The Pros & Cons of Offering Owner Financing (When You Sell Your Home)

Sometimes, home sellers find a buyer eager to purchase but unable to finance the property with traditional mortgage financing. Sellers then have a choice: lose the buyer, or lend the mortgage to the buyer themselves.

If you want to sell a property you own free and clear, with no mortgage, you can theoretically finance a buyer’s full first mortgage. Alternatively, you could offer just a second mortgage, to bridge the gap between what the buyer can borrow from a conventional lender and the cash they can put down.

Should you ever consider offering financing? What’s in it for you? And most importantly, how do you protect yourself against losses?

Before taking the plunge to offer seller financing, make sure you understand all the pros, cons, and options available to you as “the bank” when lending money to a buyer.

Advantages to Offering Seller Financing

Although most sellers never even consider offering financing, a few find themselves forced to contemplate it.

For some sellers, it could be that their home lies in a cool market with little demand. Others own unique properties that appeal only to a specific type of buyer or that conventional mortgage lenders are wary to touch. Or the house may need repairs in order to meet habitability requirements for conventional loans.

Sometimes the buyer may simply be unable to qualify for a conventional loan, but you might know they’re good for the money if you have an existing relationship with them.

There are plenty of perks in it for the seller to offer financing. Consider these pros as you weigh the decision to extend seller financing.

1. Attract & Convert More Buyers

The simplest advantage is the one already outlined: You can settle on your home even when conventional mortgage lenders decline the buyer.

Beyond salvaging a lost deal, sellers can also potentially attract more buyers. “Seller Financing Available” can make an effective marketing bullet in your property listing.

If you want to sell your home in 30 days, offering seller financing can draw in more showings and offers.

Bear in mind that seller financing doesn’t only appeal to buyers with shoddy credit. Many buyers simply prefer the flexibility of negotiating a custom loan with the seller rather than trying to fit into the square peg of a loan program.

2. Earn Ongoing Income

As a lender, you get the benefit of ongoing monthly interest payments, just like a bank.

It’s a source of passive income, rather than a one-time payout. In one fell swoop, you not only sell your home but also invest the proceeds for a return.

Best of all, it’s a return you get to determine yourself.

3. You Set the Interest Rate

It’s your loan, which means you get to call the shots on what you charge. You may decide seller financing is only worth your while at 6% interest, or 8%, or 10%.

Of course, the buyer will likely try to negotiate the interest rate. After all, nearly everything in life is negotiable, and the terms of seller financing are no exception.

4. You Can Charge Upfront Fees

Mortgage lenders earn more than just interest on their loans. They charge a slew of one-time, upfront fees as well.

Those fees start with the origination fee, better known as “points.” One point is equal to 1% of the mortgage loan, so they add up fast. Two points on a $250,000 mortgage comes to $5,000, for example.

But lenders don’t stop at points. They also slap a laundry list of fixed fees on top, often surpassing $1,000 in total. These include fees such as a “processing fee,” “underwriting fee,” “document preparation fee,” “wire transfer fee,” and whatever other fees they can plausibly charge.

When you’re acting as the bank, you can charge these fees too. Be fair and transparent about fees, but keep in mind that you can charge comparable fees to your “competition.”

5. Simple Interest Amortization Front-Loads the Interest

Most loans, from mortgage loans to auto loans and beyond, calculate interest based on something called “simple interest amortization.” There’s nothing simple about it, and it very much favors the lender.

In short, it front-loads the interest on the loan, so the borrower pays most of the interest in the beginning of the loan and most of the principal at the end of the loan.

For example, if you borrow $300,000 at 8% interest, your mortgage payment for a 30-year loan would be $2,201.29. But the breakdown of principal versus interest changes dramatically over those 30 years.

  • Your first monthly payment would divide as $2,000 going toward interest, with only $201.29 going toward paying down your principal balance.
  • At the end of the loan, the final monthly payment divides as $14.58 going toward interest and $2,186.72 going toward principal.

It’s why mortgage lenders are so keen to keep refinancing your loan. They earn most of their money at the beginning of the loan term.

The same benefit applies to you, as you earn a disproportionate amount of interest in the first few years of the loan. You can also structure these lucrative early years to be the only years of the loan.

6. You Can Set a Time Limit

Not many sellers want to hold a mortgage loan for the next 30 years. So they don’t.

Instead, they structure the loan as a balloon mortgage. While the monthly payment is calculated as if the loan is amortized over the full 15 or 30 years, the loan must be paid in full within a certain time limit.

That means the buyer must either sell the property within that time limit or refinance the mortgage to pay off your loan.

Say you sign a $300,000 mortgage, amortized over 30 years but with a three-year balloon. The monthly payment would still be $2,201.29, but the buyer must pay you back the full remaining balance within three years of buying the property from you.

You get to earn interest on your money, and you still get your full payment within three years.

7. No Appraisal

Lenders require a home appraisal to determine the property’s value and condition.

If the property fails to appraise for the contract sales price, the lender either declines the loan or bases the loan on the appraised value rather than the sales price — which usually drives the borrower to either reduce or withdraw their offer.

As the seller offering financing, you don’t need an appraisal. You know the condition of the home, and you want to sell the home for as much as possible, regardless of what an appraiser thinks.

Foregoing the appraisal saves the buyer money and saves everyone time.

8. No Habitability Requirement

When mortgage lenders order an appraisal, the appraiser must declare the house to be either habitable or not.

If the house isn’t habitable, conventional and FHA lenders require the seller to make repairs to put it in habitable condition. Otherwise, they decline the loan, and the buyer must take out a renovation loan (such as an FHA 203k loan) instead.

That makes it difficult to sell fixer-uppers, and it puts downward pressure on the price. But if you want to sell your house as-is, without making any repairs, you can do so by offering to finance it yourself.

For certain buyers, such as handy buyers who plan to gradually make repairs themselves, seller financing can be a perfect solution.

9. Tax Implications

When you sell your primary residence, the IRS offers an exemption for the first $250,000 of capital gains if you’re single, or $500,000 if you’re married.

However, if you earn more than that exemption, or if you sell an investment property, you still have to pay capital gains tax. One way to reduce your capital gains tax is to spread your gains over time through seller financing.

It’s typically considered an installment sale for tax purposes, helping you spread the gains across multiple tax years. Speak with an accountant or other financial advisor about exactly how to structure your loan for the greatest tax benefits.


Drawbacks to Seller Financing

Seller financing comes with plenty of risks. Most of the risks center around the buyer-borrower defaulting, they don’t end there.

Make sure you understand each of these downsides in detail before you agree to and negotiate seller financing. You could potentially be risking hundreds of thousands of dollars in a single transaction.

