofacial Surgeons.
The organization has lobbied for student loan reform, including halting interest accrual on student loans during an internship or residency, making sure fair income-based repayment structures are in place, and allowing qualified participants in the Public Service Loan Forgiveness Program (PSLF) to have remaining loan balances forgiven earlier than the standard 10 years.
Like other dental school graduates, orthodontists may face substantial student loan debt. After dental school, orthodontists train for orthodonture during a residency that can last several years.
The American Association of Orthodontists has supported legislation aimed at student loan reform: “Reducing interest rates and fees and allowing refinancing for today’s graduates are critical steps to helping them repay these loans sooner and more efficiently so they can begin to invest in their futures and careers,” Dr. Nahid Maleki, a former association president, has said.
Less than 3% of all dentists are endodontists, according to the American Association of Endodontists. Endodontists specialize in diagnosing and treating complex causes of tooth pain. The field requires two to three years of education and training beyond dentistry. This means that endodontists may shoulder a greater debt burden than their dental school counterparts.
“The high cost of a dental or medical education is a crippling problem and threatens the future of our specialty,” Dr. Keith V. Krell, then president of the American Association of Endodontists, said. The organization has supported legislation to “funnel more money into dental schools so that unreasonable tuition costs can be offset.”
Many dental students bite off a lot of debt. While the dental industry can be thought of as relatively recession-proof (your aching tooth doesn’t care about market fluctuations), dental spending may become flat during and after lean times while the supply of dentists rises.
Navigating insurance as a dental practice can also be tricky for practice owners, and the field can be competitive and crowded for new dentists.
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While radiologists can be high earners in the medical field, they also may hold a staggering amount of debt that accumulates during medical school and residency. The American College of Radiologists has supported legislation to halt interest accrual during residency.
Currently, residents can request deferment or forbearance on loans, depending on their circumstances, but even if granted, interest accrues. This can add thousands or tens of thousands of dollars to the balance of a radiologist’s student loan debt.
For many medical students, residency is when student loan debt balloons. Unlike their high-earning counterparts who may immediately begin earning six-figure salaries after grad school, med students earn an average of $64,200 during residency.
During this time, interest may accrue on loans. Increasing patient loads, malpractice vulnerabilities, and more have led to burnout in this profession. According to the American College of Obstetricians and Gynecologists, a shortage in the speciality may be on the horizon.
Residency requirements can cause interest accrual to add to the debt load of these medical professionals. The American Society of Anesthesiologists supports legislation that would allow borrowers to qualify for interest-free deferment on loans while in residency.
The legislation has been introduced to Congress but has not gained traction. The work of an anesthesiologist can be grueling: Some reports have shown that anesthesiologists have a higher risk of burnout than other physicians.
Also called a doctor, primary care physician, or family practitioner, a physician is an essential element of primary care for all ages, and a point of contact who works with other doctors to diagnose and treat patients. Not a medical specialty, this umbrella term can also refer to pediatricians and internal medicine doctors.
While the career path may not be as lucrative as some specialized medical careers, it offers intangible benefits, such as control over your hours worked and the ability to get to know your patients, according to the American Academy of Family Physicians (AAFP).
But the salary compared with student loan debt can make the debt burdensome. The AAFP has advocated for federal loans and scholarship programs that target primary and family care as well as interest deferment during residency.
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Members of one of the fastest-growing segments of health care, according to the American Osteopathic Association, osteopaths take a whole-person approach to medicine. Osteopaths may practice all medical specialties, but attend an osteopathic medical school where they receive specialized training in the musculoskeletal system.
The osteopathic association found that 86% of osteopathic medicine graduates have student loan debt. Like their medical school counterparts, osteopath students can be susceptible to burnout.
Pharmacists require undergraduate and graduate school degrees, and the career path can be varied upon graduation. Some pharmacists enter research and development, while others choose to work with patients in hospitals, clinics, or commercial settings.
