Editor's Note: This story originally appeared on The Penny Hoarder.
In case you didn’t know, child care isn’t cheap.
If you’ve never had kids, or if you have your first little one on the way, you might not be thinking much about those expenses yet. But many parents will tell you they wish they had started preparing for child care costs much earlier.
In a recent survey by The Penny Hoarder of 2,000 parents nationwide, nearly 55% said child care was more expensive than they expected. And 63% said the cost of child care factored into their decision whether to have more than one child.
So what do you do? Where do you start? Is it even possible to find affordable child care?
If you have a young one on the way, or are planning to soon, here are some ways to save money on child care.
1. Start Your Research Now
Obviously, your working schedule as parents will factor heavily into your child care costs. Stay-at-home parents will spend significantly less.
However, for single parents working full-time and in two-parent homes where both work, you’ll need to begin researching costs as soon as possible. And be aware of waiting lists. It’s not uncommon for popular day care providers in urban areas to have waitlists of anywhere from 12 to 24 months. Most places have fewer spots available for infants, so those waits can be even longer.
Once you get in, be ready for the sticker shock. Almost 44% of respondents in our survey spent at least $1,000 per month on child care, with only 17% spending under $500 per month.
Traditionally, a day care provider is less expensive than a nanny. Having two kids in a child care center costs close to $300 less per week than hiring a nanny for them, according to a 2022 survey by Care.com.
A nanny share is also a newer trend in which multiple families use one nanny who watches all the kids at once or splits time between the two. This helps save money on the hourly costs by dividing the expenses.
So whether you’re looking at a day care facility or a nanny, now is the time to start researching your options.
2. Check With Your HR Department
If this is your first child, you might be unaware of any benefits your employer offers related to child care.
With more companies going to remote work during the coronavirus pandemic, the next new popular benefit to dangle in front of potential employees may very well be child care.
Some companies are ahead of the game. Bright Horizons Family Solutions manages employer-based child care services and benefits, with clients that include Amazon, Apple, Facebook and General Motors. More than 100 of their clients chose a backup care option in 2020, a service that allows someone to bring their child to Bright Horizons when they’re in a last-minute bind.
According to our survey, 66% of parents would consider switching jobs to a company that offered child care-related assistance. With 70% saying they “feel stressed” over what child care will look like in 2022, it’s easy to understand why a workplace benefit would help ease their mind.
3. Look Into FSAs
While stipends and on-site child care are growing as benefits, a flexible spending account (FSA) is still a more common option.
Many workplaces now offer both a health care and dependent care flexible spending account. With dependent care FSAs, you withhold a certain amount from your paycheck while also paying out of pocket. After you’ve paid for child care, you file a claim, with receipts, and you’re reimbursed later.
What makes this type of FSA so attractive is that it’s funded with pre-tax dollars, which reduces your taxable income.
Single tax filers and couples filing jointly can contribute up to $5,000 in the 2022 taxable year to a dependent care FSA, while married individuals filing separately can contribute up to $2,500.
Be careful to check what are considered covered expenses in your dependent care FSA. Don’t assume that educational costs like school tuition, tutoring, overnight camps and extracurricular activities like sports or music lessons are eligible.
The downside to FSAs is that usually they are “use it or lose it.” If you haven’t used all of the money in your account by the end of the year, you’ll forfeit it. However, because of the pandemic and resulting unused FSA money, the IRS relaxed its restrictions and allowed rollovers of FSA accounts for 2021-2022.
Remember, your FSA contributions will need to appear on your federal tax return, and you’ll need to re-enroll each year.
4. Start a Sinking Fund
Forty percent of our survey respondents said they have gone into debt because of the cost of child care. That’s a tough situation to be in.
One potential way to avoid debt is by creating a sinking fund, which is a relatively easy way to pay for a large expense over time. For example, you know your HVAC unit has a few years left on it. So you put aside $300 per month in savings to pay for it.
After two years — 24 months worth of saving $300 — you’ll have more than $7,000 to put toward a nice new HVAC. If you want to reduce the amount you put in the fund per month, plan further ahead and start saving sooner.
So, for child care, let’s say you expect to pay $700 per month in expenses. That comes to $8,400 over the course of a year. How much can you set aside now, before your little one arrives and/or it’s time to enroll, to ease those expenses later?
Even if it’s not the full monthly amount, you’ll reduce your financial burden (and related stress) with that monetary boost when the time comes. The key is planning ahead and, to the best of your ability, knowing what to expect when it comes to your eventual child care costs.
5. Consider the Opportunity Cost — and Adjust Accordingly
In our survey, parents reported having to make sometimes difficult sacrifices because of child care costs:
- 26% said they’ve had to move homes.
- 25% reported they’ve had to find a new home for their pet.
- 38% had taken a side hustle.
- 29% had cut back hours at work.
- 15% had taken on a second mortgage.
- 28% had borrowed money from a friend or family member.
Some of those are extreme measures. Hopefully, your choices are a little less difficult. That’s where your “opportunity cost” comes into play.
With opportunity cost, you’re basically asking yourself, “What else could I be doing with this money?”
If child care is about to be a huge priority in your life, it might be time to look around and determine if you’re spending your money in areas that aren’t as important. For example:
- Could you drop the gym membership and start working out from home?
- What other monthly memberships (e.g., streaming services, box subscriptions) could you give up?
- Could you cut back on eating out from four times a month to two?
- What other extracurriculars, like golf, spa visits or shopping trips can you reduce or eliminate?
- Is it time for a trade-in to possibly “downsize” a car payment?
These might be temporary sacrifices until you get other permanent options in place, like an FSA. The idea is, though, to prioritize spending in your life (a budget will help with that, too).
Take a look at your expenses, list out what’s most important — obviously starting with bills like shelter and food, then moving on to transportation, child care and so on.
After looking at that list as a whole, determine what isn’t as much of a priority as child care and how much of that spending you can put toward child care expenses.
6. Look for Tax Credits
If you’re a new or soon-to-be parent, make sure you stay in tune with the available tax credits.
In 2021, many parents saw a nice bump in income from the American Rescue Act’s expanded child tax credit, which provided a total credit of $3,600 to parents with children younger than 6 and $3,000 to parents of children ages 6-17. Half of those payments were made in monthly installments from July to December of 2021, while the remaining half were paid as a credit on tax returns in 2022.
Another lesser-known but still useful tax option is the child and dependent care tax credit. If you’re paying someone to take care of your kids while you work, you might be eligible, depending on factors like the age of your children and your income. To see if you qualify for the child and dependent care credit, visit the IRS website.
Tax laws may change from year to year, so make sure you are up to speed on any benefits that might help you make child care more affordable.