Money, money and money.
While I was out prowling around on the web, I ran across this article. I found it interesting in an “if only” kinda way, but I’m really posting it for the benefit of the young cousins.
Start on your first $1 million at age 16
It's easier than you think to become a millionaire. The magic combo? Getting an early start saving and having the discipline not to raid the piggy bank.
By Scott Burns
Here's a simple recipe to become a millionaire:
* Work four summers, starting at age 16
* Save the income in a Roth IRA account
* Invest it in a simple, low-cost equity portfolio
* Simmer slowly for 47 years
* Serve ungarnished (and untaxed) at age 67
This is the first recipe in my new Small Change Millionaire Cookbook, an occasional series of columns with a single purpose -- demonstrating different ways small amounts of money can be turned into a large amount of money. Just as a mere 10 calories a day of additional food can pack on a pound a year, small change can become large amounts of money.
The good news is that money grows faster than fat. Calories don't have the benefit of compound annual growth.
Many people fail to diet because the end goal seems so far away. So it is with saving and investing: Most people fail because it is nearly inconceivable that a few dollars a day or a well-timed gift can be turned into that magical sum.
Fast-food millionaires
A million dollars. It has such a nice sound.
So let me show you how four summer jobs can become your first million.
Let's suppose that you are 16 years old, in high school, and willing to work. Let's also suppose that you can clear about $2,000 over the course of a summer, if only because a doting grandparent puts money in the Roth while you take your earnings to school. If you invest in a Roth IRA, it will grow, tax-free, for as long as you have the account. All withdrawals from the account after age 59 1/2 will be tax-free.
If your money is invested in common stocks and you achieve the average compound annual rate on large-capitalization U.S. stocks, 10.7%, your account will grow to $9,378 at the end of the fourth year. You will be 20 years old. Invested in the same way, with no additional savings, the account will grow to:
* $25,917 by the time you are 30
* $71,625 by the time you are 40
* $197,943 by the time you are 50
* $547,037 by the time you are 60
* And $1,114,423 by the time you are 67
And you will have started and finished all of your saving before turning age 21.
Worth the risk
Note that this plan does not require investment brilliance. It does depend on two things, an early start and tenacity. If you invested in small company stocks, whose long-term annual return clocks in at 12.5 percent annually, you could have much more money. (Try $2.4 million.) Similarly, you could diversify to reduce your risk and make your 47-year ride more comfortable. But you would do it at the expense of a somewhat lower return.
The "Yes, but" crew will be happy to tell you that $1 million isn't what it used to be. I can remember people telling me this in the '60s. It is as true now as it was then. Millionaires are, well, just dreadfully common.
Even so, the number of millionaires is relatively small. And being a millionaire is a better choice than being a pauper.
The same crew will be happy to tell you that the future won't repeat the past, that SARS, terrorism or some other misfortune will cripple the future, or that we will be crushed by a rising China. Similarly, an actuary might tell you that you have a substantial chance of being dead by 67.
Perhaps.
But so what?
All you've got to risk is four summers.
Start on your first $1 million at age 16
Last week my husband and curled up to watch the local news. Toward the end of the program, they covered some “new” statistics about the monetary value of a stay-at-home spouse/parent. (I have to admit, though, that they were not so PC - this was all about stay-at-home moms.) The study estimated that the salary for a full time mom should be over $100 grand. Both R-and I thought the figure over-generous. I believe there should be a reasonable equivalency, but that’s ridiculous. R-seemed less disturbed by the inflated salary than by the idea that the father (presuming he has a full-time job) doesn’t get some sort of valuation for his time spent parenting and tending the house.
We don’t see completely eye-to-eye on this issue. I do think that full-time parenting is an entirely different animal than the parenting that happens after work and on weekends. I know that’s not a popular opinion.
Before anyone jumps all over me about this, let me clarify. I believe it is absolutely possible for a working parent to be extremely invested in the welfare of his/her children. I believe it is possible for a working parent to create a healthy environment. I also believe that some working parents put the lion’s share of their non-working time and energy into active parenting. (This is most often the case when we are talking about a single parent. I think that the working parent in most “traditional” marriages does a hell of a lot less active parenting than he/she would have to do if both parents worked.)
I also believe that a stay-at-home parent can be darn near useless. There really are women (and men, I suppose) that sit on the sofa day after day, eating bon-bons and watching soaps while their children watch videos in another room. Of course such behavior would actually have negative value - this is a parasite in action.
On average, I think that most stay-at-homes contribute to the welfare of their families and do the best they can in a tough situation. I think that most working parents try to keep things balanced as they do the best they can in an equally tough situation. I’d like to see the “debate” end … and this report didn’t help.
I found the news story insulting. I’m not eager to be under-valued but I am also not interested in being patronized. I know that I have a found a suitable job for me. I also know that being a stay-at-home fits my particular strengths and weaknesses pretty well. I know that my work allows more flexibility than most paying careers. I know that there aren’t a lot paying jobs that offer so many opportunities for emotional reward. The few careers that do seem to have a similar emphasis - social work, teaching, counseling - aren’t big money makers either.
