When I had my first baby in 2007, I was overwhelmed with joy, lack of sleep, and many wonderful gifts from family and friends. It’s a time I look back on with both awe and fondness as for me nothing compares to the wonderful journey of having a baby.
At the time, I received a lot of tips, advice and books on parenting. However, there is one topic that seems to be completely off everyone’s mind before and right after having a baby: managing finances to ensure you and your newborn are well looked after.
As a financial advisor, I was already familiar with the necessary steps and strategies to prepare my family for the arrival of our newest member. However, I know that many new parents feel a bit lost and would benefit from some guidance. That’s why I’m happy to share with you this financial guide for new parents, as it’s my hope that it will help you get organized and enjoy an easier, smoother process.
BEFORE YOUR LITTLE ONE ARRIVES
When you have a baby on the way – especially if it’s your first – there are a thousand and one things to plan and arrange. Beyond medical checkups and acquiring strollers and baby clothes, there are several important financial issues to consider to ensure your family is prepared for the new addition.
Plan your maternity leave
If you or your partner will be taking maternity leave, it’s important to spend some time planning this out. Aside from the obvious need to inform your employer so that the necessary arrangements can be made, it’s also good to assess and map out the financial implications of maternity leave. For example, you should consider:
- The best timing for starting and ending your maternity leave
- The impact on your monthly household finances
- The impact on your contributions to retirement savings
- The cost of childcare should you opt for a shorter maternity leave
Take a close look at your budget
Employment Insurance (EI) maternity and parental benefits can provide a degree of financial assistance as you welcome a new baby into your family. However, these benefits are based on only 55% of your average weekly insurable income – not simply 55% of your weekly income – and capped at $562 per week in 2019. This means you will need to budget for a considerable drop in income if you are currently earning a high salary.
While you can opt to have these benefits paid out over a 12-month or 18-month period, the longer period does not mean more money; instead, you’ll receive the same amount of money split into smaller weekly payments.
To supplement your EI benefits, many employers also offer income top-ups to employees going on maternity leave. If you’re not sure whether your employer offers top-ups or how they work, be sure to speak with your HR department to seek clarification. It’s also important to note that your EI maternity and parental benefits are taxable, as is any other income you earn while on maternity leave.
Understand all the financial implications
Beyond the direct impact on your salary, going on maternity leave can have significant implications for other aspects of your financial life. For example:
- Changes to your income during maternity leave may impact your Registered Retirement Savings Plan (RRSP) contribution room, which will need to be factored into your retirement savings plan. Similarly, your contributions to an employer pension plan may also be affected.
- If you have group health insurance through your employer, you likely have premiums deducted directly from your salary. Unless you are prepared to give up the group health insurance benefits during maternity leave (probably not!), you may need to pay these premiums out of pocket since there will be no salary from which to deduct them.
Given all the different ways in which your finances can be impacted by going on maternity leave, it’s critical to carefully map them out in advance and gain clarity on what your cash flow will look like during this period.
Start saving for childcare expenses
For many Canadian families, putting their young children in childcare is necessary as one or both parents need to work. If you are planning to do so, even if it’s only later when your baby is a bit older, it’s a good idea to start setting aside money early for this extra expense.
A study by the Canadian Centre for Policy Alternatives found the median cost for infant care in Toronto to be a whopping $1,758 per month in 2017, dropping only slightly to $1,212 per month for preschool. Aside from planning ahead for this significant cost, it’s also recommended to get your name on a waiting list as early as possible since childcare spots tend to be in high demand.
Obtain or adjust your insurance coverage
Even before it’s born, your baby likely means the world to you, so it’s only natural that you want to provide the best life possible for him or her. Insurance is a key component of financial planning for any family – especially a growing one – providing both a safety net to protect your loved ones and a flexible asset to grow your wealth.
Life insurance coverage is a great way to adapt to the many changes and transitions most of us experience during our lives, such as parenthood, buying a house, entering or leaving the workforce, health challenges and relationship changes. The coverage you choose depends entirely on your situation, but to start, life insurance is often used to insure that which you can least afford to lose, namely your life, your health and your income.
Beyond this, insurance can also be a cost-effective solution to provide your growing family with the following:
- Cash to provide a cushion during emergencies
- Cash for education
- Cash to pay off personal obligations
BABY IS HERE!
When your baby arrives, it’s all about boundless joy and love. At the beginning, you will be highly focused on the essentials of making sure your newborn is well (i.e. eating, sleeping and being happy!) and adjusting to the new family dynamic (i.e. lack of sleep). Beyond this, the following are some of the important financial and administrative matters to take care of following the birth of your little one.
Choose a family doctor or pediatrician
Your baby’s health is paramount, so where should you turn for help? In Ontario, children under the age of 17 can have either a family doctor or a pediatrician, so it comes down to personal preference.
Did you know you can choose pretty much any pediatrician and they will take you as long as you call their office before you and your baby are discharged from the hospital? However, if you wait until after you have been discharged from the hospital to make inquiries, only pediatricians taking new patients will consider taking you, and for that you will need to be referred by your family doctor.
To search for family doctors and pediatricians in your area, check out the College of Physicians and Surgeons of Ontario website.
Take care of the paperwork
New parenthood should be about cuddles, not paperwork, but there are a few key logistical steps required to ensure your child reaps all the benefits that come with being Canadian. Fortunately, this process is relatively quick and efficient.
Once your baby is born, use Ontario’s online newborn registration service (you can even use your smartphone!) to complete these four important government processes for your baby:
- Register the birth
- Obtain a birth certificate
- Obtain a social insurance number (SIN)
- Register for the Canada Child Benefit, including the Ontario Child Benefit
Start saving for education
With a recent Macleans survey suggesting that the total annual cost of post-secondary education in Canada is currently about $19,500, it’s never too early to start saving. A Registered Education Savings Plan (RESP) is a great place to start – all you need is a SIN for your baby and an initial deposit.
An RESP offers several advantages compared to simply tucking away money in a saving account, including:
- Tax-free growth of contributions within the RESP
- Potential for top-up grants and bonds from the federal government and some provincial governments
- Retention of control over how your money is invested
Beyond starting an RESP for your baby, another option to consider is pairing the RESP with permanent cash value life insurance. It may sound strange, but life insurance can be a powerful tool for funding your child’s future education and providing them with a solid financial foundation.
Insurance is a flexible asset that will grow along with your child. In addition to spurring tax-advantaged growth of your child’s education savings plan, a permanent cash value life insurance policy also provides other benefits, such as locking in lifelong insurability.
NAVIGATING THE FINANCIAL SIDE OF PARENTHOOD
When you have a baby on the way or a newborn at home, there’s a lot to consider and plan for from a financial perspective. And this is on top of the endless questions and uncertainties, preparations and to-do lists, and joys and celebrations that are all part of parenthood. Hopefully this guide will start you in the right direction and provide some peace of mind that you are taking care of your family’s financial needs during this monumental life event.
If you have any questions or would like assistance implementing any of the financial strategies described here, please don’t hesitate to contact me or another member of the Rubach Wealth team. From understanding your immediate situation and managing short-term changes in cash flow to developing a long-term financial plan that will evolve with the needs of your child and family, there’s a lot we can do to help.
Lastly, whatever worries you may have, never lose sight of the joyous big picture: you have a baby! They grow fast, so plan ahead, take lots of photos and cherish every waking moment – as well as every sleeping one.