You, me and baby makes fees

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.

How much should I save for my child’s education?
Those ads for education savings plans are enough to make you feel like university is as out of reach as a Porsche 911 Turbo. One company peddling the plans estimates it will cost $135,000 for four years if your child lives away from home.

Before you despair, you should know that those estimates include costs you’d incur even if your kids weren’t away at school, such as meals, and things they should probably be paying for themselves, including entertainment. Yet the ads are effective, says Bamber. “I hear from a lot of new parents who are receiving calls from scholarship trusts who imply that if they don’t start saving now, something dire is going to happen. It’s just not true.”

That said, starting a registered education savings plan (RESP) is an excellent idea, even if you’re just kicking in a bit of Christmas or birthday money. “To my mind, an RESP should be the cornerstone of any education savings plan,” says Cestnick. There are other investment options, but only an RESP allows you to collect the Canada Education Savings Grant, the government’s 20 percent top-up on the first $2,000 you contribute each year. In addition, the money in an RESP grows tax-free, and the withdrawals are taxed in your child’s name. Since she’ll be in school and able to deduct her tuition, chances are good that the taxman won’t get any of it.

There are two main types of RESP: scholarship trusts and self-directed plans. The former are offered by companies such as Canadian Scholarship Trust Plan and USC Family Education Savings Plans. You subscribe by purchasing a number of units (a bit like a mutual fund) and making fixed monthly payments until your child enrols in a post-secondary program. At that time, your principal is returned, and then you receive “scholarship” payments at the beginning of each academic year. Self-directed RESPs, on the other hand, are offered by banks and investment firms and allow you to choose the holdings you want (stocks, bonds, GICs, mutual funds), according to your own schedule. There are some advantages to scholarship trusts (they’re low maintenance and they stick to safe investments), but they have higher fees and far less flexibility. They have also been sharply criticized for their high-pressure marketing tactics, which can deceive parents with little investment savvy. Most financial experts, including both Cestnick and Bamber, recommend self-directed RESPs.

One other note: Jack Courtney, director of tax and estate planning for Investors Group in Winnipeg, says that if grandparents want to help with the new baby, an RESP is a meaningful long-term gift. However, the grandparents should remember to deal with it in their will. “In fact, the best thing for grandma and grandpa to do is probably give the money to the parents and have them put it into the RESP. Then it’s less likely to be an issue.

Do I need a rainy-day fund?
Financial gurus often suggest saving several months’ salary to get you by in case of an emergency. It’s prudent advice — but how many young families can actually afford that?

Lori Bamber has a realistic suggestion. If you’re already making a contribution towards your retirement, Bamber suggests putting that money into a high-interest savings account within your RRSP until you’ve saved six months’ living expenses. You’ll still get the tax break, your principal can’t go down, and your money grows tax-free. If you do suffer a job loss or other emergency, you can withdraw the money as you need it. “People think they’re going to be penalized for taking money out of their RRSP,” Bamber says, “but that’s not true.” You’ll pay tax on the withdrawals, but you would have paid that anyway if you had saved outside your RRSP. All you forfeit is contribution room, and most people have more of that than they’ll ever use.

A more conventional rainy-day option, albeit more fraught with temptation, is a line of credit. “I think it’s highly desirable for any family to have at least a small line of credit,” says Tim Cestnick. “That’s your most important tool to help you provide for yourself in an emergency.” Obviously, it’s best to apply when you’re gainfully employed, since you won’t get one after the emergency. A line of credit carries no fees if you don’t use it, but you have to be disciplined, says Cestnick, and avoid dipping into it for non-emergencies.

Bamber warns, though, that she has seen many clients who can’t resist. “People wind up using lines of credit because they don’t have any wiggle room in their budget, and then they’re carrying forward a debt when they have no means to pay it off.” She also stresses that rainy-day money should be reserved for a major blow, not car repairs or home maintenance. “Any true emergency has to do with income cessation — or if the dishwasher, transmission and roof all go in the same year and you’re forced to take on a debt that you have no hope of getting under control with your current income.”

How about life insurance?
There aren’t many things financial experts agree on, but this one is a no-brainer. Life insurance is critical for young parents, and the good news is that if you’re a young non-smoker, it can be quite cheap.

Life insurance policies come in several flavours, including whole life and universal life, which have a savings component and other extra features, as well as higher premiums. Don’t let a broker talk you into these — stick to term insurance, and renew it until you no longer have dependants or outstanding debts.

“Term life insurance is unquestionably the best option for young parents,” says Bamber, “because it buys you the most coverage for the smallest monthly payment.” Cestnick agrees and says that while salespeople may encourage you to insure your children as well, take a pass. “If you’re a young family with limited cash flow, forget it,” he says. “It’s just not worth it.”

How much coverage do you need? Remember that life insurance should be bought for a specific purpose, and for most young families the idea is to pay off any outstanding debt (including the mortgage) and replace the income of the deceased person for a certain number of years. Just how many years depends not only on what you can afford, but also on your family situation. If you’re a two-career couple in your 20s, it’s not necessary for one spouse’s benefits to look after the other until old age. However, if one partner is planning to spend 10 years at home raising children, the employed spouse should be well covered.

Remember, too, that many employer benefit packages already include life insurance, so determine what coverage you already have before shopping around for more.

Do I need a will?
No one likes to plan for their death, which may explain why so many Canadians do not have a will. But no new parent should be without one. Fortunately, like buying life insurance, it’s relatively uncomplicated and inexpensive.

Jack Courtney of Investors Group says that young parents have several common misconceptions about wills. The first is that if they die without one, everything automatically goes to the spouse. In fact, if you die with no will, all your assets are frozen by the courts and then divided between the spouse and children. “So there may be a chunk of money tied up that the surviving spouse doesn’t have immediate access to.”