There’s an added benefit to my career choice: as my children mature, I have more time and energy to ease into pursuing another flexible, emotionally rewarding career in the form of my writing. I don’t expect to become rich from that either.
Fueled by my irkedness, I went looking for something that fits into the real world. Turns out I’m worth about $30,000 - though it sounds like it might be less than that, since my son is in school. I can get behind that.
What's a homemaker worth? The shocking truth
The value of a stay-at-home spouse is priceless in many ways, but don't kid yourself: In economic terms, running a household is worth far less than we've been told.
By Liz Pulliam Weston
We all know that a stay-at-home spouse can be invaluable, and the wide-ranging estimates of the real value of the arrangement reflect that knowledge.
Whether the figure is $90,000 or $125,000 or even $500,000, the numbers are meant to show how important is the unpaid work performed by a homemaker.
Unfortunately, the statistics are codswallop.
The economic value of a stay-at-home spouse is closer to $30,000 a year. Our society doesn’t place a high dollar value on a homemaker's work, and those who choose to stay home do so at their own economic peril.
No glamorous awards ceremony
How I wish this weren’t true. If it were up to me, the job of stay-at-home parent would come with retirement and health benefits, annual paid vacations and an award ceremony each spring to rival the Oscars.
Since you’ve yet to elect me Queen of the World, however, we’re stuck with the economic system we’ve got, and it does not work in favor of unpaid domestics.
The numbers that purport to show otherwise are flights of the author’s fancy. They’re typically constructed from the U.S. Bureau of Labor Statistics' average pay figures for a variety of occupations including:
* Child-care worker, $8.91 an hour
* Maid, $8.02 an hour
* Food preparation supervisor, $11.70 an hour
* Bookkeeper, $11.94 an hour
* Chauffeur, $8.67 an hour
The formula is simple. Figure out how many hours, on average, a homemaker performs each task, multiply those hours by the appropriate wage and come up with an impressive and completely overblown annual figure.
Economics and the real world
Sometimes they don’t even bother to determine working hours. Talk show host and investment adviser Ric Edelman decided that because mothers are constantly on call and perform all these functions, the appropriate figure was one that reflected the hourly rate for each of 17 occupations, performed simultaneously, 24 hours a day, seven days a week. That’s how he came up with an annual worth figure of more than $500,000.
That’s not the way the value of homemaker is determined in the real world, however. The economists who make these calculations -- for wrongful death suits, airplane crash settlements and insurance purposes -- recognize that while homemaking has economic value, it’s nowhere near the six-figure range.
The reality is that many homemakers don’t have the skills of, say, a professional bookkeeper, a licensed chauffeur or a recreational director, says economist Evan Schouten, vice president of the economic consulting firm Charles River Associates in Boston and an expert witness in many wrongful death trials.
Painful truth about payouts
And families who lose a stay-at-home spouse typically do not rush out to hire 17 professionals to take his or her place, let alone employ them 24/7. They may hire one or two people, usually for 50 hours a week or less, and pay them an hourly wage of $10 to $15.
That’s why the economic payout is typically less in wrongful death and other lawsuits when the victim is a stay-at-home spouse than when the victim is employed. The lifetime economic value of a female homemaker who dies at age 30 is currently about $300,000, Schouten said, based on statistics from a seminal study in this area, “The Dollar Value of Household Work.”
Compare that to a 30-year-old who makes the average white-collar wage of $19.86 an hour.
“The present value of her lost after-tax compensation,” Schouten said, “using conservative assumptions, likely exceeds $1 million.”
Insurance coverage takes a holiday
If you doubt the veracity of all this, just try to buy life or disability insurance on a stay-at-home spouse.
If you use the most inflated statistics as a guide, and multiply the annual figure by the 10 years of care until the kids are grown, you could come up with an insurance “need” of $5 million. But unless your insurance agent has extraordinary pull, you’re not going to get that coverage.
That’s because life insurers don’t want you taking out policies that have no economic basis. Their theory is that it becomes way too tempting to snuff an overinsured spouse.
(Interestingly, a high-income family with can generally justify a larger policy on a work-at-home spouse than a family with lower income, even though neither homemaker makes any money. Insurers presume those wealthier families will pay more for various replacement services, such as employing a nanny rather than using group day care.)
Getting disability insurance -- in any amount -- is just as tough. Without an income, disability insurers won’t write a policy, no matter how much a family would have to shell out to replace the unpaid services it would lose.
And if that weren't enough . . .
There are other significant costs to being a homemaker:
* Employment prospects decline. Your job skills become dated by the day, making it harder for you to re-enter the working world. Yes, raising children and running a household take a variety of skills but no, those skills don’t typically translate into high-paying jobs outside the home.
* Retirement savings stagnate. If you’re at home, you’re also not contributing to a workplace retirement plan or earning credit toward a pension plan or Social Security. That leaves you economically vulnerable if you ever divorce.
