Goodbye, Daycare Bills: How to Adjust Your Financial Plan When Significant Spending Changes Happen

Financial Planning

 Ranie Verby By: Ranie Verby

If you have kids under the age of 5, go ahead and bookmark this article for a later time and walk away. I mean it. Go hold your little one, smell that new baby smell, snuggle with your toddler, read to them. 

Someday, when they are registered for kindergarten, you can come back to this topic. Because for now, daycare costs are a means to an end (that end most likely being MOM’s career), and that is absolutely okay.  

Alright, now that it’s just us veteran parents here—we can brag about that Kindergarten Pay Raise! You officially get to drop an expense of anywhere between $1k and $5k a month, depending on number of kids, geography, and choices of care types.  

This financial burden can be an incredible strain, but somehow, we’ve all made it work. This is a unique situation. Other than paying off your mortgage or student loan, it’s potentially the most significant drop in expenses that most of us will experience.  

Now that this monthly expense is gone, or more likely, substantially reduced (we still have after-school care to consider, because school ends at 3 pm and most jobs, um, do not), it’s important to give some attention to how to reallocate these funds.  

If you are not intentional with this goal, what could be extra savings will quickly evaporate into lifestyle creep! In this article, we’ll outline important steps to take to make sure you take advantage of this “pay raise” and set yourself and your family up for financial success. 

By the way, these steps don’t just apply to the Kindergarten Pay Raise! That may be the freshest financial transition in my mind and life, but if you’ve faced any of these “raises” or something similar lately, keep reading:  

  • You’re an empty nester now: The kids have flown the coop entirely now, so suddenly that grocery bill is slashed, and you’re not being nickel-and-dimed to death every time they turn around. (Seriously, how many times have you heard “Hey Mom, got 20 bucks?”)  
  • Bye-bye, home mortgage: This is a biggie. That substantial payment that’s been hitting your monthly budget for years now is gone.  

Let’s dive in to the strategies we suggest so you can avoid the financial headache down the road:  

Evaluate Your Budget 

The first step toward financial reorganization is understanding your current budget. With the end of daycare expenses, you’ll have a better grasp of your disposable income.  You can use Plancorp’s cash flow worksheet as a starting point.

It’s likely that over these years you’ve already noticed some reallocation of funds, as that monthly Amazon subscription for diapers and wipes was finally cancelled, but you had to upgrade to a minivan, so…take some time to lay things out again and get clear on your spending.  

Remember to count new or continuing expenses, like after-school care and new sports or other extracurriculars like dance & gymnastics classes... these add up fast! It’s best to be realistic with yourself here and err on the side of including all of your expenses with even a little cushion.  

If you’re overly optimistic, you’ll end up with a savings goal that you won’t actually be able to meet, which can cause some psychological stress and ultimately erode your confidence in financial decisions.   

Bump Up Your Retirement Savings 

Many companies offer an auto-increase option for your 401(k), so even if you start small, your contributions will increase by 1% annually, an almost unnoticeable change to your cash flow.  

This is a great time to get some extra bang for your buck on those daycare dollars. You can contribute $1,000 more to your 401(k) each, and because the funds come out pre-tax, it will reduce your paycheck by much less—around $700 (assuming a 25% federal/5% state tax bracket).  

Just make sure you keep contribution limits in mind!  

Start a Savings Plan 

You might already be maxing out your retirement savings, or you might not yet have topped up your emergency fund for the increased monthly spending for the whole family.  

This is a good time to consider diverting the money previously spent on daycare into a dedicated savings account. This could be for an emergency fund, college savings for your child, or even a special family vacation.  

Automating these savings can ensure you consistently set aside funds—so if daycare was on autopay, this savings can be too!  

529 plans are great options for reallocating these funds, but remember to put your own oxygen mask on first! Saving first into your retirement and taxable accounts to meet your goals is incredibly important. 

Plan for School-Related Expenses 

Kindergarten may come with its own set of costs, such as school supplies, field trips, or uniforms. Try to have a plan in place for these so it doesn’t derail your savings goals.  

If your budget seems like it would allow for $2,000 of monthly savings now, consider putting $200 of that into a regular high yield savings account for easy access, and the rest over into your brokerage or retirement accounts.  

Review Your Insurance Policies 

You may be like most people and elect the same insurance coverage from year to year. Now is a good time to review your family’s health insurance specifically, and consider potentially moving to a High Deductible Health Plan (HDHP) which allows you to fund a Health Savings Account (HSA) for the entire family.  

HSA funds are triple-tax advantaged – they are pretax contributions, growth on the accounts is tax deferred, and if utilized for qualified medical expenses, the growth is able to be taken out tax-free! In 2024, families can contribute up to $8,300 to a Health Savings Account.  

If one parent has separate insurance, they can still contribute their individual maximum to their own HSA account, and these funds can be utilized for the entire family.  

Explore Tax Benefits 

Ensure you’re taking full advantage of any tax benefits associated with having a school-aged child. This might include deductions for educational expenses or contributions to specific savings accounts.  

Monitor and Adjust as Needed 

As always, be prepared to continually monitor and adjust your budget as needed. Life with kids is nothing if not unpredictable, and new expenses may arise.  

Regularly reviewing your finances will enable you to stay on top of your savings goals and make necessary adjustments. 

Transitioning your child from daycare to kindergarten is an exciting time that brings both emotional and financial changes. By taking proactive steps to manage your finances, you can make the most of the end of daycare costs and ensure a stable financial future for your family.  

Curious if your financial plan is on the right track? Our easy and free 2-minute analysis will provide instant results in 4 key areas of your finances, offer curated resources tailored to you, and suggest if it might be time to partner with a pro and achieve total wealth alignment.

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Ranie is a native of Marion, Illinois and still considers herself a small-town girl. She moved to St. Louis in 2002 for an internship and returned immediately after completing graduate school and her CPA exam in 2003. Ranie joins Plancorp with over 17 years of experience in the accounting and finance industries. Ranie is a deep relationship builder and has a passion for building community through relationships. More »

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