1. Labor & Headaches to Arrange

Selling a home takes plenty of work on its own. But when you agree to provide the financing as well, you accept a whole new level of labor.

After negotiating the terms of financing on top of the price and other terms of sale, you then need to collect a loan application with all of the buyer’s information and screen their application carefully.

That includes collecting documentation like several years’ tax returns, several months’ pay stubs, bank statements, and more. You need to pull a credit report and pick through the buyer’s credit history with a proverbial fine-toothed comb.

You must also collect the buyer’s new homeowner insurance information, which must include you as the mortgagee.

You need to coordinate with a title company to handle the title search and settlement. They prepare the deed and transfer documents, but they still need direction from you as the lender.

Be sure to familiarize yourself with the home closing process, and remember you need to play two roles as both the seller and the lender.

Then there’s all the legal loan paperwork. Conventional lenders sometimes require hundreds of pages of it, all of which must be prepared and signed. Although you probably won’t go to the same extremes, somebody still needs to prepare it all.

2. Potential Legal Fees

Unless you have experience in the mortgage industry, you probably need to hire an attorney to prepare the legal documents such as the note and promise to pay. This means paying the legal fees.

Granted, you can pass those fees on to the borrower. But that limits what you can charge for your upfront loan fees.

Even hiring the attorney involves some work on your part. Keep this in mind before moving forward.

3. Loan Servicing Labor

Your responsibilities don’t end when the borrower signs on the dotted line.

You need to make sure the borrower pays on time every month, from now until either the balloon deadline or they repay the loan in full. If they fail to pay on time, you need to send late notices, charge them late fees, and track their balance.

You also have to confirm that they pay the property taxes on time and keep the homeowners insurance current. If they fail to do so, you then have to send demand letters and have a system in place to pay these bills on their behalf and charge them for it.

Every year, you also need to send the borrower 1098 tax statements for their mortgage interest paid.

In short, servicing a mortgage is work. It isn’t as simple as cashing a check each month.

4. Foreclosure

If the borrower fails to pay their mortgage, you have only one way to forcibly collect your loan: foreclosure.

The process is longer and more expensive than eviction and requires hiring an attorney. That costs money, and while you can legally add that cost to the borrower’s loan balance, you need to cough up the cash yourself to cover it initially.

And there’s no guarantee you’ll ever be able to collect that money from the defaulting borrower.

Foreclosure is an ugly experience all around, and one that takes months or even years to complete.

5. The Buyer Can Declare Bankruptcy on You

Say the borrower stops paying, you file a foreclosure, and eight months later, you finally get an auction date. Then the morning of the auction, the borrower declares bankruptcy to stop the foreclosure.

The auction is canceled, and the borrower works out a payment plan with the bankruptcy court judge, which they may or may not actually pay.

Should they fail to pay on their bankruptcy payment plan, you have to go through the process all over again, and all the while the borrowers are living in your old home without paying you a cent.

6. Risk of Losses

If the property goes to foreclosure auction, there’s no guarantee anyone will bid enough to cover the borrower’s loan debt.

You may have lent $300,000 and shelled out another $20,000 in legal fees. But the bidding at the foreclosure auction might only reach $220,000, leaving you with a $100,000 shortfall.

Unfortunately, you have nothing but bad options at that point. You can take the $100,000 loss, or you can take ownership of the property yourself.

Choosing the latter means more months of legal proceedings and filing eviction to remove the nonpaying buyer from the property. And if you choose to evict them, you may not like what you find when you remove them.

7. Risk of Property Damage

After the defaulting borrower makes you jump through all the hoops of foreclosing, holding an auction, taking the property back, and filing for eviction, don’t delude yourself that they’ll scrub and clean the property and leave it in sparkling condition for you.

Expect to walk into a disaster. At the very least, they probably haven’t performed any maintenance or upkeep on the property. In my experience, most evicted tenants leave massive amounts of trash behind and leave the property filthy.

In truly terrible scenarios, they intentionally sabotage the property. I’ve seen disgruntled tenants pour concrete down drains, systematically punch holes in every cabinet, and destroy every part of the property they can.

8. Collection Headaches & Risks

In all of the scenarios above where you come out behind, you can pursue the defaulting borrower for a deficiency judgment. But that means filing suit in court, winning it, and then actually collecting the judgment.

Collecting is not easy to do. There’s a reason why collection accounts sell for pennies on the dollar — most never get collected.

You can hire a collection agency to try collecting for you by garnishing the defaulted borrower’s wages or putting a lien against their car. But expect the collection agency to charge you 40% to 50% of all collected funds.

You might get lucky and see some of the judgment or you might never see a penny of it.


Options to Protect Yourself When Offering Seller Financing

Fortunately, you have a handful of options at your disposal to minimize the risks of seller financing.

Consider these steps carefully as you navigate the unfamiliar waters of seller financing, and try to speak with other sellers who have offered it to gain the benefit of their experience.

1. Offer a Second Mortgage Only

Instead of lending the borrower the primary mortgage loan for hundreds of thousands of dollars, another option is simply lending them a portion of the down payment.

Imagine you sell your house for $330,000 to a buyer who has $30,000 to put toward a down payment. You could lend the buyer $300,000 as the primary mortgage, with them putting down 10%.

Or you could let them get a loan for $270,000 from a conventional mortgage lender, and you could lend them another $30,000 to help them bridge the gap between what they have in cash and what the primary lender offers.

This strategy still leaves you with most of the purchase price at settlement and lets you risk less of your own money on a loan. But as a second mortgage holder, you accept second lien position

That means in the event of foreclosure, the first mortgagee gets paid first, and you only receive money after the first mortgage is paid in full.

2. Take Additional Collateral

Another way to protect yourself is to require more collateral from the buyer. That collateral could come in many forms. For example, you could put a lien against their car or another piece of real estate if they own one.

The benefits of this are twofold. First, in the event of default, you can take more than just the house itself to cover your losses. Second, the borrower knows they’ve put more on the line, so it serves as a stronger deterrent for defaults.

3. Screen Borrowers Thoroughly

There’s a reason why mortgage lenders are such sticklers for detail when underwriting loans. In a literal sense, as a lender, you are handing someone hundreds of thousands of dollars and saying, “Pay me back, pretty please.”

Only lend to borrowers with a long history of outstanding credit. If they have shoddy credit — or any red flags in their credit history — let them borrow from someone else. Be just as careful of borrowers with little in the way of credit history.

The only exception you should consider is accepting a cosigner with strong, established credit to reinforce a borrower with bad or no credit. For example, you might find a recent college graduate with minimal credit who wants to buy, and you could accept their parents as cosigners.

You also could require additional collateral from the cosigner, such as a lien against their home.