* Economic vulnerability increases. Two-income families also have a built-in safety net should they encounter layoffs or other economic setbacks.
Obviously, there’s far more to the decision to stay home than mere economics. Stay-at-home parents provide invaluable services and benefits to their families. Many women think the monetary and economic sacrifices are well worth it, which is one reason why the Bureau of Labor Statistics finds that 40% of mothers with children under 6 stay home. (Overall, 13% of the nation’s households include a stay-at-home spouse.)
Go forth and get your ducks in order
You should understand just what you’re giving up, though, in order to make a rational decision about whether to stay at home and for how long. You also should do what you can to make sure your finances, both short- and long-term, remain sound:
# Disaster-proof your finances. Pay off debt, contribute as much as possible to retirement funds and keep a hefty emergency fund. Single-income families typically should have at least six months’ living expenses in a safe, liquid account.
# Get insured. You almost certainly won’t be able to buy disability insurance for a stay-at-home spouse, but you should be able to get life insurance coverage -- and if you have children, you almost certainly need some. The younger your children are, says former insurance agent Catherine Gretta, corporate vice president for New York Life Insurance, the more insurance you need to cover their care. To determine how much insurance you should have, you can talk to an agent or use MSN Money’s Life Insurance Needs Estimator; increase the estimate of your current living expenses by the amount your family would need to pay for child care and housekeeping services.
# Make sure you have retirement savings in your own name. Your spouse can contribute up to $3,000 a year to an Individual Retirement Account for you. (You also can claim half your spouse’s Social Security benefit if you’re married for at least 10 years, and may be able claim a portion of his or her workplace retirement plans as well.)
# Consider working at least part-time once your children reach school age. You may lose much of your wages to the costs of working -- taxes, child care, commuting costs. (For more views on this subject, read " Second incomes: twice the work, half the return," and "Cost of being a stay-at-home mom: $1 million," on MSN Money. And try MSN Money's Second Income Calculator. ) Those losses, however, could be offset by other benefits, such as keeping your job skills current and being able to contribute to a retirement fund or earn pension credits.
What's a homemaker worth? The shocking truth
And here’s another tidbit that sort of drives things home.
Second incomes: twice the work, half the return
Take into account a host of job-related expenses like commuting and child care and second incomes can actually cost more than they produce.
By Dan Akst
Everyone knows that couples who might be prosperous on a single income can, by virtue of a second, live really, really well. That second income, even if relatively modest, can pay for fancy vacations, lots of restaurant dining and maybe even luxurious automobiles. That's obvious, right?
Well, no. If the second income is that of a neurosurgeon, great. But if, as is often the case, the second income is a lot smaller than the first, the sad truth is that it hardly makes any difference at all. Perhaps it makes some difference, to the extent that it lulls two people into spending more because they work so hard and, well, they make so much money. Take into account a host of job-related expenses and second incomes can actually cost more than they produce.
Some of the positives can’t be measured financially, of course. Employment gives a person a sense of self-fulfillment that he or she is contributing to a family’s well-being. The fact remains that the person who most often must choose between working at home or in an outside job is the woman in the house. By choosing not to work, a woman often times gets labeled as being on the “mommy track.” She gets pigeonholed by employers, loses out on career advancement and once she returns to the workforce, often doesn’t get promoted as quickly. It’s a tough tradeoff.
Taxes and child care
The main culprits for the financial failure of second incomes are a tax system that savagely penalizes second incomes and the high cost of quality child care. The result, among financially savvy couples with a single high wage-earner, is that spouses with much less earning power often stop working until the kids are in school. Those who stay on the job do so not for the money, but for the challenge and fulfillment they derive from work outside the home.
Of course, most couples where both spouses work do so because the second income really does make a big difference in their family's standard of living. Indeed, many work just to put food on the table. But for affluent couples whose partners have seriously unequal earning power, the cost of that second income often means the lower-paid partner is working for free.
For many, it doesn't pay
Debra Gendel, for instance, was a fashion editor married to a successful Los Angeles television executive. When she took a good hard look at the taxes she was paying, the cost of commuting, dry cleaning and child care, it began to dawn on her that her glamorous, well-paid job just wasn't paying well enough. She quit to stay home with her children.
"You really have to love your work and think you're doing a greater good for mankind," she says, acknowledging that she is fortunate to have the option to stay at home. She adds that her decision gave her husband's career a boost because he's now free to work longer and not worry about home matters that she can attend to. This is no mere rationale; there is evidence that executives with stay-at-home wives on average earn more than their colleagues in two-career households.
Gendel's case is far from isolated. Peggy Ruhlin, a financial planner and certified public accountant in Columbus, Ohio, found it necessary to relate some hard truths about second incomes to her clients. She cites the case of a highly paid executive whose wife worked for a government social work agency. Her position was consuming and paid less than $25,000 a year, but it was deeply satisfying because she was helping people in need. Ruhlin ran through the numbers and showed that the wife was taking home a grand total of $1,500 a year when all was said and done.
