The cost to raise multiple kids in a big city like San Francisco or New York City is huge. We’re talking $1 million per kid through college. As a result, many families earning less than $300,000 a year are struggling to build up their retirement portfolios.
This article takes a unique angle at the cost to raise multiple kids in a big city. At the end of the day, let’s watch what people do with their money.
The Cost To Raise Multiple Kids Goes Up Due To Competition
After publishing my post, The Wide Implications Of The College Admissions Scandal, one recurring question was: Why didn’t these parents just donate $500,000 to get their kid in legally instead of going the illegal bribe route?
The answer is simple: $500,000 is simply not enough to bribe legally an entire admissions committee. Let’s say there are seven people on the admissions committee. Some will undoubtedly want more, some will likely refuse until you give the school a whole lot more. Therefore, instead of just $500,000, you’ll likely need to donate $5 million or more.
Thus, these parents logically viewed a $500,000 bribe as a 90% discount. Great value if you don’t get caught.
Other people, commenting over social media, were incredulous that parents would donate $500,000 to get their kid into USC instead of sending their offspring to Cal State with $500,000 in cash in his or her pocket.
I agree with this logic, but what people don’t understand is that people who are able to spend $500,000 on a bribe likely have a $20 million or greater net worth. Remember, $500,000 is only for one kid, and many rich families have multiple kids.
Let me share with you guys why a family needs to earn close to $1 million a year to raise an elite trophy kid nowadays.
I just want to provide a glimpse at how some of the really rich think when it comes to having and raising multiple children.
The Definition Of A Trophy Kid
We’ve all heard of trophy husbands and trophy wives. But what on earth is a trophy kid? I had never heard of this term until I became a parent in 2017. As I got to talking childcare, other parents started derisively whispering to me how so-and-so family birthed a trophy kid.
A trophy kid can be defined in one of two ways:
1) The 4th kid in the family.
Because raising kids is so expensive, having a 4th kid is one way the rich signal to society how rich they really are. Not only do they have the fertility to have so many kids starting at a younger age, they also have the financial means to provide for so many kids. A family of six requires a bigger house, bigger travel budgets, bigger tuition budgets, hired help, and more.
2) A lifetime private school kid with nothing to show for.
Attending private K-12 and private university is pretty common for kids growing up in big cities with poor public school systems. However, the trophy kid takes it a step further by not doing anything meaningful with their education.
Despite the enormous cost of tuition, they end up taking a job that has nothing to do with their education, working a job that doesn’t require their level of education, or works no job and returns home to live with their parents. The pressure to produce is not as high because the family is already wealthy.
One of the trophy kid’s main purpose is to make his or her parents proud so they can brag at dinner parties and fundraisers that their kid went to XYZ top private school. Even if the parents aren’t the bragging type, the trophy kid gives his or her rich parents the satisfaction of knowing they spent as much money as possible to provide the best education possible.
Throwing Money At A Problem
Wealthy parents often throw money at problems due to guilt. One of the common dilemmas wealthy parents face is that they spend too much time at work making money and not enough time at home raising their own kids. To assuage their guilt and make themselves feel better about their parental shortcomings, they willingly spend a lot of money on private education for their children.
Some wealthy parents even go the route of sending their kids off to a private boarding school like Philips Exeter, Deerfield, or Hotchkiss in order to truncate their parental responsibilities by four years. They tell themselves it is in their child’s best interest. But deep down, they actually just want a break from parenting during those mercurial teenage years.
“Sam, I tell you it’s been a relief sending my son to Philips Academy Andover. We have our time back! The education is so great and it’s such a great value compared to the private schools here in San Francisco,” said one tennis friend who made tens of millions as a hedge fund manager.
The Top 50 National Universities In America
The cost to raise multiple kids in a big city is affected by private school and college tuition. Big city parents want the best for their kids.
I’ve ranked the top 50 national universities in the chart below using various college ranking systems as well as my own judgement.
