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The Modern Chicken and Egg Problem: Houses and Babies, Which First?

I see young families every day who have one baby or toddler and are either planning another one or have another on the way and they decide it’s time to buy a house. What could be worse for your monthly cash flow? Answer: not much.

Here’s the thing, babies are a cash flow nightmare because of the childcare costs. If you have two kids who are say, 2 years apart, you are paying for two daycare payments for at least 2 years (3 if you are in a state like Maryland where there is no public pre-K).

In any coastal urban area, you are talking about $3-4k/month on childcare ALONE for two kids. Now, if you add a $3000/month mortgage payment (typical in urban coastal areas), you are talking about $6-7k/month out the door BEFORE YOU BUY FOOD OR TURN ON THE LIGHTS. You need to earn a combined pre-tax annual income of $250k+ to stand a chance of making that work. If you have student loans, too…. Well, the math just becomes absurd.

I know you want a bigger house when you have two toddlers running around. I know you hate paying rent because it’s just “money being thrown away.” But, remember the God of Cash Flow. Even if you are not building equity, while renting you may be:

  1. Saving more money for a larger down payment on an eventual house, which can make your monthly mortgage payment lower
  2. NOT having to charge things as they come up, because you have more money each month
  3. Saving appropriately for retirement so the kids you have do not have to support you in your dotage

If your rent is materially lower than a typical mortgage payment, and you can handle babies and toddlers where you are renting, it is better to WAIT on the house until at least one of the children is in public school. Do not try to do it all at once or you will be in a significant cash flow crunch that can cause you to accumulate unwanted credit card debt and make you feel like you are drowning or suffocating (neither image is good).

Owning a property is great and building equity is also great, but that is balance sheet "great" and not cash flow "great". The suffocating feeling comes from cash flow and not balance sheet issues. You still have to make it month to month spending less than you earn. I would argue that spending less than you earn each month is more important than building equity at this point in your life. Building equity can be postponed for a few years if it means living a saner, more credit card debt-free life.

If you have the reproductive years to wait, you could also buy your house first and make sure you have adequate earnings as your pay rises to accommodate a first and then second daycare payment. Just make sure you can live in the property at least 5-10 years.

The key is that you do not crush your cash flow all at once. Do not have your second and buy your dream house in the same few years. It’s too much. Try to space things out.

Also, I’m nobody’s family planning advisor, but from a financial standpoint, it is okay to have more than 2 years between your children. If you think daycare is bad, wait until college, when you have about $120k/year AFTER-TAX going to MIT for both kids when they overlap for two years.

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