Financial Planning For Couples: Starting A Family

Next to buying a house, raising children is a large ongoing expense for couples. Often both are experienced at the same time. If you’re renting a one-bedroom apartment, the upcoming birth of your child brings out the desire for a 3-bedroom house with a big yard.

I understand that not everyone wants kids, of course, but if you do, I don’t need to tell you about the benefits of starting a family. But children, while being one of life’s greatest blessings (at least most of the time), also cost money and consume a lot of your time.

Many people decide to have kids without a game plan in place (and there are those unexpected “accidents”), but there are lots of things you need to discuss when you decide to have children.

Starting a Family: Financial planning for couples

Are you financially ready to be parents?

Take, for example, a couple who are building their careers and making good money. They plan their budget accordingly, using both incomes to pay their bills and to support their lifestyle.

Would they be ready to experience the double whammy of a drop in household income (at least temporarily) and increasing expenses?

It’s hard to deal with a crying baby, sleepless nights and non-stop feedings and diaper changing without also worrying about money. That’s why it’s so important to make sure you’ve got enough savings to help get you through – at the very least – your baby’s first year. With some smart planning you won’t need to brace yourself for financial struggles ahead.

Before the arrival of your bundle of joy try living on one income and putting the second income into extra debt payments and savings. Not only will you have a bit of a cushion, you’ll be getting used to living on one salary.

Bringing up baby

So, how much do you need to pay for the basics in your baby’s nursery?

The first year is often the toughest one financially.

BabyCenter.com has a first-year baby cost calculator. It’s an American site, but you can plug in estimated prices by checking retailers like Babies “R” Us, The Bay and Walmart.

Several sites offer checklists of what you’ll need, including Expectant Mother’s Guide.

BabyCenter.ca also has lots of info and comments and tips from other mothers.

Buy on sale and don’t get sidetracked by expensive stuff.  Focus on just what you need and, keep in mind that you can also look for slightly used items that a seller’s baby has outgrown.

Scour second-hand shops and ask for hand-me-downs. Check Kijiji and Facebook Swap & Buy groups. Babies grow so quickly, clothes and baby equipment have often just been used a few times before they’re outgrown, and can look brand new.

Lost wages vs daycare costs

Sitting in the hospital together while cooing over your newborn is not the time to tackle the issue of staying at home or returning to work after maternity leave is up. It deserves careful consideration well in advance of your baby’s arrival.

Many mothers choose to continue staying at home, and there’s been a rising trend of stay-at-home dads. Lost wages from being out of the workforce means you have to re-evaluate and adjust your spending and lifestyle. But, if you factor in all the expenses you’d be eliminating that would offset some income loss, it may make more financial sense than you think.

If you’re both going to work, discuss your childcare strategy ahead of time. Who’s going to care for your baby – a nanny, day care, relatives? Unless you live near kindhearted family members who are willing to raise your baby free of charge, the alternatives will cost money.

It’s best to do some research ahead of time to find out what child care costs are and whether you’re likely to get your child into a subsidized daycare in your area. Check to see how daycare compares to hiring a nanny.

Make sure you discuss and evaluate all your options.

Get the most out of benefits

Most Canadian parents are allowed up to 52 weeks off work to care for their new infants. To get the maximum benefits, be sure to apply for Employment Insurance as soon as you take your leave as it can only be claimed within the year following your baby’s birth. There’s a two-week waiting period.

Benefits are calculated at 55% of your gross income up to a maximum amount of $537 per week based on $50,800 worth of insurable earnings (2016).

Check your employer benefits too. Some offer partial income for parental leave. You may be able to continue with your health and dental programs if you pay the premiums.

There are some tax deductions, tax credits, and other benefits offered by federal and provincial governments. You may not qualify for all of these, but you’ll certainly be eligible for some. Make sure to apply as early as you can.

Effective July 1, 2016, the Canada Child Benefit offers monthly tax free benefits that are tied to income. The maximum is $6,400 per child under six and $5,400 per child aged six through 17. There’s a reduction when family net income is over $30,000, and again at $65,000 but the number of children you have also factors into what you’ll receive.

You may be able to deduct child care costs from your income on your personal tax return – up to an annual limit. Make sure you keep all your receipts.

Get a head start on university savings

It’s never too early to start saving for university. Tuition costs have been rising at almost 5% per year over the last decade. You can make the bill more manageable by setting up an RESP.

Make your money grow faster with the Canada Education Savings Grant that matches up to 20% of your annual contributions depending on your income. You may also qualify for a Canada Learning Bond – you can apply with your RESP provider or get more info at www.canlearn.ca

Final thoughts

In the end, the choice of having children isn’t really a financially rational one at all. It’s purely emotional.

According to MoneySense magazine, the cost of raising a child to age 18 is $243,660. But the joy of watching your children grow from babyhood to adulthood is priceless.

Further reading on Financial Planning for Couples:

8 Habits That Are Killing Your Retirement Dreams

A growing number of Canadians plan on working longer because they haven’t saved enough for retirement. We see it at a macro-level; Canadian households owe a record $1.65 in debt for every dollar in disposable income, meanwhile the personal savings rate in Canada stands at a paltry 3.9 percent.

There are plenty of reasons why we owe too much and save too little. The economy stinks, people get laid off, and salary increases are few and far between.

That said we’re often our own worst enemy when it comes to taking care of our finances. Here are eight habits that are killing your retirement dreams:

8 habits that are killing your retirement dreams

1. You don’t watch your spending

It’s tough to stop a money leak when you have no clue where your money is going. Small daily purchases do add up (latte factor, anyone?), but these spending categories can bust your budget much faster – big grocery bills, dining out too frequently, filling your closet full of new clothes, one-click online shopping, and expensive hobbies, to name a few.

