You, me and baby makes fees

Here's how to get your finances in order so you can concentrate on your baby

Dan Bortolotti,

Originally published in Today's Parent August 2005

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Having a baby brings so many changes. Unfortunately, one of them is usually less money at the end of the month. Maternity and parental benefits only go so far, and if you decide to scale back or even give up your job after baby, you may be looking at a lower family income for several years. Of course, you’ll also be facing a laundry list of new expenses.

But there’s no need to panic, says Vancouver financial author Lori Bamber. She encourages parents not to worry if they can’t afford to max out their RRSPs or haven’t started saving for university. “Any financial decisions we make that contribute to a healthy emotional state are the best ones for our children.”

So where do you start? We took some of the most common questions new parents have and put them to a trio of financial experts. While no formula works for everyone, their answers should help you sort out what’s right for your family.

Should I save for my retirement or pay my mortgage down faster?
Buying a home usually comes close on the heels of a baby. It’s easy to get approved for a big mortgage these days, and new homeowners often want to concentrate on paying it down as quickly as possible. “Once we’re mortgage-free,” they think, “then we can start putting more into our retirement savings.”

Financial advisers, however, tend to discourage that idea. “Retirement savings should be your number-one priority, even before paying down your mortgage or saving for a child’s education,” says Tim Cestnick, a Toronto tax expert, financial planner and author. “When you’re dealing with limited dollars, it’s more important to get that money into your RRSP.” With people now living for 20 years or more after retirement, you’ll need to sock away a lot of money, especially if you don’t have a pension to look forward to. If you wait until your house is paid off before you start contributing, you may not give yourself enough time.

There’s also the tax refund that comes with an RRSP contribution. “That cash in your pocket allows you to meet other priorities,” Cestnick says. For example, if you’re taxed at 25 percent, a contribution of $2,000 will net you a $500 refund, which you can then put toward your mortgage or some other debt.

If you can’t scrape together a contribution now, however, don’t fret, since you can carry forward your annual contribution limit. “The couple of years after having a child are often the lowest income years,” Bamber points out, “so the tax savings will not be that high anyway.”

What if I have other debts?
Student loans, a new minivan, credit cards — there are all kinds of reasons expectant parents may find themselves in the red. And debt can mean anxiety at a time when you don’t need it.

“For a parent who’s facing late nights and the demands of a new baby, that additional burden can be debilitating,” says Bamber. “I really encourage people, if they have any kind of debt load, to put all of their financial resources toward it, even to the point of sacrificing lifestyle to some degree.” Bamber is not recommending living on bread and water, but she suggests that now might be the time to get rid of the second car—or to at least forgo the Olympic-sized stroller and designer nursery furniture until the credit cards are paid off.

Cestnick encourages parents to distinguish between good and bad debt. The former carries a lower interest rate and is used to acquire something that will increase in value. This would include not only your mortgage, but your student loans, since an education usually translates to higher future income. Bad debt carries a higher rate and is used for personal consumption — credit cards are the worst culprits, since they can carry interest rates of 18 percent or more. It’s these bad debts you should concentrate on first.