Staying home to raise children: a bad idea?
Day care is expensive in Switzerland. Many families have one parent stay home to raise children. But is it a bad idea?
Have I told you about my daughter Alice? Probably not, because this is a personal finance blog, and not a parenting blog.
Here’s a little anecdote though: After she was born, my wife extended her maternity leave by a few weeks. Then I took over: I took a nine month break from my job and stayed home full time to raise this crying monster lovely creature. But our family is an exception.
It’s no secret that, traditionally, women are the ones taking a break in their careers to raise the children. Some women choose to stay home for longer periods because the financial benefits of going back to work are not clear while the non-financial drawbacks are quite clear (to sum them up: more stress and less time with children).
But is child care so expensive and taxes so progressive that it can be not worth the effort to go back to work after taking a break to raise children?
This is what we are going to investigate in this article.
Let’s assume a family in Zurich with one child. The husband Howard works full time and earns CHF 100,000 gross per year. His wife Tammy is currently taking care of their child at home and is considering taking a position paying CHF 60,000 full time. Full time day care for cost 130 francs per day or 2,600 francs per month.
What we have to calculate in this exercise is: what is the net financial gain for the family considering the cost of child care and the higher taxes (due to the higher income) ?
Scenario 1: Tammy stays home
If Tammy isn’t working, the family solely pays taxes on the income of Howard. They can’t claim deductions for third-party child care because… well… Tammy is doing it for free.
According to the tax simulator, they would pay around 6,800 francs in taxes. They would therefore be left with around 83k after deductions and taxes.
Scenario 2: Tammy goes back to work
If Tammy is working, the family is taxed on both incomes but they get to deduct the maximum allowed for day care cost (CHF 10,100). Please note that these amounts vary from canton to canton as for everything tax related. In that scenario, they would pay around 14k in taxes. We also have to consider the actual cost of child care: 36k per year. So all in all, they would be left with around 94k after day care costs, deductions, and taxes.
In effect, Tammy is working for a mere 11k per year, or less than 1,000 francs per month.
But that’s not the only thing to consider. By working, Tammy is not only getting a salary, she is also contributing to her pension (1st and 2nd pillars) and she gets to contribute to her third pillar if she wants to. In addition to that, working right now will make her more employable in the future: taking a one year break isn’t a big deal, but trying to go back to work after 7 years might be rough. The final aspect is that by going back to work, Tammy improves her mental health by being confronted with reasonable humans instead of the same tyrannical despot little angel all day long.
So even if working full time for a mere thousand francs might seem like it’s not worth it, the immediate salary isn’t the only variable to consider.
Scenario 3: a way in-between
Now, is there a way to optimise this scenario? What if, instead of going back full time, Tammy would work 50%? And what if Howard would reduce his working time to 90%? Tammy takes care of the child 2.5 days per week. Howard, one afternoon. And day care covers the other two. What do we have now? The family earns a gross income of 120k (108k net). Taxes are 6.5k. Day care costs 12k. All in all, they have… 89k after day care costs, deductions, and taxes.
The family is giving away 5k compared to the situation where both parents are working full time. But they get a combined 3 days per week of « free » time. And everybody contributes to their retirement pillars and everybody stays employable. That’s not a bad deal in my book.
And they get 6k more compared to the scenario in which Howard works full time and Tammy is a housewife.
Of course it is difficult to generalise: each canton has its own progressive tax scale and its own available deductions. The difference in salary between husband and wife also plays a role, as well as the number of children and the cost of day care. On that note, notice how if Tammy and Howard had one more child, they would actually be losing money by externalising child care.
One thing to have in mind is that it’s not only the net financial gain at the end of the month that counts. The future earnings have to be considered as well. It might be worth it to work at least a little for a few years even if the financial gain isn’t obvious, just to preserve one’s employability.
And of course, there are also the individual preferences: some women (and some men) give away fantastic careers to raise their children, just because they find it more fulfilling than slaving away to raise the company’s profits. And that’s entirely fair. There are no wrong choices, only different priorities.