Six budgeting essentials for bringing up baby
For new parents, one thing’s for certain with the arrival of that new little person – your household budget will change drastically. And many will find the transition something of a challenge. But there are tried-and-true rules to ease the way. Here are six budgeting essentials for bringing up baby.
1. Costs
Most new parents tend to underestimate the cost of essentials like diapers, baby furniture and equipment, clothing, and formula (and later, baby food). If both parents plan to keep working after the first few months, you’ll have to plan for childcare costs – which can be steep, running from a few hundred dollars a month to $2,000 or more if you plan to have live-in help.
2. Income and expenses
Baby’s arrival will mean a drop in income, at least temporarily. Adjust your spending habits accordingly – you’ll have to take a really close look at all that discretionary spending you did before baby’s arrival. For example, eating out five times a week, all those shows, concerts, clubs, and patios, drop-of-the-hat travel and cruises to the sunny south…it adds up to thousands of dollars in savings.
3. Learn to save
In fact, it’s important to start a disciplined savings program during pregnancy, and ideally even before. You’ll need those funds during maternity leave, during which your income will typically drop. Save whatever you can, but ideally, set aside 20% of your after-tax income in the year or two before baby arrives. Talk to a financial advisor about investing your savings in assets that produce a decent return, say, solid, dividend-producing stocks or investment funds. Set up a regular savings plan with your advisor, ideally, and make automatic pre-authorized weekly or monthly transfers.
4. Control credit
This is a sure-fire budgeting tip that can save you thousands. During pregnancy and in baby’s first year, stay off or reduce the use of credit. The last thing you want to deal with during that busy first 12 months are credit card balances carrying interest of 20% or more. Do not put more on your credit card than you can pay off fully every month. Better yet, put the card away, and use your debit card or cash for routine purchases. It’s a good way of forcing you to think ahead and control impulse buying.
5. Expect the unexpected
As a family, you have longer-term responsibilities. What happens if you become ill or disabled, incur large medical expenses, or pass away? No one likes to think about these, but it’s an essential part of financial planning and budgeting.
You’ll need to get the right type of health, disability, and life insurance, depending on whether one or both of you continue working during baby’s first year. Sometimes, an employer’s benefits plan will offer some medical and disability coverage for the employee and his or her dependants. If not, a number of insurers offer basic medical and disability plans with at least a minimum level of protection.
You’ll generally have to arrange life insurance yourself. This needn’t be expensive – term life plans, for example, are extremely economical. But you still need to budget for them.
Perhaps most important, make or revise your wills. Again, this needn’t be a costly exercise, but it’s an essential part of financial planning.
6. Tax benefits
Don’t forget to claim every federal and provincial family and child tax credit and deduction you can. These are available for parents with children, and as a new parent, you should definitely look into the following in particular. But note, not all are available to every taxpayer, as many are means tested, and are reduced or eliminated at higher income levels:
Canada child benefit. This is a tax-free monthly payment made to eligible families to help with the cost of raising children. It could amount up to $6,400 per year for each child under six years old, and $5,400 for each child from 6 to 17 years old.
GST/HST credit. This is a tax-free quarterly payment of up to $560 per year for modest-income families. If you are eligible for the GST/HST credit and have children, you could also get up to $147 per year, for each child under 18 years old.
Provincial and territorial programs. Don’t forget to research these related programs on your provincial government website.
Child disability benefit. A monthly tax-free amount for families who care for a child under 18 who is eligible for the disability tax credit. The benefit is paid along with the Canada child benefit.
Childcare expenses. You may be able to claim a deduction if you or another person pays for childcare expenses so that you can work, operate a business, attend school, or do research or similar work for which you have received a grant.
EI maternity and parental benefits. If you can’t work because you are pregnant, have recently given birth, or are taking care of a newborn, you may be entitled to employment insurance maternity and parental benefits.
Check the CRA website for details and eligibility for these tax breaks.
Start now
The sooner you start applying these basic baby-budgeting principles, the better. If it all seems a bit overwhelming, seek out the services of a Certified Financial Planner, someone who’s well-trained in the art and science of family financial planning.