Driven into a higher tax bracket
How is that possible? First, her income pushed the couple from the 31% federal tax bracket into the 36% bracket. Add 8% in state and local taxes (although these are federally deductible) and nearly 8% of the woman's income for Social Security and Medicare taxes. The result? Taxes alone consumed half her earnings. (All brackets have been reduced because of the 2003 tax cuts, but the principal remains the same.)
Ruhlin says the Social Security cut was especially unkind because, on retirement, the wife will be entitled to the equivalent of half her husband's entitlement (he'll still get the full amount) even if she never worked at all. Her contributions from a relatively low-wage job would never entitle her to more on her own, and so her payments will never do her any good.
On top of all this were child care, commuting and other expenses. When the planner broke the news, the woman became teary-eyed. She started considering volunteer work with more flexible hours.
Many other women in similar situations choose to remain on the job, and more men are finding themselves in that spot, and making that choice, as well.
"It's a lifestyle decision," says Ronald Roge, a financial planner in Centereach, N.Y., who has often encountered the dual-income situation. "That's the softer side of it. Some people are just tired of staying home, or they get fulfillment from going to work."
Mounting costs
If you have children and a well-paid spouse, consider the costs of any job before you take one. This is not to say you shouldn't work. But why take a job unless you know what it really pays? When you discover that it pays nothing, you might decide to take a different one that is more fun or rewarding. Or you might decide not to take one at all.
"It's risky to automatically assume another income will balance the books or provide the wherewithal for a better life," writes Linda Kelley in “Two Incomes and Still Broke?” (Times Books, 1996). "For most families, there are monetary benefits, although not usually as many as expected if both partners work outside the home. For others, the effort is wasted in a flow of job expenses that devour the second income and leave nothing but a bewildered and angry couple arguing over where the extra money went."
Kelley and financial planners such as Ruhlin cite many obvious and not so obvious costs. Perhaps foremost among these is taxes. Changes in 2001 and 2003 eliminated much of the "marriage penalty," but a second income will always be taxed at a higher rate than the first.
And you'll have to pay Social Security taxes as well. In states with hefty income taxes (such as New York and California), this can mean that 40% to 50% of the second income goes to taxes.
"The United States tax system is a product of the 1930s and 1940s," says Edward J. McCaffery, a University of Southern California law professor whose book, “Taxing Women” (University of Chicago Press) argues that the tax system is biased against working women. "At that time the single-earner model was the norm for families -- men worked outside the home and women worked inside it. Tax policy decisions favored and rewarded this arrangement and made it difficult to be a two-earner family." He adds that, "Over time those biases have gotten worse."
But taxes are only the beginning of the story. Other major costs include:
Child care: If you plan on putting your kids in preschool anyway, don't count this. But if you need day care to work, deduct this from your earnings. The cost can range from $4,000 to $25,000 a year, and can easily wipe out whatever's left of a second income after taxes. Sue Sharp, a singer and voice teacher who has two children, says she gave up teaching when she realized she was "working just to pay for day care. It just was not worth it."
Commuting: Figure on about 30 cents a mile if you drive (to cover fuel, maintenance and wear and tear). That's $1,125 a year if your round-trip is 15 miles. And if you're figuring your hourly earnings, add in your time on the road.
Lunches: Many people eat breakfast out as well, and buy several cups of coffee or snacks during the day. At $6 daily (and you probably spend more), this costs $1,500 a year.
Other meals: Working couples probably eat out more, which can cost plenty compared to eating at home. Harried working couples are probably also likelier to give the kids money for lunch rather than a homemade sandwich. Put it down for another $1,000 or more.
Appearances: Business attire, dry cleaning and even the right kind of car fall into this category. It can run from $250 on up into many thousands of dollars. As a fashion editor, for example, Gendel needed a chic wardrobe that cost plenty. And if you're in sales or otherwise visit clients, driving up in a jalopy gives the wrong impression.
Other spending: Kelley says working couples, induced by guilt, often buy unnecessary things for their kids because they get so little time with them. Also, busy couples often don't have time to comparison shop. They frequently buy expensive takeout food or groceries from a high-priced convenience store instead of a cheaper supermarket. All these costly habits can be considered job-related expenses.
Cut your work-related costs
The really bad news about such major job-related expenses as taxes and child care is that, usually, you can't do much about them. On the other hand, many work-related costs can be reduced.
Bringing lunch to work can save a bundle, for instance. Self-employed people can use Keogh retirement accounts to shelter income from taxes, but on the other hand, the self-employed pay much higher Social Security taxes. Roge says spouses who work together in their own business can do themselves a big favor by paying one spouse only a nominal amount and funneling all the money through the other. It's legal, he says, and results in substantially lower taxes, since the optimal tax situation is to have a single, high-income earner.
Also on the bright side, discovering that a second income really doesn't contribute much financially can free a spouse to learn new skills, go back to school, pursue an unprofitable dream career or launch a home-based business that may pay little during the first few years. If you're going to work for free, after all, you might as well enjoy it.