Also review the borrower’s income carefully, and calculate their debt-to-income ratios. The front-end ratio is the percentage of their monthly income required to cover all housing costs: principal and interest, property taxes, homeowner’s insurance, and any condominium or homeowners association fees.

For reference, conventional mortgage lenders allow a maximum front-end ratio of 28%.

The back-end ratio includes not just housing costs, but also overall debt obligations. That includes student loans, auto loans, credit card payments, and all other mandatory monthly debt payments.

Conventional mortgage loans typically allow 36% at most. Any more than that and the buyer probably can’t afford your home.

4. Charge Fees for Your Trouble

Mortgage lenders charge points and fees. If you’re serving as the lender, you should do the same.

It’s more work for you to put together all the loan paperwork. And you will almost certainly have to pay an attorney to help you, so make sure you pass those costs along to the borrower.

Beyond your own labor and costs, you also need to make sure you’re being compensated for your risk. This loan is an investment for you, so the rewards must justify the risk.

5. Set a Balloon

You don’t want to be holding this mortgage note 30 years from now. Or, for that matter, to force your heirs to sort out this mortgage on your behalf after you shuffle off this mortal coil.

Set a balloon date for the mortgage between three and five years from now. You get to collect mostly interest in the meantime, and then get the rest of your money once the buyer refinances or sells.

Besides, the shorter the loan term, the less opportunity there is for the buyer to face some financial crisis of their own and stop paying you.

6. Be Listed as the Mortgagee on the Insurance

Insurance companies issue a declarations page (or “dec page”) listing the mortgagee. In the event of damage to the property and an insurance claim, the mortgagee gets notified and has some rights and protections against losses.

Review the insurance policy carefully before greenlighting the settlement. Make sure your loan documents include a requirement that the borrower send you updated insurance documents every year and consequences if they fail to do so.

7. Hire a Loan Servicing Company

You may multitalented and an expert in several areas. But servicing mortgage loans probably isn’t one of them.

Consider outsourcing the loan servicing to a company that specializes in it. They send monthly statements, late notices, 1098 forms, and escrow statements (if you escrow for insurance and taxes), and verify that taxes and insurance are current each year. If the borrower defaults, they can hire a foreclosure attorney to handle the legal proceedings.

Examples of loan servicing companies include LoanCare and Note Servicing Center, both of whom accept seller-financing notes.

8. Offer Lease-to-Own Instead

The foreclosure process is significantly longer and more expensive than the eviction process.

In the case of seller financing, you sell the property to the buyer and only hold the mortgage note. But if you sign a lease-to-own agreement, you maintain ownership of the property and the buyer is actually a tenant who simply has a legal right to buy in the future.

They can work on improving their credit over the next year or two, and you can collect rent. When they’re ready, they can buy from you — financed with a conventional mortgage and paying you in full.

If the worst happens and they default, you can evict them and either rent or sell the property to someone else.

9. Explore a Wrap Mortgage

If you have an existing mortgage on the property, you may be able to leave it in place and keep paying it, even after selling the property and offering seller financing.

Wrap mortgages, or wraparound mortgages, are a bit trickier and come with some legal complications. But when executed right, they can be a win-win for both you and the buyer.

Say you have a 30-year mortgage for $250,000 at 3.5% interest. You sell the property for $330,000, and you offer seller financing of $300,000 for 6% interest. The buyer pays you $30,000 as a down payment.

Ordinarily, you would pay off your existing mortgage for $250,000 upon selling it. Most mortgages include a “due-on-sale” clause, requiring the loan to be paid in full upon selling the property.

But in some circumstances and some states, you may be able to avoid triggering the due-on-sale clause and leave the loan in place.

You keep paying your mortgage payment of $1,122.61, even as the borrower pays you $1,798.65 per month. In a couple of years when they refinance, they pay off your previous mortgage in full, plus the additional balance they owe you.

Of course, you still run the risk that the borrower stops paying you. Then you’re saddled with making your monthly mortgage payment on the property, even as you slog through the foreclosure process to try and recover your losses.


Final Word

Offering seller financing comes with risks. But those risks may be worth taking, especially for hard-to-sell properties.

Only you can decide what risk-reward ratio you can live with, and negotiate loan terms to ensure you come out on the right side of the ratio. For unique or other difficult-to-finance properties, seller financing may be the only way to sell for what the property’s worth.

Before you write off the returns as low, remember that your APR will be far higher than the interest rate charged.

Beyond the upfront fees you can charge, you’ll also benefit from simple interest amortization, which front-loads the interest so that nearly all of the monthly payment goes toward interest in the first few years — the only years you need to finance if you structure the loan as a balloon mortgage.

Just be sure to screen all borrowers extremely carefully, and to take as many precautions as you can. If the borrower can’t qualify for a conventional mortgage, consider that a glaring red flag. Seller financing involves risking many thousands of dollars in a single transaction, so take your time and get it right.

Source: moneycrashers.com

Tips for a Successful Move: Part 2

The first part of my blog series about moving collaboration covered the decision to move, stress-free moving tips, and how to pack up your entire home in 30 days (or less). The collaboration with Homes.com continues with the second phase of moving–the move itself!

You’ve made the arrangements, chosen your new home, packed up your current one, and now the moving truck is waiting for you. You’ll either watch movers load it for you OR you will pack that baby up yourself. Well, if you are like us, you have a lot of heavy lifting ahead of you.

For our move, we opted to save money and do it all on our own. If you’re reading this and plan to move yourself, good news: we made some mistakes, and now we can pass along our hard-earned wisdom!

GET THE RIGHT EQUIPMENT:

To make moving those heavier items a breeze, make sure that you have these items listed below:

  • FURNITURE / APPLIANCE DOLLY: Request one from the truck rental company to help move washers, dryers, refrigerators and large dressers more easily.
  • FURNITURE LIFTING STRAPS: These will be your best friends for lifting armoires, large dressers, or even sofas.
  • TIE DOWNS: There are metal anchors or wooden slats in the moving truck that you can attach these to, or tie rope around to secure your larger pieces of furniture.
  • FURNITURE BLANKETS: Learn from our mistake and use furniture blankets to protect your furniture. When we began unloading the truck, we found that some furniture pieces rubbed against each other and scratched through the drop cloths. We thought we could cut corners and save some money, but by doing so it ruined five pieces of furniture.

