(No. 027)
Straight to the Point
- Is financial independence possible with childcare costs?
- A typical household with typical expenses can reach FI (at 102 years old).
- Childcare costs can make it impossible to reach FI on a median household income.
- A typical household on a tight budget can reach FI by 55.
- A dual income household can reach FI by 40.
- A dual income household with extra costs including childcare can reach FI by 55.
Summary of Findings
If you don’t like the numbers and assumptions used in this post, then an embedded (+ downloadable) spreadsheet / calculator is at the end for you to play around with.
Is FI just a dream with childcare costs?
We’ve got two young boys, a two-year old and a two-month old.
Up to now, we’ve been very fortunate to have my mother-in-law provide us with free childcare. I’ve mentioned it before, she is in her 70s yet is willing and wants to travel 4+ hours one way on public transport to see her grand children and help us out for a couple of days at a time.
She’s just wonderful. In fact, this is the order of who CFC One prefers most:
- Gran
- Mrs. CFC
- Me
Although, with me on paternity leave, I think I’ve taken Mrs. CFC’s position 🙂
With little CFC Two in the picture and as much as gran wants to help us, the reality is that she’s done more than enough and needs a well deserved break. As a result, we’ve been looking into childcare.
In the UK, there is up to 30 hours of free childcare each week based on the following three conditions:
- child is between three and four years old.
- both parents are working (or the sole parent is working in a lone-parent family), and
- each parent earns at least the equivalent of 16 hours a week at the national minimum or living wage, and earns less than £100,000 a year.
As a result, it is unlikely for a typical household to need to pay for childcare for a child older than two.
Younger than two remains an issue and would apply to us.
Having researched various option, we are currently looking at potential childcare costs of between £15,000 to £25,000 per annum from next year.
This has made me think: is financial independence just a cruel tease for people with childcare costs?
Barriers to entry
It should go without saying that not everyone can reach financial independence or have the luxury of the option to retire early. However, there have been posts and comments to suggest that anyone can do it if they put their minds to it.
Absolute BS.
Comments like that just show how it can be all too easy to live in a bubble and forget how lucky we are.
If we were to earn a median gross income of full-time employees of £29,588 per year (£569pw x 52), that would still place us within the top 2% of the richest in the word.
Or if that’s too abstract, a household income net of that amount (£23,657) means that 72% of the UK’s population are earning less than this. The graph below from the Institute of Fiscal Studies represents this. [1]
The red bar is the position of everyone earning a net income of £23,657. Along the x-axis (horizontal line) is the weekly amount. Along the y-axis (vertical line) is the number of people.
Just think about those two points for a second…
The reality, as I will illustrate, is that despite this relative wealth, it is still very difficult to reach financial independence, even before factoring in any childcare costs.
Things get a lot more interesting once childcare costs are considered.
It’s not impossible, but be prepared for some big lifestyle changes and be ready to roll up your sleeves. You’re in for what will feel like a long ride!
So, given our relative high incomes, what chances do the rest of the 98% of the world have?
To be able to even contemplate early retirement is a luxury and a privilege some forget.
The ‘Typical’ Household (example 1)
All is not lost if you’re earning the median income or below. It is still possible to hold onto your dreams. You might still be able to retire early, but maybe not as early as you hope. If not, by making some lifestyle changes, at least you’d be able to retire at a reasonable age with decent pension pot.
Lets see how…
The Office of National Statistics (ONS) show that the median household disposable income (after tax and National Insurance) is £28,400 for financial year ending 2018.
The ONS also show that the average household size in 2017 was 2.4.
This suggests that although the UK median personal income was £29,588, once you factor in household income, the average income for each person in the house drops significantly.
There could be a number of reasons for this. One could simply be an unemployed adult in the home or just as likely, the presence of children meaning that one parent needs to reduce their work hours.
In 2017, 35% of mothers who are with young children were not in employment at all.
Note: this is not a post about the pros and cons of childcare vs stay-at-home parenting. That’s an entirely different discussion.
With the above data to provide a bit of context, this is what a typical household spends for financial year ending 2018 according to the ONS:
What initially struck me with the above data was the really low housing costs. However, this does NOT include mortgage and:
Expenditure is averaged across all households including those reporting nil expenditure on a specific item so that all households are included when calculating both rent and mortgage expenditure. – ONS, 2019
As a result, for the purpose of this exercise, I have used the average weekly mortgage payment by mortgage holders of £156.50. This figure is tucked away in the report.
