Effectively using freed up Daycare dollars

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The cost of daycare for preschool age children can be one of the most significant expenses parents face. According to information collected in 2005 by the National Association of Child Care Resource and Referral Agencies, a family with a 4 year old child could pay average prices of between $3,016 and $9,628 a year for center-based child care. I pay close to $15,000 a year as I live in a metro area and my child’s daycare is near where I work. While childcare expenses may be unavoidable in two-income households, it can represent a significant increase in discretionary income once the child begins elementary school. Public elementary schools are normally government funded (thanks to your tax dollars) and so you lower or no tuition fees. You will ancillary costs like clothing, books, food etc, but even then this is much cheaper than daycare.

This is situation I will soon be facing and so did some research into this topic. Apart from blowing these funds on unnecessary discretionary expenses, here are some ways to use the freed up money wisely and more effectively:

  • Pay off or dramatically increase the payments on any outstanding credit card or other high interest rate debt
  • Consider beginning an investment program using the money previously spent on childcare once your child begins elementary school. There are a number of investment opportunities available that also offer tax advantages while you accumulate funds to help pay future education expenses. 529 programs are a good start
  • Put it in your 401K or retirement account. If you qualify you can start a Roth IRA
  • Create or increase your emergency fund using the additional dollars. Especially with kids, you never know what emergencies could arise and in the event of a job loss, having a larger emergency fund will allay some stress.
  • Increase your life insurance. As kids get older, so do you. So to ensure your family does not suffer financially in the event of a tragedy, make sure you have sufficient life insurance
  • Invest in the stock market directly via mutual or exchange traded funds. A number of people put off investing in the markets because they don’t have sufficient funds to do so with all the other expenses they have to deal with. This should no longer be an excuse. You only need $2,000 to start investing so now is a good time as any to start.

You were able to manage without these extra funds while your kid was in daycare, so there is no reason why you should miss these funds now. Use them wisely rather than fritter them away.

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[…] working parents are well aware they can claim the child and dependent care credit to help cover day care expenses for the kids. But don’t forget about day camp costs during summer. When school’s out, […]

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