LOAD THE TRUCK THE RIGHT WAY:

We have done local moves by ourselves before, but this was our first long-distance move on our own. In the past, we loaded up the truck with whatever would fit, drop off the load and come back for another. With this cross-country move, we have to pack it all and pack it right the first time, utilizing every inch of space! Here are my top four tips:

  • HEAVY ITEMS FIRST: Most rental truck companies will tell you to pack in a “T” shape to save gas and maximize the space. This means to secure all your heavy and tall pieces of furniture in the front of the truck (against the cab). Once the front part of the truck is full and stacked to the ceiling, place other heavy items such as dressers, tables and sofas in the middle of the truck.
  • BOXES & RUGS: Place rugs at the front of the truck, especially if you have an “attic space.” If not, place all area rugs underneath dressers to save space. Sort boxes by weight and load the heaviest boxes first. Regardless of size, always place the heaviest ones on the bottom. Then load boxes by size and stack all like-size boxes on top of each other so weight is distributed evenly.
  • MISC. ITEMS: For all items that won’t fit into boxes, load them around and on top of your larger furniture and boxes.
  • BEDS: Load your mattress sets after the whole truck is packed because they’ll be the first thing you want to unload. Place them along the door of the truck to hold everything else in place, and help prevent too much shifting as you travel to your destination. When unloading, go slowly as there might be an avalanche awaiting just behind them. If you use our loading tips, only slight shifting should occur.

ON THE MOVE:

  • SAYING “GOODBYE”: The home you are leaving carries many memories, so say your goodbyes and thank your home. You might be thinking… “Did this crazy lady just tell me to thank my house?” Yes. Yes I did. And here’s why: this home, now empty, has been filled with life. It’s where you spent good days and bad. Maybe it was your first home, where you brought a baby home. Maybe it was your starter rental and you are finally setting out on homeownership. Whatever your situation, thank it for the memories and all the life lived there.
  • THE TRIP AHEAD: For us, this move was as far of a cross-country move as you could get, from one coast to another. Here are my tips for making a long-distance move less stressful:
    • Pack everything you need in clear plastic totes instead of suitcases. Have outfits sorted by day and night and only bring into the hotel what you need each night. Keep toys and activities easily accessible and always have a first aid kit on hand.
    • Set daily driving hours and desired destinations, with backups in case you don’t make it that far. Sometimes the kids have enough or you hit more traffic than expected. I never book hotels ahead of time for this reason.
    • Traveling setbacks are out of your control. Some days we drove only five hours a day, then 12 hours the next. It wasn’t worth it to have cranky kids every day so we alternated long days and short ones until we reached our new home.

RELAX, YOU’RE HOME:

You survived packing, loading and traveling! But, before you relax, you have a truck to unload and a house to move into.

We opted to move ourselves to save money, but were left totally exhausted.  My advice: if you’re moving and at your limit, ask for help. Our truck didn’t come with muscle men to unload it, and we knew once we arrived to our new home that we’d need help. We called local moving companies and discovered you can hire them to unload your truck for you. For a surprisingly low cost of $200, we sat back and watched two men do all of the lifting! It was well worth the money after all of the work we had done.

We’re now settled into our new home in San Diego, California. While it’s been a long journey to get here, I can say it is so worth it. We have even more moving tips and advice to share with you so follow along with all that is to come! Moving is one of life’s biggest stressors, but it doesn’t have to be if you take one step at a time, you will soon be “home” again. – Jennifer

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Jennifer Ciani is a mom of two, wife to a Marine Corps veteran and the content creator behind the blog, Simply Ciani, where she shares easy to follow DIY’s, home decor, lifestyle and everyday tips for making life simple and organized.

Source: homes.com

How to Adjust Your Federal Income Tax Withholding Allowances

My husband and I were recently shocked by the amount of our income tax refund. At first, we were elated. It was enough to pay off our car, allowing us to live debt-free. At the same time, we were kicking ourselves for not having this money available for use during the past year.

Maybe you’ve had a similar experience — or the opposite (and decidedly less pleasant) one where you’ve had to pay more money in federal income taxes than you expected. Regardless, the issue is the same.

In both these situations, the amount withheld from your paycheck isn’t coinciding with the amount you really owe.

The best way to fix it is to adjust your federal income tax withholdings, which you can do in a few simple steps. But only make such an adjustment if you’re sure you need to.

When to Adjust Your Income Tax Withholding

You can adjust your withholding at any time. However, many life events can impact your taxes, so it’s a good idea to update your withholding whenever something significant changes.

These life events are a red flag you may need to revisit your withholding.

1. You Started a New Job

When you get a new job, your employer requires you to fill out a W-4 so they can determine how much federal income tax to withhold from your paycheck.

It may seem like just another routine part of your onboarding paperwork, but it’s crucial to complete the form accurately to ensure you won’t end up with an unexpected year-end tax bill.

2. You Got a Big Refund

If you received a large tax return from the IRS for last year’s taxes, that means your employer was taking too much money out of your paycheck. It’s exciting to get a big check, but think of it this way:

That’s money that belongs to you that you were essentially loaning the government interest-free. If you didn’t do that, not only could you have used that money throughout the tax year to pay for your expenses, but you could also have invested it and received interest on it.

It’s exciting when you can do something smart with your tax refund, but it is not the best financial situation.

For example, say you got a refund of $1,000. You gave the government $1,000, and the government gave you back $1,000.

Had your tax withholding amount been correct, you could have invested that $1,000 or had it available in an emergency fund instead. Instead, you gave the federal government an interest-free loan.

The IRS will only refund the amount you overpaid, with no interest. So your goal should be to have zero tax refund, or close to it.

3. You Owe Money to the IRS

It’s an awful feeling when you owe a large amount of money to the government, especially if you thought you might be getting a refund. But as with anything you must save up for, you need to put a little extra money aside with each paycheck to cover a considerable expense.

One way to do that is not to have the money in your possession at all. Out of sight, out of mind. Increase your withholding so the government gets the money before you receive it.

For example, if you owe $1,000 and get paid weekly, you can spread that $1,000 out over 52 weeks. So instead of owing the government $1,000 in one lump sum, give them an extra $20 each week to avoid owing when you file your taxes at the end of the year.

4. You’re Expecting Life Changes

When your life changes, so do your taxes.

Did you get married? Have a baby? Buy a home? Start giving charitable contributions? Are you expecting any of these changes in the next year?

All these things affect your taxable income and tax breaks like itemizing versus claiming the standard deduction or claiming the child tax credit. So take the opportunity to review your tax withholding and adjust accordingly.


How to Adjust Your Federal Tax Withholding

To adjust the amount of taxes withheld from your paycheck, the first step is on you, and the rest is on your employer. There are a few different methods to determine the withholding that makes the most sense for your tax situation.

Before you get started, have your previous year’s tax documents handy as well as your last pay stub.

1. Form W-4 Employee’s Withholding Certificate

If it’s been a few years since you filled out a Form W-4 for your job, you might think you need to calculate the number of allowances you need to claim to get the right withholding. But allowances aren’t part of Form W-4 anymore.