Start on your first $1 million at age 16
It's easier than you think to become a millionaire. The magic combo? Getting an early start saving and having the discipline not to raid the piggy bank.
By Scott Burns
Here's a simple recipe to become a millionaire:
* Work four summers, starting at age 16
* Save the income in a Roth IRA account
* Invest it in a simple, low-cost equity portfolio
* Simmer slowly for 47 years
* Serve ungarnished (and untaxed) at age 67
This is the first recipe in my new Small Change Millionaire Cookbook, an occasional series of columns with a single purpose -- demonstrating different ways small amounts of money can be turned into a large amount of money. Just as a mere 10 calories a day of additional food can pack on a pound a year, small change can become large amounts of money.
The good news is that money grows faster than fat. Calories don't have the benefit of compound annual growth.
Many people fail to diet because the end goal seems so far away. So it is with saving and investing: Most people fail because it is nearly inconceivable that a few dollars a day or a well-timed gift can be turned into that magical sum.
Fast-food millionaires
A million dollars. It has such a nice sound.
So let me show you how four summer jobs can become your first million.
Let's suppose that you are 16 years old, in high school, and willing to work. Let's also suppose that you can clear about $2,000 over the course of a summer, if only because a doting grandparent puts money in the Roth while you take your earnings to school. If you invest in a Roth IRA, it will grow, tax-free, for as long as you have the account. All withdrawals from the account after age 59 1/2 will be tax-free.
If your money is invested in common stocks and you achieve the average compound annual rate on large-capitalization U.S. stocks, 10.7%, your account will grow to $9,378 at the end of the fourth year. You will be 20 years old. Invested in the same way, with no additional savings, the account will grow to:
* $25,917 by the time you are 30
* $71,625 by the time you are 40
* $197,943 by the time you are 50
* $547,037 by the time you are 60
* And $1,114,423 by the time you are 67
And you will have started and finished all of your saving before turning age 21.
Worth the risk
Note that this plan does not require investment brilliance. It does depend on two things, an early start and tenacity. If you invested in small company stocks, whose long-term annual return clocks in at 12.5 percent annually, you could have much more money. (Try $2.4 million.) Similarly, you could diversify to reduce your risk and make your 47-year ride more comfortable. But you would do it at the expense of a somewhat lower return.
The "Yes, but" crew will be happy to tell you that $1 million isn't what it used to be. I can remember people telling me this in the '60s. It is as true now as it was then. Millionaires are, well, just dreadfully common.
Even so, the number of millionaires is relatively small. And being a millionaire is a better choice than being a pauper.
The same crew will be happy to tell you that the future won't repeat the past, that SARS, terrorism or some other misfortune will cripple the future, or that we will be crushed by a rising China. Similarly, an actuary might tell you that you have a substantial chance of being dead by 67.
Perhaps.
But so what?
All you've got to risk is four summers.
Start on your first $1 million at age 16
Last week my husband and curled up to watch the local news. Toward the end of the program, they covered some “new” statistics about the monetary value of a stay-at-home spouse/parent. (I have to admit, though, that they were not so PC - this was all about stay-at-home moms.) The study estimated that the salary for a full time mom should be over $100 grand. Both R-and I thought the figure over-generous. I believe there should be a reasonable equivalency, but that’s ridiculous. R-seemed less disturbed by the inflated salary than by the idea that the father (presuming he has a full-time job) doesn’t get some sort of valuation for his time spent parenting and tending the house.
We don’t see completely eye-to-eye on this issue. I do think that full-time parenting is an entirely different animal than the parenting that happens after work and on weekends. I know that’s not a popular opinion.
Before anyone jumps all over me about this, let me clarify. I believe it is absolutely possible for a working parent to be extremely invested in the welfare of his/her children. I believe it is possible for a working parent to create a healthy environment. I also believe that some working parents put the lion’s share of their non-working time and energy into active parenting. (This is most often the case when we are talking about a single parent. I think that the working parent in most “traditional” marriages does a hell of a lot less active parenting than he/she would have to do if both parents worked.)
I also believe that a stay-at-home parent can be darn near useless. There really are women (and men, I suppose) that sit on the sofa day after day, eating bon-bons and watching soaps while their children watch videos in another room. Of course such behavior would actually have negative value - this is a parasite in action.
On average, I think that most stay-at-homes contribute to the welfare of their families and do the best they can in a tough situation. I think that most working parents try to keep things balanced as they do the best they can in an equally tough situation. I’d like to see the “debate” end … and this report didn’t help.
I found the news story insulting. I’m not eager to be under-valued but I am also not interested in being patronized. I know that I have a found a suitable job for me. I also know that being a stay-at-home fits my particular strengths and weaknesses pretty well. I know that my work allows more flexibility than most paying careers. I know that there aren’t a lot paying jobs that offer so many opportunities for emotional reward. The few careers that do seem to have a similar emphasis - social work, teaching, counseling - aren’t big money makers either.
