Financial advice for new parents
Welcoming a baby to the family is an exciting, challenging time for new parents. And many moms-to-be plan to take advantage of the current 12-month maternity leave (which the Trudeau Liberals have promised to extend to 18 months). But in planning for mat leave, what do new parents have to consider financially?
Be realistic about 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. By some estimates, baby’s first year will cost a little over $7,000 for annual household incomes less than $41,000, about $10,000 for household incomes of up to $70,000, and about $15,000 for household income of $70,000 or more.
Be realistic about income and outgo
Baby’s arrival and an extended mat leave 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
Save, save, 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. And don’t just put it in what’s laughably called a “savings” account. Talk to a financial advisor about investing your savings in assets that produce a decent return. I don’t mean speculating or gambling, but perhaps solid, dividend-producing stocks or income funds. Set up a regular savings plan with your advisor, ideally, some sort of automatic pre-authorized weekly or monthly transfer, so that your saving becomes like another routine expense or withholding on your paycheque – invisible, in other words, until you start seeing the investments mount up in your monthly statements.
Get all your benefits
Make sure you apply for EI maternity and EI parental benefits, as well as the Canada Child Benefit.
According to the government, for most people, the basic rate for calculating EI benefits is 55% of your average insurable weekly earnings, up to a maximum amount. As of January 1, 2016, the maximum yearly insurable earnings amount is $50,800. This means that you can receive a maximum amount of $537 per week.
According to the government, you will stop receiving EI benefits in any of the following cases, whichever comes first:
You have received all the weeks of benefits to which you were entitled; or the maximum benefit period of 52 weeks has been reached; or the payment timeframe during which you can receive benefits has ended, as follows:
* EI maternity benefits can be paid for a maximum period of 15 weeks and must end 17 weeks after the week you were expected to give birth or the week you actually give birth, whichever is later; or
* EI parental benefits can be paid for a maximum period of 35 weeks and must end 52 weeks after the week your child was born or was placed with you for adoption.
This is a sure-fire budgeting tip that can save you thousands. During pregnancy and in baby’s first year, stay off credit. Caffeine and alcohol during this period are bad for baby’s health. And credit is likewise bad for your financial health. 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.
Protect against the unexpected
As a family – and with a new baby, that’s what you now are – 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.
Last, but not least, the sooner you start applying these basic budgeting principles, the better. If it all seems a bit overwhelming – and it can be, both during your pregnancy and in the months following baby’s arrival – seek out the services of a Certified Financial Planner, someone who’s well-trained in the art and science of family financial planning.
© 2016 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice.