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Oct 02

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It costs $241,080 to raise a child and other reasons why averages can be completely uninformative

A popular news service reported that it costs $241,080 to raise a child and then remarked, “the cost of raising a child is climbing at a rate that many families can’t keep up with.” The news agency cites falling wages and lower employment rates as support for this struggle to keep up.

A host of problems can be attributed to citing averages without also considering other statistical measures such as dispersion and underlying reasons for that dispersion. A colleague of mine is fond of mentioning that a person’s feet can be at a comfortable room temperature, on average, even though one foot is cooking in a pot of boiling hot water while the other foot is frigid in nearly freezing water. Average is only a measure of central tendency and, in cases that might be similar to feet in buckets, giving much weight to the average might be inappropriate.

Furthermore, it should be definitionally obvious that many families cannot–or at least choose not to–spend on their children at the average rate. In fact, if the selected measure is a median rather than a simple mean, exactly half of all families “cannot” spend at the average rate.

And in the case of a simple mean, at least in this instance, we would expect even more families to be unable to “keep up with” the average. As the Occupy movement taught us, wealth among families does not follow a normal distribution pattern but has a very long tail reaching to the right. Relatively few families have loads of money. These relatively few families spend plenty to raise their kids. Of course, this abnormal spending increases the average, meaning even more families can’t keep up with the so called cost of raising kids.

It is also worthwhile to consider why individual cases vary from what might be “average” or “typical.” Gee, has anyone ever wondered why it is that kids born to poor parents tend to be considerably less expensive to raise than kids born to rich parents? Remarkable that those rich parents always get ripped off like that. How did they ever became so rich to begin with?

The article studiously observes that kids in some parts of the country cost a whole lot more than kids in other parts of the country. It even goes so far as to suggest the imagery of a price tag hanging around the kid’s neck:

“The biggest price tag is for families in the Urban Northeast earning $105,360 or more. They will spend $446,100, much more than the national average… Meanwhile, families earning less than $61,590 a year in rural areas will spend the least, at $143,160.”

Wow, those poor rich folks in the northeast. How can they possibly afford it? Meanwhile, the lucky folks in Hicktown, USA are getting one heck of deal.  My own parents, as it turns out, scored an absolute bargain on their kids.  Good thing too, given that there were six of us.

Which raises another point. If families generally can’t keep up with the average cost of raising a kid, as the article points out, why is the average increasing? Families spending less and less on their kids under the pressure of an ill economy should lead to a lower average cost to raise a kid, meaning it should be easier and easier to “keep up with” the average. How convenient.  Unless, of course, those easily duped rich folks have been suckered into paying ever higher price tags for their own kids.

About the author

Eric Madsen

Mr. Madsen is a Chartered Financial Analyst (CFA) charterholder and a Manager at Fulcrum Inquiry, a finance and economics consulting firm that performs economic damages analysis involving commercial litigation, financial investigations, business valuations, and forensic accounting. He also holds an MBA from the UCLA Anderson School of Management and a B.S. in Economics. He conducts expert analysis in finance and economics. Mr. Madsen may be contacted at 213.787.4122 or at emadsen@fulcrum.com.

Permanent link to this article: http://betweenthenumbers.net/2013/10/it-costs-241080-to-raise-a-child-and-other-reasons-why-averages-can-be-completely-uninformative/

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