The other main reason to draw up a will is to specify guardianship of your children. If both you and your partner were to die in an accident without having named a guardian, the courts would be forced to appoint one, and it may not be your first choice. Courtney points out that a family member can still challenge a will, but a court is unlikely to overrule the parents’ wishes for guardianship. “Without a will, however, the parents have no say in the process.”

A lawyer will typically charge about $300 to create wills and powers of attorney (in case an accident or illness robs you of the ability to make decisions) for both spouses. If you can’t afford that, Cestnick suggests picking up an inexpensive do-it-yourself will template. “Those kits will do the job temporarily until you can pay a lawyer to draw one up.”

Living on a budget
Karen Oomen is the kind of shopper retailers wish would shop elsewhere: She’s smart. A veteran coupon clipper, Oomen is not afraid to grab a few extra from displays. “I check the expiry dates, because a lot of them are good for a year,” says the 28-year-old from Mansfield, Ont., who is planning for her first child. “I’ll grab 10 and use them for future purchases.”

Lynn Fraser, a work-life balance coach and home economist in Edmonton, stresses that becoming a new parent with less disposable income doesn’t mean you have to live in poverty. “You just have to shop smarter and stretch your budget.”

Fraser urges parents not to go overboard with new baby gear. Borrowing or buying second-hand can save you a bundle, especially on items such as strollers, baby bathtubs, change tables or monitors. If you’re buying used baby stuff, however, be scrupulous about safety. Don’t buy a used car seat, for example, unless it is in excellent condition and you have the instruction manual so you can install it properly. Transport Canada can also tell you whether the seat has been recalled. Older cribs, cradles and baby gates may also pose hazards. The Infant Toddler Safety Association, (519) 570-0181, can help with questions.

Here are some other family-tested suggestions that can save you money:
• Keep the pantry stocked with non-perishables that you buy on sale. “Even if it hurts the budget now,” says Oomen, “in the long run, it’s better than paying three times as much for each item later.” Fraser recommends buying in bulk, especially non-food items that never go bad.

• Do your holiday shopping all year. “At the end of the summer, some places have children’s clothing for just a few dollars an item,” Oomen says. “I have four nieces and nephews and girlfriends who have babies, so I buy items in whatever size they’re going to be next Christmas, or next birthday, and sock that away.” If you find Christmas expenses overwhelming, Fraser suggests putting aside a little each month instead of running up the credit card in December.

• Say yes to hand-me-downs. Gently used clothing passed down from friends and family can be big money savers. “It doesn’t matter to babies whether they have designer labels,” Fraser says, “and they grow out of most clothing before the fabric wears out.” To make baby’s new clothes last longer, she suggests, pretreat stains before washing. When baby outgrows them, sell them at consignment stores.

• Use homemade cleaners. “You don’t need most of the cleaners that are advertised,” says Fraser, who uses a mixture of a third vinegar to two-thirds water for cleaning windows and mirrors. Plain old baking soda and water also work well on sinks and bathtubs.

• Rethink your rituals. It’s amazing how the little things add up — that daily latte, Friday-night dinner out, a bottle of wine once or twice a week. If cash is tight, you don’t have to give up your fix, just look for ways to get it for less. Try brewing your morning mug at home, going out for Saturday breakfast with your partner (way cheaper than a restaurant dinner) or making your own vino.

• Tap into the community. Public libraries, toy lending libraries, family resource centres, mom and baby groups, collective kitchens — all of these are great ways to access free services, and they also help new parents connect socially. Some neighbourhoods even have a babysitting co-op where moms can take turns giving one another a break.

• Plan meals ahead and make a grocery list. Meal planning not only reduces stress, but avoids relying on expensive convenience foods and takeout. With family favourites, make double batches and freeze one for later.

Many Happy Returns
The good people at the Canada Revenue Agency don’t offer a whole lot of help for young families, but here’s how to take advantage of the tax savings available:

Apply for the Child Tax Benefit. Most families with children under 18 are eligible, and those with low incomes or disabled children can claim additional benefits. For complete information, visit cra-arc.gc.ca/benefits or call 1-800-387-1193.

File a tax return every year. This will not only build up your RRSP contribution room (even if you can’t afford to take advantage now), but it will ensure you continue to receive the Child Tax Benefit.

Take advantage of child-care deductions and spousal credits. If both partners work outside the home, the lower-income spouse can deduct child-care expenses. No such luck if one parent stays at home, but the income-earning spouse can claim a small spousal credit.

Consider income splitting. If one partner is self-employed and the other is a stay-at-home parent, the employed spouse may be able to reduce taxes by paying the other a small salary for clerical duties. Just make sure it’s reasonable and that you can back it up if it’s challenged.

Look at spousal RRSPs. If you’re planning to opt out of the workforce for several years to raise a family, a spousal RRSP may make sense. This plan allows the partner with the higher income to contribute to his own RRSP as well as one in his spouse’s name. The idea is to keep both RRSPs more or less equal so you can minimize tax when you withdraw your savings.

Where to Learn More
Smart Couples Finish Rich (Canadian edition) by David Bach, Doubleday Canada 2003. An introductory guide to financial planning designed specifically for couples.

Winning the Tax Game 2004 by Tim Cestnick, John Wiley & Sons 2005. Includes a chapter aimed at reducing taxes for families with young children.

The Wealthy Barber by David Chilton, Financial Awareness Corp, 2002. This late-1980s classic, now updated, is narrated by an expectant father and offers easy-to-understand advice on everything from saving for retirement to buying insurance. Order from wealthybarber.com.