The Tax Cuts and Jobs Act of 2018 eliminated personal exemptions — a set amount taxpayers could deduct for themselves, their spouse, and each of their dependents

The old allowance method of calculating withholding was tied to those exemptions, so it didn’t make sense to use them anymore, and Form W-4 was redesigned in 2020 to reflect a new way of estimating your tax liability. Now, it includes just a handful of steps to help you complete the worksheet and adjust your withholding.

If you and your spouse are a two-earner household, pay special attention to Step 2, whether you’re going to be married filing jointly or separately, as it has instructions for joint filers that both hold jobs.

If you need more help, the IRS has a more user-friendly tool: a withholding calculator.

2. IRS Withholding Calculator

The easy-to-use IRS Tax Withholding Estimator is on the IRS website. To use it, you answer a series of questions about your filing status, dependents, income, and tax credits. That’s where having your previous tax documents and last pay stub comes in handy.

3. Fill Out a New Form W-4

Once you’ve used the Tax Withholding Estimator tool, you can use the results of the calculator to fill out a new Form W-4. Give it to your employer’s human resources or payroll department, and they’ll make the necessary adjustments.

Some employers have an automated system for submitting withholding adjustments, so check with your employer to see if they have this option available.

It’s a good idea to take action as soon as you know you need to adjust your withholding since it will impact every paycheck you earn for the rest of the year.


Final Word

The lower your withholding, the less tax your employer will withhold from your paycheck. That may seem like a good thing, but you don’t want to have too much withheld or you could be liable for an underpayment penalty when you file.

Managing taxes can be confusing, and withholding is just the first of many things you need to know to handle your taxes well. For more guidance, check out our complete tax filing guide.

Source: moneycrashers.com

The psychology of being overworked and underpaid

Stressed woman with hands on her head looking at a laptop.

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

A competitive salary is something we all strive for in our careers, but for some, the salary we know we deserve doesn’t necessarily match our reality. An employee may put in extra hours, take on more responsibilities and go the extra mile, but they still may not be properly compensated for their work. 

Being overworked and underpaid isn’t as uncommon as we think. According to a poll conducted by Gallup, 43 percent of U.S. workers believe they are underpaid. 

Unfortunately, this can have a negative impact on a person’s productivity, mental health and even credit health. So, what can you do if you feel you’re not being fairly paid at work? 

Read on to find out the psychological impact of being overworked and underpaid and how you can combat this issue—or jump straight to the infographic below. 

Impacts of being overworked and underpaid

Sometimes we’re so eager to accept a job that we settle for whatever salary we’re offered, only to find out that what we’re given doesn’t match the responsibilities we’ve taken on. Or, you may have been at a company for a while and experienced an increase in your workload but seen little to no increase in pay. 

Being overworked and underpaid can ultimately lead to a multitude of feelings that can cause more harm than good. Here are three signs you shouldn’t ignore:

Decrease in productivity

Employees who work long hours and have heavier workloads aren’t necessarily the most productive. Some may think the more hours you work, the more you’ll get done, but for most, this can have the opposite effect.

The more work an employee takes on, the more prone they become to mistakes. This can lead to feelings of burnout, sleep deprivation and work-life imbalance due to stress and the inability to keep up with the heavy workload. On top of that, if you’re being underpaid, it can make it extremely difficult to stay motivated in your role. 

Gallup found that 23 percent of employees felt burnt out almost always at work, according to a study made up of 7,500 full time employees. When it becomes hard to juggle workplace stress, people can find it difficult to function and stay productive. The same study conducted by Gallup also found that 13 percent of workers are less confident in their work performance when experiencing symptoms of burnout.

13% of workers are less confident in their work performance when feeling burnt out. Source: Gallup.

Employees may start to feel disconnected from their work and may even have built up resentment toward their employer because of their lack of compensation, causing a never-ending cycle of stress, burnout and lack of productivity. These feelings can ultimately impact employees’ overall well-being and mental health. 

Negative effects on your mental well-being 

Most people spend the majority of their time in the workplace. Unfortunately for some, the stresses from work can be hard to shut off even when leaving the office for the day. According to a study conducted by Wrike, 94 percent of employees said they felt stress at work and 54 percent said the stresses from work negatively affect their home life.

57.9% of employees said work has impacted their mental health in some way. Source: Paychex.

Long work hours, an increase in work-related tasks and insufficient pay can all start to take a toll on a person’s physical and mental health. A survey conducted by Paychex found that 57.9 percent of employees said work impacted their mental health in some way. 

Damaged credit health  

Aside from mental health and productivity, being underpaid can start to hurt your financial standing. Though your income doesn’t have a direct impact on your credit score, lack of income can make it more difficult to pay your bills on time. A survey by WalletHub found that 30 percent of respondents missed credit card payments because they didn’t have enough money. 

30% of people missed credit card payments because they didn’t have enough money. Source: WalletHub.

A Gallup poll also found that 55 percent of women feel they are underpaid for the amount of work they do, which could play into why they hold nearly two-thirds of the student loan debt in the U.S. With women receiving lower-than-average wages, keeping up with student loans and other debt payments becomes harder, thus affecting their overall credit health. 

6 ways to handle being underpaid 

Being underpaid is a problem that many people find themselves in and struggle to get out of. The only way to get out of this predicament is to take matters into your own hands. Here are six ways you can get out of being underpaid: 

1. Negotiate a competitive raise

Present your employer with an exact dollar amount and provide documentation of your work and performance.

Asking for a raise can seem scary and intimidating, but it’s an important step toward solving your problem. Though it’s not always the easiest thing to do, you’ll never know if you don’t ask. 

When asking for a raise, make sure you do your research on your industry’s salary range and provide an exact number when meeting with your employer. Providing an exact dollar amount as opposed to a salary range will show your employer that you know what you want and will make the negotiation process easier. Try aiming a little higher than what you would like to leave room for negotiation. When researching salary ranges, tools like Salary.com and LinkedIn’s salary tool can be a huge help. 

To support your case, come to the meeting with documentation to show your work and accomplishments thus far. Provide hard data, numbers, positive feedback you’ve received in the past and all of the ways you have helped and plan to help increase the company’s bottom line. The more evidence you provide, the better chance you have at landing that raise. 

2. Review company growth path and policies 

Schedule an official performance review with your employer to discuss your progress and an increase in pay.

Most companies give performance reviews and have a growth path clearly noted, so it may be worth revisiting your company policies first. Growth paths are important in understanding what’s expected from your employer in order to progress within the company and earn a higher wage. 

If you haven’t received an official review, get one on the schedule with your boss. A 2018 report found that 68 percent of executives say they learn about employees’ concerns for the first time during performance reviews. If you’re concerned about your growth within the company, don’t wait for your employer to come to you about it. 