The solution: Write down everything you spend for three months. I guarantee you’ll have an ‘a-ha’ moment at best, and at worst discover something useful about your spending habits that you’d be willing to change.

The goal of course is to spend less than you earn. It’s one of the major tenets of personal finance.

2. You want the newest ‘everything’

Fashion and décor trends change, technology constantly evolves. Staying ahead of the curve means shelling out big bucks for the latest and greatest products. The problem is your capacity to buy new things will never keep up with the pace of innovation and change. It’s an endless cycle.

The solution: Wait. Early adopters pay a hefty premium to be first. Look no further than televisions, where the latest innovations can initially go for between $5,000 and $10,000 – 10 times what they’ll cost in a year or two.

The bigger issue is the psychological need to always have the latest gadget or be at the cutting edge. Ask yourself whom are you trying to impress.

3. You have the constant need to upgrade

Fewer than half of all iPhone users hang onto their smartphones until they stop working or become obsolete. Most want to upgrade as soon as their provider allows it – usually every two years. A small percentage upgrades every year whenever a new model is released.

While spending a few hundred dollars on a new phone every other year might not hinder your retirement plans, it could be a symptom of a bigger problem. The constant need to upgrade your technology, your car, and even your home can be a big drain on your finances.

Nearly three in 10 homeowners get the urge to move every five years, and 14 percent actually want to move every year.

The solution: The same buy-and-hold approach that you take with your investments can also apply to your major purchases. The Globe and Mail’s Rob Carrick suggests a 10-year rule for homeowners to combat the odds of a housing crash and to save on transaction fees.

Extending the life of your purchases, even by a year or two, can free up cash to pay down debt or save for retirement.

4. You treat credit card debt as a fact of life instead of a hair-on-fire emergency

Life can be expensive but there is no excuse for using credit cards to support your lifestyle. Despite what your friends or coworkers might say, credit card debt is not a fact of life. This may come as a shock but you can save up in advance for a vacation or new kitchen appliances.

The solution: Nothing can ruin your finances quite like high-interest credit card debt compounding every month. Stop everything and assess your income and expenses. Cut discretionary spending, put any savings plans on hold, and throw every cent towards your highest interest debt until it’s gone.

Related: Debt avalanche vs. debt snowball (or when math trumps behaviour)

5. You use low interest rates as an excuse to finance depreciating assets

Borrowing to invest can make sense when your expected return is greater than the cost of the loan. But it’s a mistake to take out a loan – even at today’s low interest rates – to finance consumables and depreciating assets.

Common reasons to take on debt today include weddings, vacations, furniture, and vehicles. A home equity line of credit can provide flexibility to pay for big purchases, but the habit of borrowing from your future self to pay for today’s consumption is a major retirement killer.

The solution: You need a financial plan. Most of us can wrap our heads around saving for retirement but we struggle prioritizing and funding our short-term goals. A good plan helps you identify what’s important in both the immediate and distant future and steers your savings towards the appropriate goals.

Put a dollar amount and a timeline on your goals and start saving. Trust me, it’ll feel great to pay for your next vacation or big-ticket purchase in cash.

6. You’re too complacent

Doing nothing is often the best course of action when it comes to a volatile stock market, but financial inertia can cost you in other ways. Some of us can’t find $50 a month to save for retirement, yet we pay $15 a month or more in bank fees, won’t drive half-a-block to save money on gas or groceries, and don’t bother returning items of clothing that don’t fit.

Worse examples of complacency are when people don’t take advantage of their employer matching RRSP program, don’t shop around for a better rate on their mortgage, or continue to pay high fees on their investments.

The solution: Sometimes we need a wake-up call or major life event before we start taking our finances seriously. Once you see how much complacency is costing you that’s usually enough to motivate you into taking action.

7. You put off retirement savings until a later that never comes

“We’ll start saving for retirement once we’ve paid off our credit cards-line of credit-mortgage.”

There are so many priorities competing for your hard-earned dollars. Sadly, retirement savings is easy to put on the back-burner while you deal with more immediate needs like a big mortgage, two car payments, a new trailer, and some expensive seasonal hobbies. Retirement is far away and you can save later, right?

If you’re already killing your retirement dreams with the previous six habits then later might never come.

The solution: There’s a reason why ‘pay yourself first’ is such a powerful savings tool. Money is automatically whisked out of your account before you get a chance to spend it. Like some kind of magic you barely notice and are somehow able to live on the rest.

8. You keep your long-term savings in cash

You actually managed to get some money from your chequing account into your RRSP or TFSA. The problem now is that it’s sitting in cash – you actually need to take the next step and buy an investment such as a mutual fund, ETF, stock, bond, or GIC.

This is a uniquely Canadian problem as investors have nearly $75 billion in excess cash sitting in their portfolios.

The solution: Whether it’s risk-aversion or analysis paralysis, you need to take action and get your retirement savings working for you. Speak with a financial planner who can help you make sense of your investment choices and risk tolerance. Read books, blogs, and magazines to try and educate yourself about investing and how to build a portfolio.

A good place to start is with the model portfolios listed on the Canadian Couch Potato blog.

Final thoughts

It’s true, we do plenty to sabotage our own retirement dreams. The good news is that it’s never too late to take control of your finances and start saving for retirement. Start by fixing bad habits that have a negative effect on your finances.

Save enough and you can retire on your terms.

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