This can allow for career flexibility for pharmacists, as they can balance family and personal obligations with a career. But student loan debt can become a burden for pharmacists that can affect their financial decisions for decades. As with other professions, the challenge becomes balancing debt with future financial goals such as saving adequately for retirement.
Educated at the master’s degree level, a physician assistant can diagnose, treat, and prescribe medication to patients and can often be a patient’s main health contact. A physician assistant does not have to go through the years of medical school and residency training of doctors but still must have hours of clinical experience.
The career is in demand, with three-quarters of graduates receiving multiple job offers after graduation, according to the American Association of Physician Assistants. But the student debt burden can be intense.
“Lawyer” has come to mean “high earner,” but the truth is much more nuanced. Lawyers have a large income discrepancy based on the type of law they pursue and the state they practice in. Some 71% of law school graduates have some form of student loan debt, and the average debt has risen in the past several decades.
For example, in 2000, law school graduates came out of the gate with an average of $59,000 (nearly $88,000, adjusted for inflation) in student loans, while today, new graduates have an average of $180,000 in cumulative debt. The American Bar Association has lobbied the government to provide student loan debt relief for lawyers.
Physical therapists must earn a doctor of physical therapy degree, a three-year course after a bachelor’s degree. After graduation, physical therapists may do a residency or fellowship, or may begin practicing right away. Salaries can depend on the type of work a physical therapist pursues. Student debt can affect those decisions.
According to the American Physical Therapy Association, 70% of respondents to a survey said debt caused anxiety. The association has been advocating for physical therapists on Capitol Hill, lobbying for more scholarship opportunities for therapists from underrepresented backgrounds and inclusion of physical therapists in the National Health Service Corps Loan Repayment Program, a loan repayment program for health professionals.
Many people think a master of business administration degree (MBA) translates into a high-salary career, and while it’s true that graduates of top programs often receive high pay offers, top programs are expensive, and there’s no guarantee that a job will result. So is an MBA worth it? That depends on your career goals.
Some employers will offer full or partial tuition reimbursements to employees who pursue an MBA. Requirements vary by employer, but some expect employees to continue working during school. Though rigorous, this means that MBA students may not necessarily lose out on a salary while getting their graduate degree.
Occupational therapists (OTs) need to obtain a master’s degree and satisfy licensing requirements, as well as supervised fieldwork. Like physical therapists, the salary progression for OTs depends on the type of work they pursue, and the type of work they pursue also affects the type of potential loan forgiveness that may work for their circumstances.
The American Occupational Therapy Association recognizes that many students graduate with student loan debt that can be tough to pay back on a median OT salary. The association actively lobbied for occupational therapists during the COVID-19 pandemic to make sure their interests were covered under the CARES Act.
Nursing salaries — and the student loan debt that nurses carry — depend on education level. Nurses who have a Master of Science in nursing have the most student loan debt, while those who have a bachelor’s degree or associate degree have lower debt, but may have lower salaries as well. Scholarship opportunities for nurses can limit the necessity of student loans, and some nurses may qualify for forgiveness opportunities, including the Public Service Loan Forgiveness Program and the Nurse Corps Repayment Program, a federal program for nurses who work in high-need areas.
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The price of college has soared, and a typical student borrows around $30,000 to pursue a four-year degree. That amount can be substantially higher for students who choose more lucrative degrees, such as those in medicine and law. Orthodontists, for example, owe an average of $560,000 in school loan debt, while lawyers owe around $180,000 in school loan debt.
There are options to help borrowers manage their debt, such as the Public Service Loan Forgiveness program, student loan consolidation or student loan refinancing. Refinancing student loans could help you snag a lower interest rate and/or extend or shorten the loan term. (Note: You may pay more interest over the life of the loan if you refinance with an extended term. Also note that when you refinance, you will no longer have access to federal protections and benefits, such as certain loan forgiveness programs, the current payment pause, flexible payment plans, and more.)
Refinancing could be a great choice for working graduates who have higher-interest graduate PLUS loans, Direct Unsubsidized Loans, and/or private loans.
