This post is guest-written by Claudia DoRego of Planswell.
Having a child is one of the most incredible miracles in life. What’s also miraculous is the increasing cost of raising children, which is why incorporating your growing family into your financial plan is so important. From the early years, throughout childhood, adolescence and into young adulthood, having kids means a range of new expenses. This is where having a financial plan comes in handy for new parents.
If you’re planning to grow your family or are already welcoming a new addition (congratulations!), you have probably asked yourself the question: how will I financially prepare for this? There are plenty of expenses that will come up along the way that every parent experiences. We’re here to give you the head start you need to start organizing and preparing your finances so that things will be a bit easier down the road.
Update your budget
When you find out that you’re expecting, it’s smart to revisit and update your budget immediately. This will help you begin planning for the upcoming significant expenses while finding places you may be able to cut back on spending and increase the amount you’re saving. You should consider budgeting by trimester to help you create achievable and timely goals.
An increase in spending is bound to happen when you have a child, but if you are well prepared ahead of time, you and your finances won’t be caught off guard. At Planswell, we’ve made it a bit easier for you to begin your budget, with our Child Affordability Calculator.
Once you have figured out how much paid and unpaid time-off your employer offers, you should begin to think about how much leave you want to take, and how you plan to pay for it. This can give you a sense of control over the big expenses that are lurking around the corner while getting a few months ahead of the game regarding daycare, and other major childcare costs.
You’re also more likely to make steady progress towards your financial goals if you set up automatic payments and/or deposits. By doing this, you’re prioritizing your goals, and forcing the rest of your life to fit around them.
Purchase term life insurance
Before a child was relying on you, life insurance may not have ever crossed your mind. You might have even questioned whether or not it was worth it. After all, everyone plans to be around for many years. But having a baby changes everything, and to answer that question – it is worth it. If you have dependents that are relying on you financially, life insurance is designed to protect you and your family against those worst-case scenarios, financially.
Life insurance, specifically, term life insurance, can be quite affordable. For young and healthy adults, you can purchase an inexpensive policy that will create a secure safety net for your family. Make sure to buy a term that is long enough to cover the years that you’re building your savings, paying off debts and have the additional costs of raising children.
It’s important to note that many, if not most, insurance agents are incentivized to sell you more insurance than you actually may need, due to their commission-based payment structure. You never want too little, or too much, when it comes to insurance. Ensure that you are always asking how they get paid so you can confirm that your needs are being served in the best interest.
Build an emergency fund
If you haven’t started to build your “rainy day fund,” now is the time to anticipate some emergencies. It’s helpful to have an emergency fund that will cover three to six months of after-tax income in the event of a change in employment, car damage, home repairs, or simply the addition of an accident-prone child. This money can be invested in a low-risk portfolio in your TFSA, or in cash. Either is fine and simply depends on your preference.
With the cost of raising a child, it’s difficult to tell if you’ll have enough disposable income to pay for any surprises that may come your way. An emergency fund will provide you with a comfortable cushion, and should be calculated based on the new family budget. This cash reserve is especially important is your family lives on a single family member’s income.
Prepare for tuition costs
Nobody wants their children to start their adult lives owing a crippling amount of student debt. But the costs of post-secondary education can paralyze parents into doing nothing at all. It’s often hard to find any wiggle room in the family budget, especially when you’re already paying a mortgage (or rent), child care, insurance and perhaps even a student loan of your own.
The single best way for Canadian parents to pay for future education costs is to save as much as possible. The best way to save is through a Registered Education Savings Plan(RESP), which parents can open at birth. This investment tool allows your savings to grow tax-free until your child is enrolled in a university, college or other specified education programs. The RESP can stay open up to 36 years, with a lifetime maximum contribution of $50,000 per child.
One of the best features of an RESP is that as you contribute your money throughout the years, the federal government also adds to your savings through the Canada Education Savings Grant (CESG). They will provide 20 cents on top of every dollar that you contribute, up to a maximum benefit of $500 (i.e. 20$ of $2,500). It’s important to know that you aren’t required to contribute $2,500 per year, and you can carry forward any unused CESG room, until the end of the year in which the child turns 17. The maximum lifetime amount of money you can gain through the CESG is $7,200.
For more information regarding RESP contributions, withdrawals, the Canada Learning Bond and what to do if the beneficiary decides not to pursue post-secondary education, check out Planswell’s blog.
Know your credit score
If you’re planning on starting a family, it’s also a good idea to check your credit score and credit report to get a pulse for where you stand financially. You can check your score in less than 3 minutes with Borrowell and it won’t affect your credit score.
Growing your family comes with quite a long list of new responsibilities, but don’t try to do them all at once. Be sure to prioritize and get through the most critical items on your financial “to-do” list.
With at least 18 more years until your child leaves home, you would think that time would be on your side. But as we know, time flies, and before you know it, you’ll be an empty nester once again. Having the help of qualified professionals can help set your family up for financial success for years to come. Take the first step into financial stability today and build your financial plan with Planswell.
About the Author
Planswell is a financial planning company. Grow your wealth. Manage your borrowing. Protect your assets. Planswell gives you a free plan that ties investments, insurance and mortgages together so you can maintain your lifestyle throughout work and retirement.