Should I Adopt? The Financial Guide
Five financial questions to ask before adopting a child.
|Written by Tom Yeung, CFA | CDFA|
Investment Advisor & Fund Manager, Jurnex Financial Advisors
As a financial advisor, I’m often asked: “should I adopt?”
That’s because adopting a child is also one of the most significant financial decisions you can make in your life. Not only must you consider your personal emotions. You also have to consider how you’ll provide for your new family.
But when it comes to asking yourself, “should I adopt,” it’s hard to know where to begin. There’s a lot of information out there — everything from lengthy parenting books to brief how-to guides. And none of them seem to answer the critical questions you want to know.
That’s because most articles focus on the EMOTIONAL aspects of adopting a kid. In this article, we’ll focus on the FINANCIAL aspects instead.
Adoption is also a financial decision
If you’re reading this article, you’re probably already emotionally set on adopting a child. It’s the practical side that needs answering: can you afford a kid, what changes will you have to make, and can you make them?
These are all important questions to answer. So as always, I strongly suggest you reach out to an investment pro before making a final decision. It helps so much to find someone who understands how important adopting a child is to you.
But to get you started, I’d like to cover the five critical questions to ask yourself before adopting a kid. Because once you can answer “CAN I afford to adopt,” the next item of “SHOULD I adopt” tends to solve itself.
“Should I adopt?” The five questions to ask
1. Can you afford to adopt?
Everyone knows that raising children can be expensive. But without specific numbers, it’s like trying to buy a house without knowing the sale price. While this might be fine for smaller purchases, you shouldn’t use a “let’s see what happens” approach when adopting a child.
How much extra should you budget?
The cost of raising a child depends on three essential items:
- Your current lifestyle
- Where you live
- Private or public education
Each family will have a different budget.
To start, though, let’s use some averages. According to Fidelity Investments, the median child costs roughly $233,000 to raise to age 18 before education costs. That’s an extra $13,000 per year.
Half of that comes from additional housing needs. Families upsize their homes, and many also relocate to better school districts. All this adds to the costs of housing. On average, families with children spend an additional $540 per month.
If you live in a higher-cost city such as New York, Chicago or Washington DC, expect to pay closer to $700-$900 per month in additional housing expenses.
Learn more about How Much House Can I Afford?
Do you have $20,000 per year to spare?
Of course, no one is truly average. To be safe, I recommend all my clients have demonstrated having at least $20,000 in disposable income when asking themselves, “should I adopt.”
By demonstrating, I don’t mean PLANNING to have an extra $20,000. I suggest you should ALREADY be saving that money.
Fortunately, most people looking to adopt are already in a strong financial position. This extra check makes sure you’re truly ready.
Will you be sending your child to private school?
Private-school education can more than double the cost of raising a child. The average private school tuition costs around $10,676 per year, while the average 4-year college costs around $32,410 per year. Some universities such as Columbia and NYU cost as much as $75,000 once you include room and board.
In total, private school and college tuition can cost upwards of $400,000 over a child’s lifetime.
Will you change your lifestyle?
Often, people equate parenthood with lower costs of living. After all, you’ll be traveling and eating out a lot less. However, you might find yourself spending far more in certain areas.
- Childcare. Dual-income families often have to hire professional nannies or caretakers
- Clothing/Toys/Entertainment. Children outgrow clothing and toys surprisingly quickly.
- Health Insurance. Check with your employer and state to get health insurance rates.
- Life and Disability Insurance. New parents should consider insurance to guarantee income for the family.
All these are factors to consider when calculating how much a child will cost to raise.
2. Do you have enough financial cushion?
When you’re asking yourself, “should I adopt?” you need to consider your financial cushion too. In other words, even if you can afford a child, can you afford the emergencies that might come with it?
Do you have 3-6 months of emergency savings?
Adopting a child adds a series of unknowns to having a kid. Many foster children (especially those coming from abroad) don’t have full medical records, so you’re often left guessing about what to expect.
That’s why I recommend all adoptive parents have at least three to six months of emergency savings in cash. You want to prepare for anything.
Do credit cards count as a financial cushion?
Credit cards can be a great source of emergency cash for those with good credit scores. As long as you’re guaranteed access to the money, you can count 2-3 months of expenses towards credit cards.
However, you should avoid relying on credit cards for more than three months of expenses. That’s because even if your limit allows it, the interest you will pay on outstanding balances will quickly weigh on your finances.
Common emergencies to prepare for
When emergencies happen, you want enough cash to avoid dipping into your long-term savings.
- Medical emergencies. Kids play hard. 40% of girls and 50% of boys break or fracture a bone at least once before age 15.
- Loss of job. Losing a job is hard enough. Doing it with a kid can be even worse unless you have enough savings to bridge short-term gaps.