Currently, there is more than $1.76 trillion in outstanding student loan debt, and more than 43.5 million Americans have federal student loan debt.
Doctor of Osteopathic Medicine is the major with the largest median debt, at $287,820, according to the Education Data Initiative. An associate’s degree in Biological and Physical Sciences is the major with the smallest median debt, at $7,590.
Student debt is most prevalent among borrowers under 40 years of age, according to the New York Federal Reserve. That said, only 57 percent of balances are owed by those under 40. Borrowers with larger balances are more likely to be older, perhaps because they borrowed for graduate school.
SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.
Have you ever wondered how much it costs to raise a child from birth to 18?
Are you sitting down?
Based on consumer surveys and other data, most estimates these days put the price of parenting just one child at $300,000 or more.
Your costs may vary significantly, of course, depending on where you live, your income, your marital status, and other factors. But it’s probably safe to say that raising a child to college age — and beyond — can deal a real wallop to the budget.
Read on for a breakdown of some of the costs prospective parents can expect.
It’s hard to find an “official” calculation for the cost of raising a child.
For many years, parents and prospective parents could get an idea of the costs they faced from the Expenditures on Children by Families report published annually by the U.S. Department of Agriculture. But the USDA stopped updating the report in 2017, so the most recent information is for a child born in 2015.
Back then, the USDA estimated the cost of raising the younger of two children in a middle-income home with married parents would be approximately $233,610 in 2015 dollars.
Today, that number is a bit higher. A 2022 analysis conducted by the Brookings Institution found that parents can expect to spend at least $310,000 raising a child who was born in 2015. That’s for food, shelter, and other necessities, but not college, which for most students starts at age 18 or older.
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In 2015, the USDA divided the major infant-through-high-school expenses into the following categories:
• Housing 29% of income
• Food 18% of income
• Child care and education 16% of income
• Transportation 15% of income
• Health care 9% of income
• Miscellaneous 7% of income
• Clothing 6% of income
But remember, those are the USDA’s numbers for one child in an average household with two kids, and those percentages have likely shifted in the past few years. You might end up with a similar allocation, or, based on your own circumstances and priorities, one that’s far different.
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How much you pay to raise your family may be largely influenced by where you decide to live. In 2022, a mortgage payment was 31% of the typical American household’s income, based on data gathered by Black Knight. But that percentage may look different if you reside in a city or town where housing costs are much cheaper or far more expensive than average.
Child-care costs may vary widely as well, depending on the age of your child and the type of care you choose. Unless you can get Nana and Grandpa involved, be prepared for a hefty bill: 51% of parents who responded to Care.com’s 2022 Cost of Care Survey said they spent more than 20% of their household income on child care every year.
And those costs may not go down when a child reaches school age if he or she attends private school. According to the Education Data Initiative, the average annual tuition among the nation’s 22,440 private K-12 schools was $12,350 in 2021.
Your miscellaneous costs may also be different if your child is involved in sports or other activities that require expensive equipment, camps, or lessons.
Add to that potential healthcare costs, which could depend on the type of insurance you have and your child’s individual needs.
Considering all the costs involved, it may make sense to start transitioning your budget long before a baby actually arrives. Here are some things to consider if you decide to adjust your household budget categories to fit your growing family:
You’ve probably heard it a thousand times: A baby will change your life — and your priorities. Still, your own financial security can help determine your child’s future, so it can help to stick with your savings goals, like building an emergency fund (you may need that money more than ever once you have a child), putting money away for a mortgage down payment, and investing for retirement. Then, if you still have room in your budget, you might consider including a 529 education savings account or some other type of investment plan for your child.
The last thing you’ll want to worry about when you have a new baby is old debt. Paying interest on credit cards and other debt can eat away at any extra money you’re hoping to save for or spend on your child. A debt reduction plan like the popular snowball and avalanche strategies can help you focus on methodically dumping your debt and getting it done ASAP.