For completeness, the rental figure in the report is at £107.80 per week. However, I have used the mortgage amount to be more conservative in my calculations.
Assumptions
- Annual After Tax Income of £28,400
- Annual pay rise of 2% (I’m being conservative, but if you’re in the public sector, this is rather generous!)
- Inflation at 2%
- Investment growth rate at 7%
- Safe withdrawal rate of 3.5%
- Income starts at the age of 25 with zero net-worth. Yup, I’ve given them a few years grace to get their sh*t together!
- No childcare costs.
| Annual After Tax Household Income | £28,400 |
| Annual Pay Rise | 2.0% |
| Inflation | 2.0% |
| Investment Growth Rate | 7.0% |
| Safe Withdrawal Rate | 3.5% |
| AGE | 25 |
| INCOME | |
| Annual Income | £28,400 |
| Monthly Income | £2,367 |
| EXPENSES (monthly) | |
| Transport Total | £323 |
| Operation of Personal Transport | £133 |
| Purchase of Vehicles | £112 |
| Transport Services | £79 |
| Housing Total | £880 |
| Rent / Mortgage | £626 |
| Gas and Electricity | £90 |
| Water and Service Charges | £37 |
| Council Tax | £94 |
| Repairs | £33 |
| Communication | £72 |
| Groceries | £242 |
| Household Goods | £163 |
| Clothing | £97 |
| Eating Out | £155 |
| Recreation | £298 |
| Other | £59 |
| Annual Expenses | £27,482 |
| Monthly Expenses | £2,290 |
Results
A typical household with typical expenses will NOT reach financial independence before 60. In fact, at 60, they have only just reach Tiny FI, 10% of the way towards financial independence.
They will need to work into their old age and even the state pension (if one still exists by then) would not be enough to save them.
‘Typical’ Household with Childcare Costs (example 2)
The last scenario does not factor in childcare costs. Lets see what would happen by adding this in.
Assumption
- Same income as above.
- A one child household spends an average of £122.46 per week on childcare.
This amount has been added to “Other” expenses.
Granted, this cost will be gone once the child no longer needs childcare, but I’ve kept them going in any case. This is to factor in saving for their education and other dependant costs.
| Annual After Tax Household Income | £28,400 |
| Annual Pay Rise | 2.0% |
| Inflation | 2.0% |
| Investment Growth Rate | 7.0% |
| Safe Withdrawal Rate | 3.5% |
| AGE | 25 |
| INCOME | |
| Annual Income | £28,400 |
| Monthly Income | £2,367 |
| EXPENSES (monthly) | |
| Transport Total | £323 |
| Operation of Personal Transport | £133 |
| Purchase of Vehicles | £112 |
| Transport Services | £79 |
| Housing Total | £880 |
| Rent / Mortgage | £626 |
| Gas and Electricity | £90 |
| Water and Service Charges | £37 |
| Council Tax | £94 |
| Repairs | £33 |
| Communication | £72 |
| Groceries | £242 |
| Household Goods | £163 |
| Clothing | £97 |
| Eating Out | £155 |
| Recreation | £298 |
| Other + Childcare | £549 |
| Annual Expenses | £33,362 |
| Monthly Expenses | £2,780 |
Results
A typical family with typical expenses AND childcare costs will NOT reach financial independence before 60. In fact, the numbers are pretty depressing.
This is even with relatively low childcare costs.
They will need to drastically increase their income or reduce their costs.
This example is purely done for illustrative purposes. The likelihood is that with free or subsidised childcare, both parents are likely to still be in work so their household income could be far higher.
A single parent would seriously struggle based on these numbers, but I have not included benefits.
These numbers are simply not sustainable.
Financial Independence by 50 Household (example 3)
Lets put this household on a budget to get to them to FI.
Assumptions
- No car finance.
- Reduced non-essential expenses.
- Still provides a small eating out and recreation budget.
- No childcare costs.
| Annual After Tax Household Income | £28,400 |
| Annual Pay Rise | 2.0% |
| Inflation | 2.0% |
| Investment Growth Rate | 7.0% |
| Safe Withdrawal Rate | 3.5% |
| AGE | 25 |
| INCOME | |
| Annual Income | £28,400 |
| Monthly Income | £2,367 |
| EXPENSES (monthly) | |
| Transport Total | £133 |
| Operation of Personal Transport | £133 |
| Purchase of Vehicles | £0 |
| Transport Services | £0 |
| Housing Total | £880 |
| Rent / Mortgage | £626 |
| Gas and Electricity | £90 |
| Water and Service Charges | £37 |
| Council Tax | £94 |
| Repairs | £33 |
| Communication | £50 |
| Groceries | £242 |
| Household Goods | £50 |
| Clothing | £25 |
| Eating Out | £50 |
| Recreation | £25 |
| Other | £50 |
| Annual Expenses | £18,067 |
| Monthly Expenses | £1,506 |
Results
This family will reach FI by 50 with a net-worth of £837k.