Perhaps I’m being a little too lax regarding a trophy kid needing to attend a top 50 university. Maybe the cut off should be a top 10 or top 25 university. However, there are simply a lot of great universities in America that should be appreciated and respected by employers.
When I was in high school, the smart rich kids went to Ivy League schools and other top 25 schools. The reasonably intelligent, middle class and poor stayed in-state and attended UVA, William & Mary, and Virginia Tech. While the rich kids who couldn’t get into a top 25 university or the better in-state schools attended the University of Richmond, which is a good school, but its tuition is a whopping $50,000 a year today!
We see the same phenomena occur in many cities around the nation. In San Francisco, you can attend SF State University for under $10,000 a year. But the rich kids tend to go to the University of San Francisco for $45,000 a year. In Portland, you can go to Portland State for less than $9,000 a year. But the rich kids tend to go to the University of Portland for $47,500 a year.
Yes, the private schools tend to offer more tuition assistance. But still, the difference in tuition is stark between state and private universities.
The Cost To Raise Multiple Kids In A Big City
Now that we know the definition of a trophy kid, it’s time to look at the cost of raising a trophy kid.
I first started with a household income of $500,000 to see if raising four kids was possible in an expensive city like San Francisco or New York on an average budget. Impossible.
Then I raised the household income to $650,000 to see whether the impossible was possible. Still impossible. It was only until I raised the household income to $800,000 could a couple reasonably raise four kids.
See the budget below.
Income And Budget Of Family Making $800,000 A Year
As expected, the biggest costs revolve around the raising of their four children. Each one attends private school at an average of $40,000 each + $2,000 a year in school fundraiser donations.
Then there is the live-in au pair, which is a necessity for raising four kids because both parents work. The au pair route is the cheap route because the family is providing lodging and food. The expensive route is a professional nanny who lives independently, but costs anywhere from $7,000 – $12,000 a month for 40 hours a week.
To house seven people requires a massive, six-bedroom, four bathroom house. The parents live in one room, the au pair lives in one room, two kids live in their own rooms, and the youngest two share a room. Every bedroom is occupied and there is no space for guests or an office.
On the positive side, this couple is putting away the maximum $38,000 a year in their 401(k)s while also contributing $20,400 a year to their kids’ 529 college savings plan. The couple is also paying down roughly $36,000 a year in property principal. Total savings when adding up their 401(k) contributions, 529 plan contributions, and principal pay down equates to roughly $94,400 a year, or 11.8% of gross salary.
An 11.8% savings rate is about double the national savings average, but this family feels the strain of living paycheck-to-paycheck. One unanticipated emergency will force the couple to draw from principal or drastically cut back on vacation and charity expenses.
A $800,000 a year household income is simply not enough to feel like this couple is getting financially ahead while raising four children in a HCOLA. Only when this couple starts making at least $1 million a year will the strains of having a trophy kid loosens.
College Bribery Savings
Even if this household earns $1 million a year, after tax, they will only take home roughly $120,000 year extra in cash.
Given we learned that the average bribe was $500,000 from the college admissions scandal, this $1 million a year earning family would have to save aggressively for 17 years to offer a $500,000 bribe per child.
What we’ve learned from the college admissions scandal is that even if you grow up in the most privileged household possible, it’s still extremely difficult for you to get into a top 50 school, let alone a top 25 school.
Even Dr. Dre, who sold Beats to Apple for over $3 billion, felt the need to give $70 million to USC with his business partner to help ensure his daughter’s entrance and brag about how she got in through merit. It’s awesome she got in, but come on now. Not many people have $70 million to donate.
In other words, even if you send your kid to the best private grade schools, there is still no guarantee your child will be able to get into an elite university. The world has become simply too competitive, especially as US universities have begun accepting more and more international students.
If you think Asian-American kids study hard, wait until you meet a kid from India whose parents have bet their entire household savings to help give their child a better life. It is not unfathomable to expect elite private schools to start raising admissions standards for international kids as well.