3. Start a conversation about your workload

Consider decreasing your hours to alleviate workplace stress and create a healthier work-life balance.

If you’re continuing to work long hours and find the pay still isn’t worth it, it might be beneficial to have an open and honest conversation about the amount of work you’ve taken on. If your employer is unable to give you a raise, you may want to discuss cutting back on your hours or workload.

The result may not be an increase in pay, but you may be happier in your role and be able to perform better if they ease up on your day-to-day tasks. Your pay sometimes isn’t worth being unhappy at work. In fact, one of our studies on employee happiness found that 60 percent of Americans said they would take a job they loved with half their current income over one they hated. 

Employers may not be aware of the impact the extra work is having on you, so always try your best to be transparent about your load to find a healthy compromise. 

4. Start exploring other options 

Aside from monetary benefits, take other factors into consideration, such as health insurance coverage and time-off policies.

If your request for a raise gets denied and you still find yourself in the same predicament, you might want to start exploring other options. In fact, those experiencing symptoms of burnout at work are 2.6 times as likely to actively be looking for another job. 

Though monetary benefits are usually of the utmost importance, remember to consider other factors like health insurance options, flexible hours, vacation policies and overall company culture. The issues you experience in your current position can help you determine what you’re looking for in your next role. 

5. Consider quitting your job 

Make sure you’re in a good financial standing and have at least 3 to 6 months of pay saved.

At the end of the day, no job is worth putting your mental health at risk. If your current employer isn’t paying you what you deserve and you don’t feel fulfilled in your role, consider moving on. Now that you’ve done extensive research on your industry’s salary range, you’ll know what range to keep in mind when applying for other positions. 

Before jumping the gun and resigning from a position, make sure you’re financially prepared. In these situations, it’s smart to have at least three to six months’ worth of pay saved to give you some cushion during your job search. It may become more difficult to get approved for a credit card without a job, so having saved up income can help ensure you’re able to pay your credit balance. 

6. Know your worth 

Use Glassdoor’s Know Your Worth tool to compare salary levels according to location, experience level and job title.

Understanding your own worth means being clear on the value you can bring to a company. When you know your worth, asking for a raise and vocalizing your concerns will start to come naturally to you. 

Assess your own skills and level of expertise and be realistic with yourself. Once you’ve analyzed your own skills and industry’s expectations, you’ll have a better understanding of an appropriate wage. Glassdoor has a Know Your Worth tool that can help you determine salary ranges by title, experience level and location. 

The most important thing to remember is to not sell yourself short. Research from Glassdoor found that 59 percent of employees did not negotiate salary and accepted the first offer they were given. Know your worth and don’t settle for less than what you deserve. 

Money isn’t everything when it comes to employment, but it can certainly start to impact your career and personal growth if it remains stagnant. If your paycheck isn’t reflecting your worth, take action and make sure you’re getting the compensation that will set you up for further financial success. 

For tips on how to handle being overworked and underpaid, check out our infographic below.


Reviewed by Kenton Arbon, an Associate Attorney at Lexington Law Firm. Written by Lexington Law.

Kenton Arbon is an Associate Attorney in the Arizona office. Mr. Arbon was born in Bakersfield, California, and grew up in the Northwest. He earned his B.A. in Business Administration, Human Resources Management, while working as an Oregon State Trooper. His interest in the law lead him to relocate to Arizona, attend law school, and graduate from Arizona State College of Law in 2017. Since graduating from law school, Mr. Arbon has worked in multiple compliance domains including anti-money laundering, Medicare Part D, contracts, and debt negotiation. Mr. Arbon is licensed to practice law in Arizona. He is located in the Phoenix office.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

Source: lexingtonlaw.com

Everything You Need to Know About Bill Gates’ Extraordinary House, Xanadu 2.0

Not many houses have their own Wikipedia page. But then again, few residences have owners with a net worth greater than the GDP of over 100 countries.

Once the richest man in the world, the Microsoft co-founder is now #4 on the list of wealthiest people, surpassed only by Elon Musk, Jeff Bezos, and French LVMH founder, Bernard Arnault. Bill Gates’ net worth is a mind-boggling $130 billion, though in recent years he’s stepped aside from most of his business endeavors to run the Bill & Melinda Gates Foundation, the world’s largest private charitable foundation.

Despite his vast wealth, Bill Gates didn’t stray too far from home. Born and raised in Seattle, WA, the billionaire lives in a 66,000-square-foot mansion built into a hillside overlooking Lake Washington in Medina — a small city on the opposite shore from Seattle. Ironically, the tiny city (which had a population of just under 3,000 people at the 2010 census) is also home to fellow billionaire Jeff Bezos.

Bill Gates house near Seattle, Washington
Bill Gates’ home near Seattle, Washington. Image credit: house via reddit, snapshot via Wikimedia Commons, author Simon Davis/DFID

Gates’ house — which goes by the name of Xanadu 2.0, after the fictional home of Charles Foster Kane, the title character of Orson Welles’ infamous Citizen Kane — is worth well over $100 million and boasts some unique features worthy of its owner’s deep pockets. Let’s take a closer look, shall we?

The house has almost as many kitchens as it has bedrooms

The massive 66,000-square-foot home fits many rooms with very different uses between its numerous walls. To list some of the most conventional ones first, Gates’ house has 7 bedrooms, 24 bathrooms (yes, you read that right, that equals over three bathrooms for each bedroom suite), and an impressive total of 6 kitchens.

If you think that’s one burner stove too many, it will make more sense once you learn that the billionaire’s home has a 2,300-square-foot reception hall that can accommodate up to 200 people. The dining room alone sits 24.

There’s also a 60-foot pool, a 1,500-square-foot art deco theater, and a 1-bedroom guest house where Gates reportedly wrote his book, The Road Ahead, while the main house was still being built.

Another unique feature is a massive 2,500-square-foot fitness facility that has a trampoline room with a 20-foot ceiling (which tells you quite a bit about the billionaire’s favorite way to blow off some steam). It also has a sauna, steam room, and separate men’s and women’s locker rooms.

Xanadu 2.0’s most striking room is the library

An avid reader whose book lists hold headlines every year, Bill Gates made sure his house has with a massive — and downright impressive — library.

bill gates in his home office
While images from inside of Bill Gates’ home are hard to come by, Netflix’s documentary Inside Bill’s Brain: Decoding Bill Gates gave us a sneak peak of how the billionaire lives. Pictured here: Bill Gates in his home office. Image credit: Saeed Adyani courtesy of Netflix

From a design perspective, the paneled library spans 2,100 square feet and features a domed reading room and two secret pivoting bookcases, one of which was fitted with a bar. At the base of the dome, there’s a memorable quote inscribed, taken from F. Scott Fitzgerald’s novel The Great Gatsby. It reads, “He had come a long way to this blue lawn and his dream must have seemed so close he could hardly fail to grasp it.”