By 60, they are close to Fat FI with a net-worth of £1.9 million (assumes they choose to keep working once FI).
Financial Independence by 40 Household (example 4)
Lets give this household dual income by using the median income of an individual in 2017 (slightly reduced to be more conservative).
Assumptions
- Same expenses as FI by 50 household.
- Dual income family with an annual disposable income of £40,760, i.e. each person earning about £25k before tax.
| Annual After Tax Household Income | £40,760 |
| Annual Pay Rise | 2.0% |
| Inflation | 2.0% |
| Investment Growth Rate | 7.0% |
| Safe Withdrawal Rate | 3.5% |
| AGE | 25 |
| INCOME | |
| Annual Income | £40,760 |
| Monthly Income | £3,397 |
| EXPENSES (monthly) | |
| Transport Total | £133 |
| Operation of Personal Transport | £133 |
| Purchase of Vehicles | £0 |
| Transport Services | £0 |
| Housing Total | £880 |
| Rent / Mortgage | £626 |
| Gas and Electricity | £90 |
| Water and Service Charges | £37 |
| Council Tax | £94 |
| Repairs | £33 |
| Communication | £50 |
| Groceries | £242 |
| Household Goods | £50 |
| Clothing | £25 |
| Eating Out | £50 |
| Recreation | £25 |
| Other | £50 |
| Annual Expenses | £18,067 |
| Monthly Expenses | £1,506 |
Results
This family will reach FI by 40 with a net-worth of £766k.
By 60, they are well on the way to Filthy FI with a net-worth of £4.2 million (assumes they choose to keep working once FI).
Financial Independence with Childcare Costs (example 5)
Finally, lets see what happens when we give the FI by 40 household child care costs to contend with plus other additional costs.
Assumptions
- Same expenses as FI by 40 household except: increased groceries, clothing and housing costs.
- Same income as FI by 40 household.
| Annual After Tax Household Income | £40,760 |
| Annual Pay Rise | 2.0% |
| Inflation | 2.0% |
| Investment Growth Rate | 7.0% |
| Safe Withdrawal Rate | 3.5% |
| AGE | 25 |
| INCOME | |
| Annual Income | £40,760 |
| Monthly Income | £3,397 |
| EXPENSES (monthly) | |
| Transport Total | £133 |
| Operation of Personal Transport | £133 |
| Purchase of Vehicles | £0 |
| Transport Services | £0 |
| Housing Total | £1,104 |
| Rent / Mortgage | £850 |
| Gas and Electricity | £90 |
| Water and Service Charges | £37 |
| Council Tax | £94 |
| Repairs | £33 |
| Communication | £50 |
| Groceries | £400 |
| Household Goods | £50 |
| Clothing | £50 |
| Eating Out | £50 |
| Recreation | £25 |
| Other + Childcare | £549 |
| Annual Expenses | £28,932 |
| Monthly Expenses | £2,411 |
Results
This family will reach FI by 55 with a net-worth of £1.4m.
By 60, they will have a net-worth of around £2.2m and is FI+ (assumes they choose to keep working once FI).
Don’t despair
The point of this exercise is to show that not everyone can reach FI by being ‘typical’.
If you need to pay for childcare on a median household income, then you can pretty much kiss goodbye to the idea of retiring early. At least in the early days until the kids are off to school or you earn more.
With moderate incomes, it is still possible to retire by 50 if that’s what you choose.
Retiring by 40 is absolutely possible with dual income and no childcare costs.
I know some people time their family planning to be able to make use of the government free childcare allowance, or move closer to grandparents. It shouldn’t be the case, but that is the practical financial reality.
Now, I’m not saying don’t have children.
Nor am I saying f*ck it and give up on the idea of financial independence altogether.
What I am saying is that childcare costs absolutely matter when it comes to the likelihood of achieving financial independence early. It can either slow you down or make the dream even more difficult for most people. It is better to go into this knowing what to expect and plan for it.
