First comes love, then comes marriage, then come massive amounts of debt?
It’s not the way most people would like to hear the popular refrain end, but for many first-time parents, the reality of having a child is an expensive one.
It’s also a life event that many couples are not prepared for, often made worse by the seemingly mandatory spending spree that precedes the baby’s arrival, as the excitement somehow morphs into designer cribs, high-tech strollers and more shoes than any baby can ever reasonably wear.
The problem is that in securing all the gear babies are thought to need, parents often forget to pay attention to the most important aspec t of planning for a baby’s arrival: their finances.
Canadians are fortunate to have the option to take a full year off work for maternity or parental leave — an incredibly long time compared to the six weeks many parents are afforded in the U.S.
Many people opt to do so, but the decision is often an emotional one. They want to spend as much time as possible with their baby.
Yet a year off work is costly, even for parents who qualify for employment insurance or even a salary top-up from their employer.
John Tracy, senior vice-president of retail saving and investing at TD Canada Trust, suggests that as with any life event, the smartest bet is to start saving as early as possible.
He recommends setting up a system for automatic saving, so you stash the money away without really feeling it. The sooner you start, the smaller the amount you’ll have to take out of each paycheque.
To determine how much you need to accumulate to make it through the year, Tracy suggests thinking about what percentage of your income you’ll have, what extra expenses will come with the baby, what you’ll save by not working, and how much of that difference you think you will reasonably need.
“If you don’t sit down with a pen and paper and just think how this all unfolds, what will likely happen is that in the moment you’ll be pulling out a credit card to pay for the difference,” he said.
“What you really don’t want is to have a new chunk of debt that you weren’t planning on because you didn’t do your thinking and preparation up front.”
Todd Sigurdson, a tax and estate planning specialist with Investors Group, says you should put any money you gather in a tax-free savings account if you have the room, because you will not get taxed when you pull it out.
“The amount you need is very personal,” he said. “In many cases people do incur a little bit of debt, at least initially, just because there are all these new expenses — everybody’s excited and wants new things for the baby.”
A good way to approach the change in your finances is to create a budget and try to stick to it.
That will also help you figure out how long you can afford to be off.
“I’ve met many people who went through a year of mat leave and made the necessary cuts to their monthly budget to make it happen despite the fact that they were on a reduced income,”Sigurdson said.
“Some of those people came out of it without racking up a significant amount of debt.”
If you have no choice but to incur some debt to finance your mat leave, Sigurdson suggests staying away from credit card debt, which can be the most expensive kind.
If you own a home you can use it for a secured line of credit, which has a lower interest rate than an unsecured one.
You should also set goals for the loan’s repayment, and determine how quickly you think you’ll be able to pay it back.
“At the end of the day no debt is the best debt,” Sigurdson said. “But for some people it’s such an important time in their life, they want to enjoy it and be home with the baby, (and) there’s no other alternative so they’re willing to go there.”
Financial planning around maternity leaves can also include a look further into the future.
Kids have a way of making you re-think where you live, whether you have enough space for them in your current home and whether you’re close to the right schools.
They create expenses that go well beyond reduced income during parental leave.
“I don’t think I’m atypical when I think that 11 months after my first child, I was moving into a new home,” said Tracy.
In addition things as basic as budgeting, he said, planning should include future expenses like education, whether that’s daycare, private schools or even university.
It’s why it is crucial to have conversations with your partner, with friends, family or even a financial adviser to make sure you have a sound plan.
You should tread lightly, however, because thinking that far ahead can be overwhelming, which is one of the biggest pitfalls soon-to-be parents should try to avoid.
“As you start thinking about it, don’t get overwhelmed,” Tracy said.
“You can look at stuff like this and almost not plan because you get a bit of paralysis. There’s no shame in that.”
You will find the feeling of being in over your head will become a constant companion when your child is first born, and in financial planning as well as parenting, your best bet is to take a moment to breathe.