The Learning Centre:
Oh, baby: how to financially prepare for a new arrival.
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Starting a family means committing to a whole new lifestyle, both personally and financially.
As far as the kind of financial commitment it takes, you’re looking at roughly $260,000 to raise your little one from infancy until the age of 18 (at least that’s how much personal finance magazine MoneySense estimates it’ll cost). With each passing year, there’s also inflation to consider, along with rising interest rates—so you can expect that the cost of raising children will continue to climb.
But it’s not all doom and gloom for your pocketbook.
While having kids is not cheap, planning ahead costs nothing and puts you in a better position to provide for your bundle(s) of joy—especially if you keep the following 5 steps in mind:
#1: Budget (for baby) using baby steps.
No amount of estimating can predict exactly how much it’ll end up costing you to raise a child, but let’s say it’s somewhere in the ballpark of $260,000. In its entirety, that’s a daunting amount. However, divide that amount across 18 years and you’re only looking at about $40 a day. Suddenly that amount is far less daunting.
Will you be able to make that $40 per day adjustment to your budget right away?
Possibly. But if you can’t, that’s okay. Like toilet training, finding the right balance to your budget will be an ongoing process. There will be ups. There will be downs. Things may even get messy. However, you’ll get there eventually. Just take it one day at a time and most importantly, stick with it.
#2: Get your debt under control.
According to BDO Canada, one in five Canadian Millennials are choosing not to start a family because they believe they aren’t financially ready—specifically because of the amount of debt they’re carrying. But debt doesn’t have to dictate when you decide to grow your family.
Instead, put proactive debt payment strategies in place, such as:
Consolidation: If you’re carrying balances across multiple credit cards and loans, chances are you’re paying varying rates of interest on each of those balances—which can be very expensive. A debt consolidation loan can reduce the cost of borrowing by swallowing up all of those outstanding balances in favour of one manageable monthly debt payment (typically at a far more competitive interest rate). This will free up monthly cash, which you can then put towards everything you need for baby.
Prioritization: If you prefer to pay off debt without taking the consolidation approach, put everything you can towards paying down the debt with the highest rate of interest, first (while still making the minimum monthly payment on the others). Once one debt is paid off, keep maximizing your payments on the others until you’re in the clear.
For even more debt management strategies, check out: 5 credit tips to put you on a path to borrowing responsibly and saving money.
#3: Create a pension buyback strategy.
With maternity, parental, and adoption leaves making up more than 70% of Ontario Teachers’ Pension Plan (OTPP) buybacks, there is also the impact on your pension contributions to consider if you’re planning on taking such a leave.
If you’re unfamiliar with the concept of ‘buybacks’, think of it as OTPP’s way of letting you top up your pension contributions to cover the leave period.
That’s because when you take a leave such as a maternity, parental, or adoption leave, you don’t make pension contributions during that time. This creates a gap in your pension. However, you can fill in the gap by paying for your leave (hence the term ‘buyback’).
What’s the average cost to ‘buy back’ your pension?
You’re looking between $6,000 and $12,000 to cover the cost of a year’s gap in pension contributions.
Are buybacks worth it?
Well, that’s for you to decide.
Although, according to OTPP, buying back a year’s leave would increase your pension by roughly $1,800 a year. Since most retired educators collect a pension for at least 30 years, this could mean you getting as much as $56,000 more throughout your retirement. So you’ll most likely find that buybacks are definitely worth it.
Is there a buyback time limit?
Yes. You have up to 5 years from the end of your leave, or up to the date of your first pension payment, whichever comes first.
Click here for the full scoop on pension buybacks.
#4: Educate yourself on all eligible tax credits for parents.
Adoption expenses: If you are adopting a child under 18 years of age, the Canadian government allows you to claim eligible expenses related to the adoption up to a maximum amount of $15,670.
Canada Child Benefit: This is a tax-free monthly payment made to eligible families/single parents to assist with the cost of raising a child under the age of 18. Benefits are paid over a 12-month period from July to June.
Child-care expense deduction: You can claim this if you hire caregivers or enrol your child in day/overnight camps, nursery schools, educational institutions that provide childcare services, and boarding schools. The amount you can deduct annually is $8,000 for each child under the age of 6, and $5,000 for each child between 7 and 16.
Child Disability Benefit: This is for families who care for a child under the age of 18 with a severe or prolonged impairment in physical or mental function.
Get details on the above tax credits by checking out the CRA’s website.
#5: Start saving for baby’s post-secondary education, now.
If you think raising a child is expensive, just wait until that child leaves the nest to pursue higher education. That’s why the first four letters you should be introducing your child to are not ‘A-B-C-D’… but R-E-S-P.
Highlights of a Registered Education Savings Plan (RESP):
- Receive an additional 20% of your RESP investment in the form of the Canada Education Savings Grant (CESG), which equals up to $500 annually on the first $2,500 per year, up to a lifetime maximum of $7,200 per child
- Eligible parents could also receive another grant for their child in the form of the Canada Learning Bond (CLB), which is money the government deposits into each eligible RESP annually up to $2,000. Through the CLB, the Government will add money to the RESP every year, even if you do not add money (click here to learn more about CLB eligibility requirements)
- Earnings are tax-sheltered (similar to an RRSP)—when the money is withdrawn, the CESG money and earned investment income will be taxed at the child’s tax rate(zero in some cases)
- There’s no annual contribution limit—just make sure you don’t go over the $50,000 cumulative maximum for each beneficiary, since over-contributions are subject to a special 1% monthly tax
- When it comes time for your child to withdraw RESP funds, the accumulated income earned in the plan (I.e. dividends or interest, and grants such as Earning Assistance Payments) is taxed in their hands at a lower tax rate
- In addition to parents—uncles, aunts, and grandparents can set up an RESP, making it the ultimate education savings investment the whole family can get in on
- If you’re planning on having multiple kids, consider a family RESP—as it offers the flexibility to share accumulated income and grants among your other children, or to change the beneficiary of the plan to someone else in the family
Tip: Make RESP contributions by the December 31st deadline in order to take advantage of the full 20% CESG amount annually. While you can catch up on previous years’ contributions, the maximum CESG that can be received annually per child when you’re playing catch-up on RESP contributions is only $1,000.
If your family is about to get a little bigger, Educators Financial Group can ensure that you’re set up to successfully provide for them, every step of the way.
From pay grids to pension contributions, we understand how your pay structure works—which means we can provide you with the kind of financial advice that is unique to education members like you.
Put your financial plan for baby on the right track. Have one of our financial specialists contact you.
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The information provided is general in nature and is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering of tax, legal, accounting or professional advice. Please ensure to consult your accountant and/or legal advisor for specific advice related to your circumstances. Educators Financial Group will not be held responsible or liable for any losses, costs, damages or expenses incurred by reason of reliance as a result of the aforementioned information. The information presented was obtained from sources that are believed to be reliable. However, Educators Financial Group cannot guarantee their completeness or accuracy.