Summary: Financial Tips for New Parents
Becoming a parent is one of the most exciting things that can happen in your life, but if you’re not prepared for it financially, it can quickly become extremely stressful. With someone relying on you to care for them now and for many years to come, you’ll want to make sure your finances and estate plan are set up properly to support you through parenthood. Here are some items you’ll want to consider prioritizing as new or soon-to-be parents:
Update Your Budget
As you likely already know, having a baby can be expensive. Believe it or not, raising a child from birth to the age of 18 will likely cost in excess of $250,000! Creating a budget breaking down the amount and timing of household expenses will help ensure your income can support your obligations and that you’re allocating your money in alignment with your goals and priorities.
There is likely to be a reduction in your income at some point throughout maternity and/or paternity leave, and by planning in advance you can save to account for any income shortfall you might experience. In addition, there will be new expenses such as diapers, baby formula, clothing, nursery decor, education savings, child care and more which you’ll need to budget for. Depending on your situation, this may necessitate a reallocation of spending or a reduction in savings to cover these costs.
Get Life Insurance
Although nobody wants to think about leaving their loved ones behind, buying life insurance is one of the most important things you can do as a new parent. Life Insurance has many uses, but when it comes to new parents its purpose is primarily to replace your income, pay off debts, fund child care, and even fund your children’s post-secondary education in the event you pass away.
While the various types of life insurance can be a bit confusing, think of it this way: there is term insurance and permanent insurance. Term insurance is meant to cover temporary needs like income replacement, debt repayment, and child care expenses. Permanent insurance is meant to fund needs or desires that are inevitable regardless of when we pass away such as paying for a funeral and final expenses, funding taxes owing on the last death of two spouses, providing an inheritance, etc. Without going into too much detail, know that term insurance is likely most appropriate for you at this stage of your life, and most term policies come with the flexibility to be converted into a permanent structure in the future regardless of your state of health.
When it comes to beneficiary designations, you’ll likely want to appoint your partner as primary beneficiary and your child as contingent beneficiary in the event you and your partner pass away at the same time. If your child is under the age of majority, you’ll need to name a trustee which is someone you trust to responsibly manage the funds until your child is of age.
If you already have life insurance, you’ll want to consider whether the amount is sufficient as well as update your beneficiary designations to ensure they reflect your current wishes.
The birth of a child is often the first time people will purchase life insurance. If that’s you, try not to feel overwhelmed as the process is quite straightforward and can even be done without meeting your advisor in-person.
Get a Will
While it could be argued that every adult should have a Will, there is no question that every parent needs one. There are many uses for a Will, but its most important use when it comes to parents with young children is the ability to appoint a guardian to care for them in the event both parents pass away. Without a Will in place, you’re choosing to leave this decision up to the courts to decide.
Other important uses for a Will as it relates to having young children include appointing beneficiaries for your financial assets and other property as well as stipulating the age you want your minor children to receive their inheritance if you would prefer them be older than the default age of majority in your province.
If you already have a Will, great work! You’ll want to ensure it is up-to-date by adding a legal guardian as well as adding your children as beneficiaries or contingent beneficiaries.
Update Beneficiary Designations
To ensure your assets end up in the right hands in the event you pass away, make sure you have proper beneficiary designations on every account that will allow you to do so. In addition to your life insurance as mentioned above, some common accounts to consider are your RRSP, TFSA, employer-sponsored savings plans, as well as employee benefits plans – particularly your group life insurance. To prevent potential confusion, make sure your beneficiary designations are consistent with the instructions in your Will.
Start Saving for Education
One of the most common tools used to save for a child’s education is the Registered Education Savings Plan (RESP). The RESP is a great option as it provides government grants of 20% up to $500/year, to a lifetime maximum of $7,200 and the investments grow on a tax-deferred basis. When you look at the grant as the equivalent to a 20% rate of return before even investing the funds, it’s easy to see why the RESP is so attractive to many Canadian parents.
By starting to contribute to an RESP as soon as your child is born, you can maximize the length of time the investments have to grow. For example, by contributing $2,500/year starting when your child is born until they turn 14, and contributing another $1,000 in the year your child turns 15, you’ll maximize the total available Canada Education Savings Grant of $7,200. Assuming a conservative 5% rate of return, the RESP would be worth $66,741 by the time your child turns 18 while you would have only contributed $36,000.
For an RESP, you’ll want to designate a joint subscriber such as your partner to ensure continuity of the RESP in the event you pass away, as well as include a clause in your Will to appoint a successor subscriber that will take over in event you and your partner pass away. This will ensure the RESP remains in effect and that its intended purpose is carried out. For added certainty, you can arrange for a testamentary trust to be created out of your Will to administer the RESP, which is the most surefire approach to ensuring the RESP lives on after your passing.
Like most strategies, there are limitations to be aware of with the RESP such contribution limits as well as the risk of your child not attending post-secondary education. Be sure to speak with your financial planner when crafting your education savings strategy to ensure you’re taking the approach best suited to your unique circumstances.
Increase Your Emergency Fund
The purpose of an emergency fund is to protect you from incurring high interest debt or liquidating investments in the event of unforeseen expenses, which are now much more likely with children in the picture. If you already have an emergency fund, now is a good time to reevaluate whether it’s sufficient based on your additional monthly expenses. If you don’t have an emergency fund, start setting aside funds until you reach a level of savings you’re comfortable with based on your unique circumstances.
Apply for the Canada Child Benefit as New Parents
The Canada Child Benefit is a tax-free monthly payment paid to parents to help with the cost of raising children under age 18. Until it is adjusted for inflation in the latter half of 2022, the maximum annual benefit is $6,833 for each child under the age of 6, and $5,765 for each child between ages 6 and 17. How much you will receive depends on the age of your children, your family income, how many children are under your care, and your marital status. Any funds available will help with the cost of raising children, so be sure to apply for the Canada Child Benefit as soon as your child is born.
Conclusion: Top Financial Tips for New Parents
While there is no doubt becoming a new parent can be overwhelming, checking these items off of your financial to-do list will ensure your finances are organized in a manner that supports your goals and wishes, and just might make your journey into parenthood a little less stressful!
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