How to prepare your finances for having children
#Family and finance
Starting a family requires careful financial security planning
Starting a family means committing to a whole new lifestyle. While many unknowns lie ahead, a little planning can go a long way towards helping you remain in control of your financial destiny.
Raising children isn’t cheap. A 2011 MoneySense magazine report based on Canadian government statistics estimates the average cost of raising one child to age 19 to be $304,600 – about $1,300 a month.1
That same report found that having additional children can create economies of scale, meaning two children will cost about $2,200 a month, while three will cost $2,600. These estimates cover all expenses, including bigger cars and homes – but not post-secondary education.
Monitor expenses with a spending plan
The first step in preparing your finances is creating a spending plan with an eye on trimming expenses and existing debt. Easy pickings include restaurant meals, pricey vacations and top-of-the-line electronics. Cutting monthly outflows helps pay for immediate needs, such as baby furniture and child car seats.
Paid maternity and parental leave
It’s important you become familiar with the rules for paid maternal and parental leave offered by Employment Insurance (EI), or in Quebec, the Quebec Parental Insurance Plan (QPIP). Total weeks available vary by province and territory and range from 15 to 18 weeks for the biological mother and 35 to 52 weeks of sharable parental leave. Apply early and decide on the optimal timing to avoid losing benefits.
EI will withhold taxes on your benefits but if your pre-leave income was high, you may end up owing money at tax time. Your employer may “top up” the payments, but these are also taxable – so ensure enough taxes are withheld. You can find EI benefit rates on the Government of CanadaOpens a new website in a new window website.
Child care
Many of today’s young parents were raised in households where one parent stayed home, full-time. Statistics Canada data shows that, in 1977, roughly half of all households with children included a stay-at-home parent. By 2009, that number had fallen to about one in six.2
The decision for one parent to leave the workforce to care for kids is rooted in economics – lost income versus the cost of daycare. Some households may be able to make it work if one spouse has high enough earnings and they’re willing to make significant lifestyle adjustments.
Now is the time for soon-to-be parents to start thinking about daycare costs. Parents who live in Quebec may enjoy subsidies that limit daycare fees to a maximum of $7.30 a day. For the rest of Canada, daycare can range from $700 to more than $2,000 a month, with costs highest for infant care. The sooner you start your search, the sooner you get your name on waiting lists for the daycare centre that meets your needs.3
Now is the time for soon-to-be parents to start thinking about daycare costs.Opens a new website in a new window
Insurance
Having children is the perfect time to review your insurance needs. Term life insurance is often an ideal choice for a growing family when protection needs are high but funds are limited. Critical illness and disability insurance can also be important parts of a financial security plan by helping ensure your family is protected in the event of an injury or critical illness. Individual health insurance can also help families with dental care and extended health benefits. Easy-to-use calculators can walk you through different insurance options.
Where there’s a will, there’s a way
Having a will in place is a must for parents. It simplifies the process if one parent dies and it provides the opportunity to appoint guardians for children.
Do-it-yourself will kits can help you save money, but an estate lawyer can reduce the risk of your intentions being misinterpreted.
RESPs help parents build an education fund
With the cost of post-secondary education increasing, parents need to plan ahead. For many, registered education savings plans (RESPs) make sense. Although RESP contributions can’t be deducted from your taxes, they grow tax-free and, when withdrawn, are treated as the student’s income – which is typically taxed at a much lower rate. Also, the federal government provides incentives that add $1 for every $5 you put into an RESP (up to $500 a year), with some provinces offering additional incentives. Total RESP contributions are capped at $50,000 per beneficiary.4
Freedom to chooseTM
Having children shouldn’t cause you to deviate from your established financial targets. Your financial security advisor can help you meet all the needs of raising a family while helping you stay on track towards achieving your financial goals.
1 Camilla Cornell, “The real cost of raising kids,”Opens a new website in a new window MoneySense, Aug. 2011
2 Chad Skelton, “Stay-at-home parents in sharp decline in Canada,”Opens a new website in a new window Vancouver Sun, Oct. 27, 2010
3 Konrad Yakabuski, "In Quebec, daycare remains a sacred cow,"Opens a new website in a new window The Globe and Mail, Dec. 1, 2014
4 Melissa Leong, "FP summer school: 22 savvy savings strategies to help you reach your goals,"Opens a new website in a new window Financial Post, July 12, 2014
The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature, and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.