Given how poor we are at predicting our future or our misery, such thoughtful planning is highly unlikely.
Only Very Wealthy Families Have Multiple Kids In Big Cities
The median family income of a Harvard student is $168,800. This differs sharply from the national median household income of roughly $62,000. 67% of Harvard students come from households whose earnings are in the top 20 percent nationally.
If Harvard was fair, it would only have 20 percent of its students coming from the families of the top 20 percent income earners. But even with a $30+ billion endowment, Harvard is still heavily focused on raising more money.
Take a look at these graphics from the New York Times. The first row of graphics highlights the median family income of attendees at 12 of the top private universities.
The second row of graphics highlights the percentage of students who come from families earning $680,000 a year or more, a top 1% household income level according to the New York Time’s definition.
As you can see from the chart, schools like Yale, Penn, Duke, Brown, Stanford, Princeton, Dartmouth and Harvard have a whopping 15% – 21% of their student body coming from families who make $630,000 a year or more.
I’m not sure why they chose $630,000 a year. Based on my research with IRS data, a top 1% household income is closer to $400,000. Therefore, if we use $400,000 as the cut off for a top 1% household income, the percentage of students attending such schools with family incomes in the top 1% would likely increase by 50%. For example, Dartmouth goes from 21% to 31+%.
Raising Multiple Kids Requires A Huge Income And Net Worth
If you want to ensure that you can afford to raise elite trophy kids, then your household likely needs to generate $1 million a year or more in new income each year.
With $1 million a year, the family above would have an extra ~$300,000 a year in cash flow to pay for after-school tutoring and potential bribes if their current living expenses remain unchanged.
With the proper investments and savings over a 10 year period, a $1 million a year household could probably increase its net worth by $3 – $5 million. In such a scenario, forking out $500,000 in under the table money to pay off a university sports coach or admissions officer becomes financially possible.
Let’s take a look at a typical budget for a $1 million a year income earning household with two kids to see how much easier it is to purchase success.
Instead of having an extra $300,000 a year in cash flow to spend on tutoring and illegal bribes, this family only has about $100,476 a year left in cash flow because of their nicer home, more expensive cars, more luxurious vacation plans, higher college 529 contributions, and more.
Legal Bribery Is The X-Factor
Therefore, even after earning $1 million a year for 10 years, it still isn’t enough to bribe legally your child’s way into an elite university.
To bribe your kid’s way legally through front door donations, a household would likely need to earn at least $5 million a year for 10 years and/or have a liquid net worth of at least $25 million to afford donations of $5 million or more. Even then, spending 20% of your net worth on legal bribery might seem a bit much.
The great irony about all this craziness is that we are fast approaching an era where we will no longer need a college degree to get ahead. The devaluation of a college degree is one of the most wealth narrowing phenomena in modern society.
From this exercise, I hope readers will realize how rich the rich truly are. Look around you. Chances are extremely high the next elite private school graduate you meet was born into a top 1% household and never needs to work a day in his or her life.
They may likely tell you they got scholarships which might make them seem less rich. But there’s also a good chance they’re practicing a form of stealth wealth.
On the flip side, those students who attended a top private university and came from a middle-class background need to commended and recruited. They have truly overcome the odds.
This article is also a wakeup call to myself about the downside of going down the trophy kid road. But then again, we only have one kid so the chances of having a 4th at our age is about 0%!
Recommendation To Build Wealth
Sign up for Personal Capital, the web’s #1 free wealth management tool to get a better handle on your finances. In addition to better money oversight, run your investments through their award-winning Investment Checkup tool to see exactly how much you are paying in fees. I was paying $1,700 a year in fees I had no idea I was paying.
After you link all your accounts, use their Retirement Planning calculator that pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms. Definitely run your numbers to see how you’re doing. I’ve been using Personal Capital since 2012 and have seen my net worth skyrocket during this time thanks to better money management.