In corporate settings, it is not unusual for firms to assess the financial viability of a business unit and decide whether to retain it within the corporation or divest it. The selling of units that do not seem to “fit” should bring about greater synergy for the firm. This same logic can be applied in a personal finance situation as well. An important question that comes up for families with two working parents and young children is whether one of the working adults should stay at home or whether the family should use day-care services.
Assume that Ted and Maggie Smith have two young children who need childcare services. Currently, Maggie is a stay-at-home mother but could go back to her former job as a marketing analyst. She estimates that she could earn $3,800 per month gross, including her employer’s 401(k) contributions. She will receive monthly employer-paid benefits that include health insurance, life insurance, and pension contributions totaling $1,200.
Maggie expects her federal and state income taxes to total about $1,300 per month. The Smiths have calculated that total additional expenses such as child care, clothing, personal expenses, meals away from home, and transportation related to Maggie’s job could total $1,400 per month.
Does it make economic sense for the Smiths to hire child care and have Maggie return to work? To answer this question, calculate the net income or loss from her possible return to work.