Written by Michael Wickware for Planswell
As a new or expectant parent, you may already be overwhelmed with all the tips and advice (solicited and otherwise) that have been coming your way. Well, hold on to your hat, because we’re not done yet!
A new baby can send ripple effects across your personal finances. This article is about three of the biggest things to cross off your list so you can build a home of joy, love and… financial stability.
Update your budget
It doesn’t matter if you take proactive steps to prepare your budget or not – as soon as you swipe that credit card for an industrial-size skid of diapers, you realize this is really happening.
Suffice to say, you’re better off being prepared. Unfortunately, it can be tough to generalize about the cost of raising a child. One variable is geography – for example, a year of infant care that costs around $8,000 in Winnipeg will set you back over $21,000 in Toronto.
Another variable comes down to the choices you make as a parent. Do you picture your little one wearing designer-brand organic rompers or are you going to be ok with slightly scraggly hand-me-downs? Other major lifestyle choices include squeezing baby into your existing residence or moving to something larger and deciding between public or private school.
The best approach to your new budget is to calculate the hard numbers, like the cost of formula and the loss of income from maternity or paternity leave, and estimate the rest based on your lifestyle choice, and informed by the experience of friends and family who live a similar lifestyle as your own. Don’t be shy to ask, because their real-world experience can teach you a lot about the expenses you might never think of on your own.
Set up a safety net
What is life insurance for? Mainly, it’s for your kids. Imagine this: something happens to you, and you are suddenly no longer there to provide for your family. In a moment, that budget you spent so much time lovingly crafting goes right out the window.
If you want to see what families without life insurance look like, check out websites like GoFundMe.com. Unfortunately, those who ask for financial support after there’s already been a loss in the family are extremely unlikely to get the level of help they need. The average GoFundMe campaign raises about $1,500.
A far better solution is to buy inexpensive term life insurance long before you need it. The right policy will settle the mortgage, cover the rent, pay the bills and generally make sure that the people who counted on you will be able to continue living the lifestyle they’re used to. This beats the heck out of adding a financial crisis to the emotional crisis that’s already happening.
Ok, not a terribly fun topic, but an essential one. Now let’s talk about how to prepare to send that kiddo off to school.
Grab free money for university
We’ve all heard the stories about students graduating with crippling debt levels. Maybe you’ve experienced it first-hand. A smart way to help your child get a jump on post-secondary school costs is by opening a Registered Education Savings Plan, or RESP.
Here are three great reasons to do it:
- You make deposits to your RESP, which you can invest as you wish. The bonus is your investment gains are not taxed until the money is withdrawn, and even then, it’s taxed in the hands of the student. This is good because most students are in a low or non-existent tax bracket. We recommend investing in low-cost ETFs. That way, you’ll be minimizing both taxes and fees, and maximizing the amount of money you can hand over to Harvard some day.
- Would you invest in something that offered a guaranteed return of 20% per year? Well, when you contribute to an RESP, the government matches 20% of your contributions up to $500 per year and $7,500 over the lifetime of the student. That means you can maximize the benefits of an RESP and lock-in a 20% return by contributing about $200 per month.
- Maybe you don’t have an extra $200 per month in your budget? No worries, one of the neat features of RESPs is that anybody can contribute. Aunts, uncles, grandparents, friends, nosy neighbours, you name it. Asking loved ones to participate in building an education fund is a gift that will pay dividends for the rest of your child’s life.
One word of caution: at some point, a salesperson will probably try to sell you something known as a Group RESP. The government outlawed new Group RESPs long ago, but a handful of companies still exist. These plans will gouge you with very high fees and nasty penalties if you miss a payment. In short, stay far away.
So there you have it. Make a budget, so you understand what you need to cover the essentials. Carve out a little bit each month for life insurance so that, no matter what happens, junior will be cared for. Then take advantage of tax-sheltered investment growth, free government grants, and maybe a little help from your friends to groom the world’s next literary genius or rocket scientist.
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.
Photo by Alyssa Stevenson on Unsplash
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