But the value of the room extends beyond its design, to the books and manuscripts you’ll find inside. Among them is Leonardo da Vinci’s 16th-century collection of scientific writings, the Codex Leicester, which Gates purchased for a whopping $30.8 million.

Bill Gates’ house is as tech-heavy as you’d expect

As you’d probably expect from a man who once revolutionized the world of personal computers, the Microsoft cofounder’s home is heavy on tech, incorporating some very unique uses for technology.

The house features an estate-wide server system, a 60-foot swimming pool with an underwater music system, and about $80,000 worth of computer screens lined up around the house to display art. In fact, visitors and guests of Gates mansion are given devices (worth an extra $150,000) to pick and choose their favorite paintings or photographs to display.

According to Business Insider, the house also comes with a high-tech sensor system helps guests monitor each room’s climate and lighting. When visiting Gates’ house, guests receive a pin that interacts with the sensors, allowing them to change temperature and lighting settings as they see fit. Moreover, there are also speakers hidden behind the wallpaper, which means music can follow visitors as they move from one room to the next.

The house took 7 years to build

In a tribute to its moniker (the word Xanadu is defined as an idealized place of great or idyllic magnificence and beauty), Bill Gates’ home is an architectural feat that took 7 years — and lots of manpower — to complete.

Bill Gates' house as seen in summer 2015 from Lake Washington.
Bill Gates’ house as seen in summer 2015 from Lake Washington. Image credit: Dllu via Wikimedia Commons.

Xanadu 2.0’s architecture, a modern design in the Pacific lodge style, is the result of the combined efforts of Cutler-Anderson Architects and Bohlin Cywinski Jackson. Ironically, the latter is most known for creating the signature aesthetic of the Apple Stores.

What sets it aside is that it’s also an “earth-sheltered house”, which means it uses its natural surroundings as walls for temperature and to reduce heat loss.

According to an older report, the house was built with 500-year-old Douglas fir timbers rescued from an ancient lumber mill, painstakingly sanded and refinished. In total, half a million board feet of lumber was used during construction.

More homes with famous owners

“Neverland” No More! The Past & Present of Michael Jackson’s Former Home
The Mysterious Allure of Stephen King’s House, the Beating Heart of Bangor, Maine
The Three (Tragic) Lives of Frank Lloyd Wright’s Taliesin HouseErnest Hemingway’s Iconic House in Key West Stands Tall and Mighty After 170 Hurricane Seasons

Source: fancypantshomes.com

12 Hidden Costs of Raising a Child – Expenses Parents Should Budget For

A USDA report pegs the total cost of raising a child at $233,610, or $284,570 if you factor in future inflation. That includes only the basics however, and excludes costs like helping with college education, birthday parties, and holiday gifts.

Include those, and you’re looking at $745,634, according to a report by NerdWallet — a jarring amount, no matter how much you earn.

Most of us know that kids come with extra costs like clothing, food, and possibly college tuition. But what about the hidden costs of raising a child? Kids require more than food and clothes, and often the less obvious costs get lost in estimates of just how much children cost to rear.

As you consider having children or plan your finances for an existing family, keep the following costs in mind. Just remember that although these expenses are common, they’re not written in stone, and you do ultimately control how much your own children cost you.

Hidden Costs of Raising a Child

Many parents, particularly mothers, take a career break to raise young children in their first years and often up to school age. It’s not like pressing the pause button and resuming play where you left it. Taking an extended break comes with significant costs, some less obvious than others.

1. Lost Income

On the obvious side, you lose out on the income from those years spent outside the workforce.

Imagine a family where both partners work, and upon having their first child, the mother decides to take a career break. They have a second child three years later, and the mom decides to stay at home until the youngest starts kindergarten at age 5.

That’s eight years of lost income. At a median full-time salary of $52,312 calculated by BLS, that comes to $419,496 in lost wages, not including wage growth over the next eight years.

This says nothing of lost retirement benefits, such as 401(k) matching, or lost returns on your own contributions to investments you could have made with that extra income. Compounded over the next 30 years, those lost returns can amount to millions of dollars.

2. Lost Career Momentum & Potential

Beyond the lost years of income, becoming a stay-at-home parent can stunt your career potential.

By the time you’re ready to reenter the workforce, you’ve fallen vastly behind your colleagues who have had many years to climb the corporate ladder. They’ve been advancing and winning promotions, while you’d be lucky to reenter your industry at the same level where you left.

The opportunity cost doesn’t end there, either. In today’s world of disruption and fast-paced change, eight years of falling out of touch with industry trends, best practices, and technological innovations puts you at a deep disadvantage compared to people still in the workforce and up to speed.

The bottom line: parents who take a break of several years from their career may reenter the workforce at a lower level than they left, and advance less over the remainder of their career. While there’s surprisingly little research on this effect, one study by Adzuna found that Brits who took a five-year career break took an average annual salary loss of £9,660 (about $12,500).

3. Less Time for Side Hustles

Even among parents who don’t take a career break, they simply don’t have the same free time to build extra income through a side hustle.

Historically, I spent much of my Saturdays working on either my business or writing. When my daughter was born, that came to an abrupt end, first because I was so sleep-deprived and later because my wife wouldn’t hear of it.

My father told me growing up that the 40-hour workweek was a baseline for survival, and it’s what you do outside those hours that determines your success, particularly in your 20s and 30s.

Although I believe in creating passive income streams and pursuing financial independence, you need to save a lot of money in the beginning to build momentum. That comes from a high savings rate and a high income, which often requires side gigs.

It’s not so easy to run a business on the side of your full-time job when you have young children.

4. Higher Housing Costs

A family of two can share a one-bedroom apartment. A family of three, four, or five? Not so comfortably.

At the time of this writing, Apartment Guide lists the average one-bedroom apartment rent at $1,621, compared to the average two-bedroom apartment rent of $1,878. That’s a difference of $257 per month, or $3,084 per year, just to add one more bedroom.

Larger homes cost more money, whether you rent or buy. And with the extra square footage comes higher utility costs to light, heat, cool, and power the property and everything in it.

They also require more maintenance for homeowners. The larger the roof, the more square footage there is to spring a leak. The larger the lawn and grounds, the more time and/or money they cost to maintain. And so on.

Expect to pay thousands of dollars more each year for a home that can accommodate your children, not just you and your spouse.

5. Transportation Costs

The same logic applies to transportation.

According to Kelley Blue Book, the average cost to buy a new compact car is around $20,000. The cost to buy a midsize SUV? A hefty $33,000, representing a 65% increase in cost.