There’s an added benefit to my career choice: as my children mature, I have more time and energy to ease into pursuing another flexible, emotionally rewarding career in the form of my writing. I don’t expect to become rich from that either.
Fueled by my irkedness, I went looking for something that fits into the real world. Turns out I’m worth about $30,000 - though it sounds like it might be less than that, since my son is in school. I can get behind that.
What's a homemaker worth? The shocking truth
The value of a stay-at-home spouse is priceless in many ways, but don't kid yourself: In economic terms, running a household is worth far less than we've been told.
By Liz Pulliam Weston
We all know that a stay-at-home spouse can be invaluable, and the wide-ranging estimates of the real value of the arrangement reflect that knowledge.
Whether the figure is $90,000 or $125,000 or even $500,000, the numbers are meant to show how important is the unpaid work performed by a homemaker.
Unfortunately, the statistics are codswallop.
The economic value of a stay-at-home spouse is closer to $30,000 a year. Our society doesn’t place a high dollar value on a homemaker's work, and those who choose to stay home do so at their own economic peril.
No glamorous awards ceremony
How I wish this weren’t true. If it were up to me, the job of stay-at-home parent would come with retirement and health benefits, annual paid vacations and an award ceremony each spring to rival the Oscars.
Since you’ve yet to elect me Queen of the World, however, we’re stuck with the economic system we’ve got, and it does not work in favor of unpaid domestics.
The numbers that purport to show otherwise are flights of the author’s fancy. They’re typically constructed from the U.S. Bureau of Labor Statistics' average pay figures for a variety of occupations including:
* Child-care worker, $8.91 an hour
* Maid, $8.02 an hour
* Food preparation supervisor, $11.70 an hour
* Bookkeeper, $11.94 an hour
* Chauffeur, $8.67 an hour
The formula is simple. Figure out how many hours, on average, a homemaker performs each task, multiply those hours by the appropriate wage and come up with an impressive and completely overblown annual figure.
Economics and the real world
Sometimes they don’t even bother to determine working hours. Talk show host and investment adviser Ric Edelman decided that because mothers are constantly on call and perform all these functions, the appropriate figure was one that reflected the hourly rate for each of 17 occupations, performed simultaneously, 24 hours a day, seven days a week. That’s how he came up with an annual worth figure of more than $500,000.
That’s not the way the value of homemaker is determined in the real world, however. The economists who make these calculations -- for wrongful death suits, airplane crash settlements and insurance purposes -- recognize that while homemaking has economic value, it’s nowhere near the six-figure range.
The reality is that many homemakers don’t have the skills of, say, a professional bookkeeper, a licensed chauffeur or a recreational director, says economist Evan Schouten, vice president of the economic consulting firm Charles River Associates in Boston and an expert witness in many wrongful death trials.
Painful truth about payouts
And families who lose a stay-at-home spouse typically do not rush out to hire 17 professionals to take his or her place, let alone employ them 24/7. They may hire one or two people, usually for 50 hours a week or less, and pay them an hourly wage of $10 to $15.
That’s why the economic payout is typically less in wrongful death and other lawsuits when the victim is a stay-at-home spouse than when the victim is employed. The lifetime economic value of a female homemaker who dies at age 30 is currently about $300,000, Schouten said, based on statistics from a seminal study in this area, “The Dollar Value of Household Work.”
Compare that to a 30-year-old who makes the average white-collar wage of $19.86 an hour.
“The present value of her lost after-tax compensation,” Schouten said, “using conservative assumptions, likely exceeds $1 million.”
Insurance coverage takes a holiday
If you doubt the veracity of all this, just try to buy life or disability insurance on a stay-at-home spouse.
If you use the most inflated statistics as a guide, and multiply the annual figure by the 10 years of care until the kids are grown, you could come up with an insurance “need” of $5 million. But unless your insurance agent has extraordinary pull, you’re not going to get that coverage.
That’s because life insurers don’t want you taking out policies that have no economic basis. Their theory is that it becomes way too tempting to snuff an overinsured spouse.
(Interestingly, a high-income family with can generally justify a larger policy on a work-at-home spouse than a family with lower income, even though neither homemaker makes any money. Insurers presume those wealthier families will pay more for various replacement services, such as employing a nanny rather than using group day care.)
Getting disability insurance -- in any amount -- is just as tough. Without an income, disability insurers won’t write a policy, no matter how much a family would have to shell out to replace the unpaid services it would lose.
And if that weren't enough . . .
There are other significant costs to being a homemaker:
* Employment prospects decline. Your job skills become dated by the day, making it harder for you to re-enter the working world. Yes, raising children and running a household take a variety of skills but no, those skills don’t typically translate into high-paying jobs outside the home.
* Retirement savings stagnate. If you’re at home, you’re also not contributing to a workplace retirement plan or earning credit toward a pension plan or Social Security. That leaves you economically vulnerable if you ever divorce.
