The baby plan

Budgeting for that new addition to the family

With a new baby on the way, parents-to-be often find the transition from a free-and-easy twosome to responsible threesome something of a challenge, especially when it comes to personal finances. Luckily, there are some tried-and-true rules to ease the financial transition. So here’s a quick look at some financial essentials for bringing up baby.

Most new parents draw up a budget, and typically come up with a long list of monthly expenses, with a zero balance – or worse – at the end of the month. That’s when it’s time to do a little hard-nosed cost-cutting for your growing family “business.”

There are, of course, a few things that are essential; but others are totally discretionary, which is a fancy way of saying that you can cut them without too much trouble or loss. Here are a few suggestions:

Essentials

Furniture, equipment, diapers, clothing, formula and food are all essential. But the cost of these items can vary widely, ranging from no-name economical to eye-watering, over-the-top expensive. Baby furniture and equipment like beds, mattresses, strollers, and car seats sold by reputable suppliers are all now manufactured to mandated safety standards. The additional cost for designer baby gear won’t really bring any extra benefits in terms of safety or reliability. Baby will soon outgrow them anyway, and if you’ve spent a bundle on this stuff, you’ll soon have a storage room full of very expensive junk. So you can definitely save money here.

But do not stint on diaper quality or baby formula and food – buy the absolute best brand-names you can afford.

Living expenses

Space is essential. That downtown condo will likely become just a little too cozy with the addition of that extra very important person. And that little person will accumulate stuff as if by magic, and you’ll soon be out of space. Plus, both of you will need a little elbow room to cope with those sleepless nights and cranky days.

So your new baby budget should include funds for an upgrade in accommodation, to a larger condo or apartment, or if you’re still in the pre-baby stage, a townhome or house if you’re not already in one.

Transportation

There’s a really good reason for all those mini-vans and SUVs you see with baby seats in the back. They’re hugely practical when ferrying baby (and later, toddlers, and school kids) around with all their gear! So if you’re driving a cramped luxury two-seater, and you’re on a tight budget, consider trading it in for the comfort, room, and safety of a mini-van or SUV. You’ll never regret it. This one goes into the “essentials” category.

Financial expenses

Medical, disability, and life insurance, are critical. If you’re on a tight budget, you can always go for the bare-bones minimum coverage, which is still pretty good, and which you can then upgrade as your financial conditions improve over time.

Low-priority items

Low priority items include things from your pre-baby life, like frequent eating out, clubs, bars, and pubs, movies, concerts, and shows. It also includes travel on all those cruises to “fun-in-the-sun” places – just not advisable with a new baby. The upside is that you’ll be saving thousands of dollars. That’s not to say you should eliminate R&R altogether. You’re going to need it. But you’ll have to tone down your expectations, at least in the first couple of years.

Another area to look at is your combined communications expenses. You may not think you can live without the highest smartphone, internet, and cable package, but think again. You can. Your monthly bill for staying totally plugged in to our wi-fi mobile world can run to several hundred dollars a month if you’re not careful. Check the various plans and options available in today’s ultra-competitive communications market. You may be able to get close to what you have now at a far lower rate. And don’t be afraid to ask for discounts and bargains.

Tax benefits

Don’t forget to claim every federal and provincial family and child tax credit and deduction you can. These are available for parents with children, and as a new parent, you should definitely look into the following in particular. But note, not all are available to every taxpayer, as many are means tested, and are reduced or eliminated at higher income levels:

* Canada Child Benefit.
* GST/HST Credit.
* Childcare expenses.
* Child Disability Credit.
* Working income tax benefit.

Check the CRA website for details and eligibility for these tax breaks.

Registered Education Savings Plan: Post-secondary education costs have soared. Currently students can expect to pay about $60,000 for an average four-year post-secondary education program. It’s more than double that for professional degrees like law or medicine. The cost for a U.S. Ivy League school is a minimum US$60,000 for one year. By the time your child is ready for college or university in 17 years’ time, those costs will have risen dramatically, if only because of inflation.

The RESP is designed to help you save for your child’s education, starting now. Like other registered plans, investments inside the plan grow tax free, although there is no deduction for contributions made. When the beneficiary withdraws funds for post-secondary education, he or she will very likely be in a low or zero tax bracket, so the tax impact will be small or non-existent.

In addition, the federal government provides a Canada Education Savings Grant (CESG) of 20% annually on each dollar contributed to an RESP up to the first $2,500. That’s a potential extra $500 every year.

Here’s an example of how powerful this savings plan can be. If you open a self-directed RESP when your child is age seven, and invest $2,500 per year for 10 years in, say, a solid balanced mutual fund like the Mawer Balanced Fund (see Gordon Pape’s recent article for more information), you could end up with over $100,000 by the time your son or daughter heads for university. The Mawer fund is one of the best Canadian balanced funds on the market, with a 30-year history of performance. For illustrative purposes only, I’ve used its 10-year average annual compounded rate of return of 9.9% to June 30. Your own investment choices will depend on your personal situation, your tolerance for risk, and your overall financial plan. Always discuss investment ideas with your advisor before acting.

To open an RESP, your child will need to have a Social Insurance Number, so as crazy as it seems, as soon as you have your child’s birth certificate, apply for a SIN to be eligible for government benefits, including the CESG.

Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at rthompson@castlemarkwealth.com for a confidential planning consultation.

Notes and Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned are illustrative only and carry risk of loss. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.