As with housing, the difference in costs doesn’t end at the sticker price. It costs more to insure and fuel a beastly SUV than an efficient compact. When your kids reach their teenage years and start driving, they’ll need car insurance, which many parents pick up.

(Personally, I had to pay for my own as a teenager, and I recommend you do the same with your kids to give them practice earning and budgeting for real world expenses. But I digress.)

Some parents even go so far as to give their teenage kids a car, whether a hand-me-down or buying it for them as a gift.

Again, these costs remain voluntary. But it’s harder to drive your kids, their friends, and their gear to hockey practice in a sporty compact than in a minivan or SUV.

6. Medical Costs

People of all ages need medical care. And in the United States, medical care is expensive, no matter how you approach it.

Higher Health Insurance Premiums

Adding more people to your health insurance plan adds to your monthly premium. Period.

Well, not quite period. Some insurers, like Blue Cross Blue Shield, charge for each additional child up to the first three, then stop charging extra and only charge for the three oldest under the age of 21. Regardless, expect to pay more for family health insurance when you have children than you’d pay as a couple.

You may also decide you need more coverage as a family with kids than you did as a couple. For example, you may opt for dental coverage, or more inclusions, or a lower yearly ceiling on out-of-pocket expenses.

Higher Out-of-Pocket Expenses

Kids get into trouble, break their arms playing soccer, step on rusty nails while running around the neighborhood barefoot. And before they do that, babies require plenty of checkups and medical care of their own.

Every time they visit a doctor, need a prescription filled, or look cross-eyed at the health care system, you can expect to get hit with an out-of-pocket bill. Few health insurance plans cover 100% of all medical expenses with no deductible, and those few charge outrageous premiums.

And kids come with other medical costs. If you don’t want your kids to have crooked teeth, suddenly you find yourself with orthodontist bills. Eye exams, contact lenses, glasses — the list goes on.

Your kids will need plenty of medical care between birth and when they enter the workforce, and you’ll be on the hook for every penny.

7. Lessons, Tutoring, and Other Extracurriculars

If your child has dyslexia, they may need special tutoring to help them learn how to read. Many children need speech therapy as young kids. Many others require academic tutoring at some point or another.

If your kids want to learn an instrument, dive deeper into a sport, or pick up just about any hobby, they’ll need lessons.

Parents always forget to budget for these sorts of expenses until they strike, but kids — and just as often their parents — may want or need more than what resources their school offers for free. And when it happens, you need to be prepared to open your wallet.

8. Baby Paraphernalia

I was shocked and appalled at the amount of baby paraphernalia that flooded our apartment when we had a baby.

At every turn, I fought my wife to stop buying so much stuff. And at every turn, I lost the battle. She insisted on buying every gadget, every “cute” piece of baby clothing, every piece of nursery furniture she could get her hands on. From infrared baby monitors to smart chips that attach to diapers to track vital signs, we have it all.

As a minimalist, it drives me insane. Like so many middle-class parents, we have far more baby items than we need. Eventually, I stopped tallying the cost because it was pushing my cortisol levels through the roof.

You may consider yourself a reasonable human being, vigilant against unnecessary spending. But new parents get both anxious and excited — and their response to both is usually to buy more stuff. When you or your spouse gets pregnant, budget extra for spousal splurges when you try to predict how much it costs to have a baby.

9. Toys and Gifts

Again, parents all too often go wild buying gifts, toys, and unnecessary clothes, all in the name of spoiling their children.

It’s so insidious that many parents go into debt each holiday season. Between gifts, swag, and travel, the average American family spends $1,050 at the holidays according to a 2019 National Retail Federation study reported by USA Today.

You can and should fight the urge. But parents overspend on gifts and toys all the time, so it bears including here.

10. Electronics

Increasingly, kids need electronics for schoolwork, not just as frivolous gifts. In the era of COVID-19, they’ve become mandatory learning tools.

Laptops and tablets aren’t cheap though, and they come with notoriously short lifespans as they slip into obsolescence after a few short years. Between the time a child is old enough to use one and the time they move out and pay their own bills, they’ll likely go through dozens of devices between phones, tablets, laptops, and gadgets that haven’t been invented yet but will be all the rage 15 years from now.

Added together, that comes to tens of thousands of dollars.

11. Travel Costs

My wife and I once looked up the cheapest flights for the following week from our then home. We booked flights to Bulgaria for $160 round trip per person and spent only a few hundred dollars over the entire next week.

That doesn’t happen when you have kids, for several reasons.

First, you can’t just up and go during the travel offseason when you feel like it. Your kids have school, so you have to travel when everyone else and their mother travels: during school holidays. Which means always traveling during the expensive high season.

Second, you have to pay for more, well, everything. More airline tickets. More hotel rooms, or a larger home on Airbnb. And then come the meals, entertainment, entrance passes, and so forth. All of it costs more money.

When you travel with an infant, you can avoid many of those costs. But they don’t stay infants very long, and soon you find yourself traveling with teenagers who insist on doing the exact opposite of what you want to do. So you end up paying to do both.

And good luck doing low-key travel like backpacking or hiking trips with social media-addicted kids and teens.

If you really want to travel the way you used to with your spouse, you end up either having to hire a nanny or ship your kids off to summer camp — both of which cost an arm and a leg in themselves.

12. Life Insurance

Many couples can responsibly dodge life insurance, provided they both work. If the worst happens, the surviving spouse can still pay their bills, albeit with the possible need to downsize.

Add children to the mix, however, and you have more mouths to feed — plus all the other expenses outlined above. Losing one spouse, particularly a primary breadwinner, could tip the family into poverty or at the very least require a massive, painful change in lifestyle.

Having children doesn’t necessarily require you to buy life insurance. I don’t have it, as one of the many side benefits of the FIRE lifestyle. But when you have children, you need to plan for contingencies like losing a spouse, and making sure your family can survive without them.

Often that means a life insurance policy, and even when it doesn’t, you still need a plan in place.


Final Word

Having children is not all financial doom and gloom. Yes, some expenses remain unavoidable, no matter how frugally you live. But many of the expenses above represent average expenses among parents with little financial literacy. You can minimize many of them with a little more awareness, and avoid others entirely.

The costs of raising children also operate on an economy of scale. While you and your spouse don’t want to share a bedroom with your child after the first few months, you can put two children in the same second bedroom, for example. Younger children can benefit from hand-me-downs such as cribs, strollers, and clothes. And once you bite the bullet to buy a minivan, having a third child doesn’t change your transportation needs any further.

It doesn’t have to cost $745,634 to raise a child. But it certainly can if you’re not careful.

Source: moneycrashers.com