* Economic vulnerability increases. Two-income families also have a built-in safety net should they encounter layoffs or other economic setbacks.
Obviously, there’s far more to the decision to stay home than mere economics. Stay-at-home parents provide invaluable services and benefits to their families. Many women think the monetary and economic sacrifices are well worth it, which is one reason why the Bureau of Labor Statistics finds that 40% of mothers with children under 6 stay home. (Overall, 13% of the nation’s households include a stay-at-home spouse.)
Go forth and get your ducks in order
You should understand just what you’re giving up, though, in order to make a rational decision about whether to stay at home and for how long. You also should do what you can to make sure your finances, both short- and long-term, remain sound:
# Disaster-proof your finances. Pay off debt, contribute as much as possible to retirement funds and keep a hefty emergency fund. Single-income families typically should have at least six months’ living expenses in a safe, liquid account.
# Get insured. You almost certainly won’t be able to buy disability insurance for a stay-at-home spouse, but you should be able to get life insurance coverage -- and if you have children, you almost certainly need some. The younger your children are, says former insurance agent Catherine Gretta, corporate vice president for New York Life Insurance, the more insurance you need to cover their care. To determine how much insurance you should have, you can talk to an agent or use MSN Money’s Life Insurance Needs Estimator; increase the estimate of your current living expenses by the amount your family would need to pay for child care and housekeeping services.
# Make sure you have retirement savings in your own name. Your spouse can contribute up to $3,000 a year to an Individual Retirement Account for you. (You also can claim half your spouse’s Social Security benefit if you’re married for at least 10 years, and may be able claim a portion of his or her workplace retirement plans as well.)
# Consider working at least part-time once your children reach school age. You may lose much of your wages to the costs of working -- taxes, child care, commuting costs. (For more views on this subject, read " Second incomes: twice the work, half the return," and "Cost of being a stay-at-home mom: $1 million," on MSN Money. And try MSN Money's Second Income Calculator. ) Those losses, however, could be offset by other benefits, such as keeping your job skills current and being able to contribute to a retirement fund or earn pension credits.
What's a homemaker worth? The shocking truth
And here’s another tidbit that sort of drives things home.
Second incomes: twice the work, half the return
Take into account a host of job-related expenses like commuting and child care and second incomes can actually cost more than they produce.
By Dan Akst
Everyone knows that couples who might be prosperous on a single income can, by virtue of a second, live really, really well. That second income, even if relatively modest, can pay for fancy vacations, lots of restaurant dining and maybe even luxurious automobiles. That's obvious, right?
Well, no. If the second income is that of a neurosurgeon, great. But if, as is often the case, the second income is a lot smaller than the first, the sad truth is that it hardly makes any difference at all. Perhaps it makes some difference, to the extent that it lulls two people into spending more because they work so hard and, well, they make so much money. Take into account a host of job-related expenses and second incomes can actually cost more than they produce.
Some of the positives can’t be measured financially, of course. Employment gives a person a sense of self-fulfillment that he or she is contributing to a family’s well-being. The fact remains that the person who most often must choose between working at home or in an outside job is the woman in the house. By choosing not to work, a woman often times gets labeled as being on the “mommy track.” She gets pigeonholed by employers, loses out on career advancement and once she returns to the workforce, often doesn’t get promoted as quickly. It’s a tough tradeoff.
Taxes and child care
The main culprits for the financial failure of second incomes are a tax system that savagely penalizes second incomes and the high cost of quality child care. The result, among financially savvy couples with a single high wage-earner, is that spouses with much less earning power often stop working until the kids are in school. Those who stay on the job do so not for the money, but for the challenge and fulfillment they derive from work outside the home.
Of course, most couples where both spouses work do so because the second income really does make a big difference in their family's standard of living. Indeed, many work just to put food on the table. But for affluent couples whose partners have seriously unequal earning power, the cost of that second income often means the lower-paid partner is working for free.
For many, it doesn't pay
Debra Gendel, for instance, was a fashion editor married to a successful Los Angeles television executive. When she took a good hard look at the taxes she was paying, the cost of commuting, dry cleaning and child care, it began to dawn on her that her glamorous, well-paid job just wasn't paying well enough. She quit to stay home with her children.
"You really have to love your work and think you're doing a greater good for mankind," she says, acknowledging that she is fortunate to have the option to stay at home. She adds that her decision gave her husband's career a boost because he's now free to work longer and not worry about home matters that she can attend to. This is no mere rationale; there is evidence that executives with stay-at-home wives on average earn more than their colleagues in two-career households.
Gendel's case is far from isolated. Peggy Ruhlin, a financial planner and certified public accountant in Columbus, Ohio, found it necessary to relate some hard truths about second incomes to her clients. She cites the case of a highly paid executive whose wife worked for a government social work agency. Her position was consuming and paid less than $25,000 a year, but it was deeply satisfying because she was helping people in need. Ruhlin ran through the numbers and showed that the wife was taking home a grand total of $1,500 a year when all was said and done.