- One-time expense (car/house repair). Unanticipated repairs and upkeep might be the least of your worries with a new child, but these are expenses you have to consider
3. Do you have a stable career?
For prospective parents, it’s universally useful to have a stable job, regardless of whether you’re adopting or having a biological child. However, adoptive parents face an additional set of financial hurdles
Approval by the adoption agency
The US Children’s Bureau requires adoption agencies to conduct home studies of prospective parents’ house. These studies test a family’s income and financial situation for adequacy. The bar for adoptive parents is set far higher than that of biological parents.
For adoptions, many parents first consult a qualified financial advisor to create a financial plan. This can help smooth the process of demonstrating financial adequacy.
Moving for work becomes more difficult
Most states require a caseworker visit and supervise the child until the court finalizes the adoption. This process can take up to a year, depending on the jurisdiction. During this time, if you want to relocate to a different state, you’ll have to restart the adoption and follow the Interstate Compact on the Placement of Children (ICPC)
Adopting an older child can also mean he or she might already have strong life preferences. That often makes it more challenging to move away from existing friends, schools, and climates.
4. Do you have a parenting plan?
Before you adopt, you should also have a good parenting plan in place. These plans go hand-in-hand with your financial plan.
Do you have access to adoptive leave?
By federal law, all employers must provide at least 12 weeks of unpaid, job-protected leave for new parents from BOTH births and adoptions.
However, when it comes to additional maternal or paternal leave, many employers don’t offer equivalent policies for birth-parents and adopted-parents. And as any parent knows, 12 weeks isn’t enough to bond with a child.
So before you adopt, make sure to check with your employer to see how much access you have to adoptive parenting leave. If you need additional leave, you’ll have to factor lost wage into your financial plan too.
Will one parent become a part-time or full-time parent?
From a financial perspective, the decision to leave the workforce “costs” far more than the cash spent raising a child. That’s because you’re also forgoing wages you could have earned. In the world of economics, that’s known as an “opportunity cost.”
You would think an individual earning $100,000 per year will forego at least $1.8 million over 18 years of parenthood. In actuality, the number is closer to $2.5 million once you factor in wage growth and compound interest on savings.
Will you have to delay retirement?
Adoptive parents tend to be older than those having biological children. According to the CDC (Center for Disease Control and Prevention), around half of all adoptive parents are between 40 and 44 years old when they adopt. And the later you adopt, the older you will be by the time your child finishes college.
Top reasons for delaying retirement.
- Maintaining income.
- Paying for college.
- Delaying a move to a retirement home.
5. Are you ready to make the financial commitment?
When asking yourself, “should I adopt,” you should also ask if you and your partner are ready to make the necessary tradeoffs.
I know this sounds like tough love. But it’s important to fully commit.
When you adopt a child, you’re GAINING a new soul in your family. But you’re also LOSING some freedoms because of the responsibilities and commitments you have to make.
Costs of adoption
A survey by the Adoptive Families Magazine found the average adoption costs $43,000. While this might seem high, adoption fees also include payment to help keep adoption centers running.
The costs of biological births, on the other hand, are generally covered by health insurance. So parents looking to adopt must be aware of this additional financial cost.
Lower risk tolerance
Once you adopt a child, your overall RISK TOLERANCE decreases.
Before, you might have been able to invest more aggressively. Families without kids have an easier time adjusting their lifestyle to rebuild lost savings. But with one or more children in your life, you have far less flexibility to cut spending. And that means focusing on less aggressive investments, which often leads to lower long-term returns.
Fewer work hours
There’s a famous saying that “time is money.” Put another way, there’s a tradeoff between leisure and work.
The moment you adopt a child, you have to be prepared to make an income tradeoff to spend more time with your kid. Many first-time parents try to spend only after-work hours with their young children. But as any experienced parent would tell you, you’ll probably want to spend MORE time. This is especially true for adopted children.
Promotions you may have considered just a year before suddenly become too time-consuming. Business travel suddenly looks rather unattractive.
Adoption is the RIGHT choice
Please don’t let all this dissuade you from adopting a child. The chances are very high that you’re financially prepared for adopting a child. With nearly 443,000 children in foster care, it’s almost unbelievable that people wouldn’t adopt!
And if this seems like a lot of information, don’t worry. The great news is that help is available. Consider talking to a qualified investment advisor about your adoption today. That’s because a great investment pro can help you analyze your finances and give you the confidence that you’re financially prepared for a new child in your life.
Where to find more resources
If you’re looking for even more investment tips, you’ve come to the right place.
That’s because I’ve helped invest client money for over a decade in the same old-fashioned way. And that’s to seek out great companies in great industries that can you can buy at a discount to their fair value. Sounds too simple to be true? Give me a call today, and I’ll show you that it’s still possible after all these years.
We are an independent registered investment advisor and asset manager. We have the securities backing of Charles Schwab, yet we retain our operational independence from any third party. This means you can have the confidence your money is safe with one of America’s best brokerages and still receive knowledge and advice from an independent firm focused on YOU.
Want to learn more?Book an Initial Meeting