New and expecting parents: An exciting time – and a time to adjust your financial plan

By Tore Corrado, Advisor, Ciccone McKay Financial Group

If you’re a new or expecting parent, congratulations! You’re busy now, and understandably so. But along with the baby shower gifts, here’s something else you may wish to unpack: key changes you should consider making to your financial plan.

You’ve probably heard that old adage: Everything changes when you become a mom or dad. It’s as true about your finances as about everything else in this momentous time. In fact, no other event in your life will have more significant impact on your financial planning than becoming a parent.If you haven’t yet thought about this impact, no worries. Below I’ll list the key changes you may want to consider making to your family’s financial plan.

 

Create a budget.

Creating a budget is an essential step for any individual. It becomes even more important when welcoming a child to your family. With the added expenses of diapers, clothes and childcare, you should ensure your budget reflects these changes – while still allowing your family to save for the future. Review your current budget and adjust it accordingly, making room for the new expenses that will inevitably arise.

 

Implement a valid Will and update your estate plan.

Many young people believe they don’t need to have a Will in place. They reason that, if they pass away, no one will be affected financially. Maybe, but that all changes when you become a parent. Implementing a Will that matches your current and future needs will provide you with peace of mind, knowing that what you want to happen will happen.

With no Will, there’s no executor – and no directions as to how an estate should be divided. Instead, intestacy laws are applied, using the Wills, Estates and Succession Act (WESA). Also, with no Will, there are no instructions about guardianship of your children. If both parents pass away, the kids will be left in the hands of the Court:

• The Public Guardian and Trustee (PGT) will become responsible for the children’s financial and legal affairs; and
• The Ministry of Children and Family Development will become responsible for the children’s living arrangements, health and education.

 

Yes, another family member could apply to Court to become the legal guardian of your minor children. Such an applicant would have to meet the requirements of the Court, including age, financial ability and more. However, these applications could be costly. Worse, they might not be successful.

Naming appropriate trustees and guardians in your Will ensures your children would be looked after by someone close to your family, without interference from family courts.

 

Time to revisit your insurance coverages.

As an expecting or new parent, this is the time to review your insurance coverages. Is the insurance you had before still adequate? With a child, your family’s needs change. Some of the affected coverages include: extended health plans; life insurance; and disability insurance.
If you are a member of an extended health benefits plan, add your child to the plan. This ensures your family will have access to medical care when needed.

Life insurance becomes significantly more important for new parents, as it can give financial support to surviving family members in the event of your untimely death. Life insurance not only provides the capital required to reduce or eliminate debts; it also replaces a portion of your income. This is paramount for parents: It guarantees that the surviving spouse can maintain the current home, pay monthly bills and maintain asset growth for the children’s future.

One vital option that many couples overlook is insurance enabling an at-home spouse in addition to the income-generating spouse. With both parents alive, one spouse may be working to generate the family income while the other is at home. Should the at-home spouse pass away, it is very unlikely that the income-generating spouse would be able to work at the same capacity as before. Conversely, should the working spouse die, the at-home spouse would need financial support.

Finally, if you become unable to work due to injury or illness, disability insurance can help protect your income. Often a substantial portion of an employee’s income is not protected above the maximum level allowed by a group plan. The solution: personal top-ups, to shield your family’s financial future in the event of forced time away from work.

 

Plan accordingly for any income lost during a parental leave.

If you, or your spouse, intend on taking time away from work following the birth of your child, it is important to plan for the loss of income that accompanies a parental leave. Yes, in Canada we have a program in place to offer maternity benefits (offered prior to the birth of a child) or parental benefits (following the birth or adoption of a child).

Although parental benefits can provide a source of income to a parent that extend between 12 to 18 months, it is very likely that your family will experience a significant shortfall of income during this time. The best way to account for this reduction in income is to plan for this ahead of time, in the months leading up to your time away from work. In the end, by building up some cash reserves you can avoid relying on credit or debt products or investment withdrawals; allowing you a smooth transition without a concern about the affects your time away may have on your cash flow, or future plans.

 

Consider the use of a Registered Education Savings Plan (RESP).

Starting an RESP for your child(ren) is a prudent financial move. An RESP is a tax-sheltered savings plan that can help you save for your child’s postsecondary education. The government also provides grants and incentives for those who contribute to an RESP, making it an advantageous strategy when utilized appropriately. Most Canadians with an RESP are provided a grant that equates to 20% of the total deposits, up to a maximum of $2,500 per year. Starting early means you’ll have more time to take advantage of compound interest, as well as several years of grant eligibility.

 

Don’t neglect your Registered Retirement Savings Plan (RRSP).

Yes, putting capital towards your children’s future via an RESP is important. But it doesn’t mean you should neglect your retirement savings. Many working Canadian parents forego saving into their RRSP because of the grants provided by their RESP. If your marginal tax rate is greater than the 20% grant offered through the RESP program, it is worth considering which account best suits your family’s goals and objectives most effectively.

One solution: First, save into your RRSP so that you’ll receive a tax refund on filing your tax return. Then, take the tax refund (to a maximum of $2,500 per child) and incorporate it into an RESP deposit.

Via this strategy, you’re able to generate more household tax-savings and grant maximization during your capital accumulation phase, i.e., your working years.

 

Determine the tax benefits you’re eligible for as a new parent.

Make sure you and your family are taking full advantage of all tax benefits provided to parents. These programs include: the Canada Child Benefit; Child Care Expenses Deduction; and BC Family Benefit.

These tax programs are based on certain criteria that determine whether you are eligible. If you are not familiar with these programs, consulting an advisor will ensure you receive all the benefits you’re entitled to claim.

Expecting a child is a joyful experience! But it does come with added financial responsibilities. Making some necessary changes to your financial plan will help ensure you’re prepared for the added expenses and challenges of this exciting life event. If you are already a parent, now is the time to adjust your plan to best suit your family’s situation.

There’s no one-size-fits all approach to financial planning. The shape your personal plan takes today may look drastically different than it did in the past or will in the future. In the end, understanding your current situation, as well as some of the gaps that you may have in your plan, will shed light on where you can focus your energy, make changes, and put your family on the best course going forward.

 

Tore Corrado is an advisor with Ciccone McKay Financial Group. Tore works with many young families, providing them with financial advice and direction. If you are the parent of a young child, or are expecting a child, and want to revisit your financial initiatives, please feel free to contact Tore at salvatore@ciccone-mckay.com or 778-945-2651.