Driven into a higher tax bracket
How is that possible? First, her income pushed the couple from the 31% federal tax bracket into the 36% bracket. Add 8% in state and local taxes (although these are federally deductible) and nearly 8% of the woman's income for Social Security and Medicare taxes. The result? Taxes alone consumed half her earnings. (All brackets have been reduced because of the 2003 tax cuts, but the principal remains the same.)
Ruhlin says the Social Security cut was especially unkind because, on retirement, the wife will be entitled to the equivalent of half her husband's entitlement (he'll still get the full amount) even if she never worked at all. Her contributions from a relatively low-wage job would never entitle her to more on her own, and so her payments will never do her any good.
On top of all this were child care, commuting and other expenses. When the planner broke the news, the woman became teary-eyed. She started considering volunteer work with more flexible hours.
Many other women in similar situations choose to remain on the job, and more men are finding themselves in that spot, and making that choice, as well.
"It's a lifestyle decision," says Ronald Roge, a financial planner in Centereach, N.Y., who has often encountered the dual-income situation. "That's the softer side of it. Some people are just tired of staying home, or they get fulfillment from going to work."
Mounting costs
If you have children and a well-paid spouse, consider the costs of any job before you take one. This is not to say you shouldn't work. But why take a job unless you know what it really pays? When you discover that it pays nothing, you might decide to take a different one that is more fun or rewarding. Or you might decide not to take one at all.
"It's risky to automatically assume another income will balance the books or provide the wherewithal for a better life," writes Linda Kelley in “Two Incomes and Still Broke?” (Times Books, 1996). "For most families, there are monetary benefits, although not usually as many as expected if both partners work outside the home. For others, the effort is wasted in a flow of job expenses that devour the second income and leave nothing but a bewildered and angry couple arguing over where the extra money went."
Kelley and financial planners such as Ruhlin cite many obvious and not so obvious costs. Perhaps foremost among these is taxes. Changes in 2001 and 2003 eliminated much of the "marriage penalty," but a second income will always be taxed at a higher rate than the first.
And you'll have to pay Social Security taxes as well. In states with hefty income taxes (such as New York and California), this can mean that 40% to 50% of the second income goes to taxes.
"The United States tax system is a product of the 1930s and 1940s," says Edward J. McCaffery, a University of Southern California law professor whose book, “Taxing Women” (University of Chicago Press) argues that the tax system is biased against working women. "At that time the single-earner model was the norm for families -- men worked outside the home and women worked inside it. Tax policy decisions favored and rewarded this arrangement and made it difficult to be a two-earner family." He adds that, "Over time those biases have gotten worse."
But taxes are only the beginning of the story. Other major costs include:
Child care: If you plan on putting your kids in preschool anyway, don't count this. But if you need day care to work, deduct this from your earnings. The cost can range from $4,000 to $25,000 a year, and can easily wipe out whatever's left of a second income after taxes. Sue Sharp, a singer and voice teacher who has two children, says she gave up teaching when she realized she was "working just to pay for day care. It just was not worth it."
Commuting: Figure on about 30 cents a mile if you drive (to cover fuel, maintenance and wear and tear). That's $1,125 a year if your round-trip is 15 miles. And if you're figuring your hourly earnings, add in your time on the road.
Lunches: Many people eat breakfast out as well, and buy several cups of coffee or snacks during the day. At $6 daily (and you probably spend more), this costs $1,500 a year.
Other meals: Working couples probably eat out more, which can cost plenty compared to eating at home. Harried working couples are probably also likelier to give the kids money for lunch rather than a homemade sandwich. Put it down for another $1,000 or more.
Appearances: Business attire, dry cleaning and even the right kind of car fall into this category. It can run from $250 on up into many thousands of dollars. As a fashion editor, for example, Gendel needed a chic wardrobe that cost plenty. And if you're in sales or otherwise visit clients, driving up in a jalopy gives the wrong impression.
Other spending: Kelley says working couples, induced by guilt, often buy unnecessary things for their kids because they get so little time with them. Also, busy couples often don't have time to comparison shop. They frequently buy expensive takeout food or groceries from a high-priced convenience store instead of a cheaper supermarket. All these costly habits can be considered job-related expenses.
Cut your work-related costs
The really bad news about such major job-related expenses as taxes and child care is that, usually, you can't do much about them. On the other hand, many work-related costs can be reduced.
Bringing lunch to work can save a bundle, for instance. Self-employed people can use Keogh retirement accounts to shelter income from taxes, but on the other hand, the self-employed pay much higher Social Security taxes. Roge says spouses who work together in their own business can do themselves a big favor by paying one spouse only a nominal amount and funneling all the money through the other. It's legal, he says, and results in substantially lower taxes, since the optimal tax situation is to have a single, high-income earner.
Also on the bright side, discovering that a second income really doesn't contribute much financially can free a spouse to learn new skills, go back to school, pursue an unprofitable dream career or launch a home-based business that may pay little during the first few years. If you're going to work for free, after all, you might as well enjoy it.