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Just having a baby can be expensive. In 2022, the Peterson-KFF Health System Tracker estimated that the health costs associated with pregnancy, childbirth, and postpartum care for women enrolled in large group insurance plans came to almost $19,000 on average, and average out-of-pocket payments were almost $3,000. Then there’s the crib, car seat, clothes, formula, diapers, and other things you’ll need when you bring your baby home.
If you can adjust your budget to get ready for those upfront and monthly costs, you may have a better shot at keeping up with expected and unexpected bills later on.
Your budget is bound to evolve as your child gets older. The money you spend on diapers and formula in the first years will go toward buying new shoes, clothes, toys, team uniforms, and other expenses later on. (Maybe buying a car? Putting multiple kids through college? Paying for a wedding? Who knows?)
The good news is, these days, you can use a spending app to track exactly where your money is going and decide where you want it to go. So if your kiddo comes home from school one day and wants to switch from playing soccer to playing the piano, you can quickly rework your budget categories and see where you stand.
Of course your beautiful baby will be worth every penny of the $300,000 (give or take) you’ll be spending over the next 18 years. Still, you may want to keep your financial readiness in mind as you think about when to have a baby.
Besides the basic costs, raising a child also can affect your finances if you decide to do in vitro fertilization (IVF), take an unpaid maternity leave, buy a more “reliable” car or a bigger home, or go part-time at work so you can be home after school.
Any planning you can do in advance and as you go to minimize the financial blow can benefit you and your child. (Not to mention the example it will set down the road, when you’re teaching your child about money management.)
Figuring out how to save money while raising kids isn’t easy. But there are some spending categories over which you can have some control, including:
Kids grow out of everything so quickly. Borrowing some items from friends and family, or buying things secondhand, could be a big money-saver. If your sister wants to lend you her perfectly good (and safe) crib or car seat, let her! And don’t underestimate the quality and cuteness of the clothes you can find for little ones at yard sales, consignment shops, or online. There also may be bargains to be had when shopping for secondhand sports equipment and musical instruments.
There may be several ways you can save on child-care costs, including forming a co-op with other parents and taking turns watching each other’s children, or asking nearby family members to help out on a full- or part-time basis.
When your kids get older, it may be tempting to stop for fast food on busy nights, especially if you don’t have any idea what you’re going to serve for dinner. By planning ahead, you may be able to reduce your grocery costs, the number of trips to the grocery store, and unplanned visits to the closest hamburger joint.
While you’re adjusting your budget for baby, think about little things you can do to cut down on spending and expenses. Could you adjust your thermostat to save a few bucks every winter and summer? Will you have time to watch all those cable channels and streaming services with a child in the house? Or can you clean the pool yourself, cut the grass, or wash your own car?
Every activity you plan for your child doesn’t have to come with a big price tag. Going around the block with your kid in a stroller, wagon, or on the back of a bike can be the best kind of free fun. Want to see a movie? Check out the price of a matinee or other discounted screenings. Or buy a bottle of bubbles or a small swimming pool for a good time in the backyard.
At $310,000, the estimated cost of raising a child from birth to 18 may be daunting. But if you plan in advance for those first major costs — and adjust your budget for changing priorities as your child grows — it may be easier to manage your finances during this exciting, expensive time in your life.
Using a money tracker app can be a good place to start. SoFi lets you know right where you stand, including what you spend and how to reach your financial goals.
Parents could expect to spend around $310,000 or more raising a child who was born in 2015, according to a 2022 analysis conducted by the Brookings Institution. Note that the cost of raising a child can vary significantly depending on where you live, your household income, your child’s health, and other factors — including if you’ll be paying for college, a wedding, or other big-ticket items.
The cost of raising a child can vary from one household to the next, based on many factors. But it’s been estimated that the bill for an average U.S. family raising a child to 18 (without college) could be $310,000 or more.
The more you can put away before you have a baby, the better prepared you can be. Some things to focus on might include setting up or adding to your emergency fund, continuing to make contributions to your retirement plan, and, if you hope to move to a bigger home, coming up with the necessary down payment.
Photo credit: iStock/JohnnyGreig
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