Financing baby
Economics is sometimes a factor in deciding whether or not to have a child. Financial considerations include not only caring for a newborn and but also affording a year-long parental leave.
According to research by TD Canada Trust, 72 per cent of Ontario residents say they would use savings to start a family and plan for a year-long parental leave, compared to 28 per cent who would have to rely solely on other sources like the generosity of family or friends, loans or credit cards. The research also showed that 45 per cent would be comfortable taking on debt to finance their new family.
“The cost of caring for a baby can increase your annual expenses by up to $10,000 in baby’s first year,” says John Tracy, a senior vice president at TD Canada Trust. “The key to affording your new little bundle of joy, without taking on too much debt, is to understand the true costs of your parental leave and then work with your partner and a financial advisor to create a realistic budget and a savings plan to meet your goals.”
A father of two young boys, Tracy provides his advice on how to plan and save for a year-long parental leave:
1. Understand the true costs of parental leave and write a budget
Consider what additional expenses lay ahead, such as new furniture, baby supplies, food, clothing and toys, and add them to your list of regular expenses. Make room in your budget so you can keep saving (ideally 10 per cent of your income) when your little one arrives, and add some buffer to cover life’s little surprises, such as extra medical needs or even twins! Remember, before you can start receiving employment insurance benefits there is a two week waiting period during which you will not be paid, so ensure you have buffer in your budget to cover this gap, too.
2. Set up a tax-free savings account (TFSA) and start saving
To save that extra $10,000 for baby’s first year, you would need to find $250 per week for nine months, so planning and saving ahead for several years is ideal. A TFSA is a great saving tool, because you’re not taxed on the income you earn and you can withdraw your funds tax-free at any time.
“It can be hard to find money to save for your family’s future when you have bills to pay today,” says Tracy. “If you’re having trouble saving, start small, set up an automatic transfer and gradually increase your savings. If money is tight, sit down with your family or a financial advisor to look for ways to compromise on your current living expenses so you have more money to save.”
3. Consider the implications of parental leave on your RRSP
“Even a short departure from the workforce, like a one year parental leave, can impact the value of your retirement nest egg,” says Tracy. “Where possible, try to stay on track with long term investment plans while on parental leave. In some cases, a spousal RRSP can be a smart family saving strategy by helping the lower-income spouse save and entitling the higher-income spouse to a tax deduction. Another way to boost your retirement savings is to invest your tax refund into your RRSP.
4. Have open and honest conversations with your partner
Talking openly and honestly about money is an important part of establishing a healthy financial foundation with your partner, but Tracy says it can be hard for couples to start the dialogue. “The bottom line is that you need to ensure you’re financially aligned before your baby arrives,” he says. “You need to have frank conversations about the financial realities of parenthood and how you will work together through the emotional and fiscal implications of a one-income household.”
5. Speak to an expert at your bank
Find out if your new family qualifies for any government benefits or tax incentives, and speak with an advisor about updating your financial plan. For example, the Universal Child Care Benefit is a government program that gives Canadian families $100 (pre-tax) each month for each child under the age of six. You may also be able to deduct child care expenses from your income when you’re filling out your tax return, so make sure to keep receipts for your child care expenses—from nannies and day care to nursery schools and sports programs.