As for those of us earning more than the median income and also dreaming of having the option to retire early. What’s stopping you? Start building a better future for your family.
Even if the numbers are stacked against you, improving skills in budgeting, increasing your earning potential and avoiding lifestyle inflation will still provide your family with much better odds of succeeding.
Also, for those young enough who are reading this. Don’t forget that it’s not a binary decision: kids or no kids. Another option is to plan ahead, start the journey towards financial independence early and have kids once FI. [2]
Just remember to factor in the extra expenses for when older into the FI calculations if having kids later!
What do you make of all this?
How are you managing your childcare costs?
[1] Updated 03/05/18 – correction. Figure originally used were gross instead of net as required by the Institute for Fiscal Studies website. Thank you to Indeedably.
[2] Updated 16/05/18 – thank you to @MatthewFIREuk for reminding me of this point (I’m not jealous of how young he is at all).
Further Reading
Investing for Our Children: Will it Ruin or Motivate Them?
My Property Investment Journey – Part 1: Making £100k with Lodgers
FI vs. Childcare Costs Calculator
- Fill in the white boxes only.
- If you accidentally mess up the formulas, then just refresh the page.
- It’s probably much easier if you downloaded your own copy and change it how you want.
Humans of FI
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Read more…
- Full Circle – 12 February 2023
- Financial Origin – 20 February 2021
- Our Numbers – Tax Year 2019/2020 – 16 February 2021
This is very similar to a post i had been half way writing.
Childcare is a killer and in our case it had cost us a lot (we went down the nanny route)
I am now thinking of FIRE/stay at home dad for me as i don’t want to work so hard to pay the £1600 per month children’s nursery bills.
We have planned and saved for it but if you haven’t then kids can be a real cashflow stress!
It makes me realise why people move back home to be close to family- convenient reliable and free childcare is worth thousands!
I’ve heard stories about how expensive childcare was, but there was a part of me which thought there must be a tad bit of exaggeration in it. Having recently properly looked into it, I am actually shocked by the numbers involved.
£1,600pm is a lot of money regardless of how much anyone earns. I don’t blame you for considering pulling the FIRE trigger or becoming a SAHD.
I totally get your point about moving closer to family. No stranger will love your child more than your own family.
I look forward to reading your post and will link it to this one to provide another viewpoint.
Extensive and detailed research.
Childcare costs is one of the reasons, and probably the mainly one, why we keep postponing having kids, as we don’t have any member of our families living currently in the UK to help out, and no future plans neither. I’m aiming to become FI by the age of 40-45, but childcare costs will certainly increase that number by more than I was actually expecting.
Thanks for bringing down some common sense to the FIRE earth.
Thanks Tony.
The numbers and assumptions could be disputed. Some could say the assumptions are unrealistic whilst others might say the expenses don’t match their own.
I think whichever way it is looked at, childcare costs are a real obstacle to FIRE for anyone on a median household income.
I also know that I have readers living in countries with lower earnings than this even after factoring in different living costs. So as a FIRE writer, I feel I owe it to all my readers to be more considerate.
It is always a balance between being financially responsible by postponing kids vs. delaying it too long and age is working against you. I’m in my 30s and I find raising young kids tiring. I can’t imagine how much harder it would if it I was in my 40s or 50s doing this.
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I must confess I skimmed this article. However, yes FI with childcare costs is possible. My son arrived later in my life ( I was 42). This coincided with being made redundant (apparently it was a coincidence). I’d been working that job for 18 years so the severance was large enough for me to take a year off at home with my son.When my son was 18 months I returned to the workforce and he went to full time nursery which cost about £800 a month. My son now goes to school and he has wraparound care with a child minder before and after school which cost about £300 a month. Having a child later in life is tiring but it has meant that I already had a secure financial position. We also sacrifice by not working overtime and working jobs that allow us to spend time with our son. I’m now FI but continue to work as the job pays well and is local so I get to spend lots of time with my family. It is nice having the option to leave at any time though.
Hi David. It’s reassuring to read about someone who managed to reach FI with childcare costs to contend with.
My post was intended to be more considerate and realistic as to what a typical household with a median income need to deal with in regards to day-today expenses when dreaming about the idea of financial independence. I don’t intend for the article to sound defeatist or pessimistic. Just that sometimes going into this eyes wide open will allow for a better chance of success, because for most, it won’t be easy.
I’m am happy that FI has allowed you to spend more time with your family. It is definitely one of the top motivations for me to pursue it myself.
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