Pre-baby financial planning
You just found out you’re having a baby. Congratulations! This can be an exciting time as you prepare for the new bundle of joy to enter your life. This is also the best time to take a good look at your personal finances and make adjustments now for what is inevitably going to be an expensive new addition to your family.
Maternity vs. parental leave
In Canada, there two types of job-protected leave available for new parents. Maternity leave is available to the person who is away from work because they’re pregnant or have recently given birth. This leave is up to 15 weeks and cannot be shared between parents.
Parental leave is available to the parents of a newborn or newly adopted child. Parents can choose between standard parental benefits that last up to 40 weeks or extended parental benefits for up to 69 weeks.
These weeks can be shared or taken at the same time. For example, on standard leave both parents can each take 20 weeks together, or one parent can take all 40 weeks. The choice on how you use this time is up to you, but once you start receiving parental benefits, you cannot make changes partway through the benefit period. For more information please visit Canada.ca.
Who takes leave?
Deciding which parent should take leave can be tricky. Traditionally, the parent giving birth takes leave time in the first year of the newborn’s life. But in cases where the birth mother earns more, or the non-birth spouse has access to better parental benefits from work, it may make sense from a financial standpoint for the other parent to take leave.
If you’re concerned with your total cash flow during your planned leave, you can always do the math to determine whose leave will net the greater benefit and proceed that way. You’ll also have to decide to take either the parental leave plus maternity leave for 12 months, or for 18 months.
Whether you take the benefits over 12 or 18 months, your job remains available until you return. Also, there’s no monetary benefit for choosing one term over the other if you decide to take the longer parental leave term as the benefit remains the same and is simply stretched over 18 months.
Cut out the extras
It seems obvious, but if you’re saving for a baby, cutting down on all the extra spending can help. All too often couples put considerable and unnecessary pressure on themselves by going on a “babymoon” or buying the mom-to-be a so-called “push gift.”
As sweet as both these gestures are, they can take away thousands of dollars from your bank account that you may need once the baby arrives. There’s no harm in celebrating, just make sure that you can afford it first.
This goes for baby items too. Many new parents end up buying unnecessary items for their baby before it arrives. Take your time, and don’t think you have to have all the supplies at once. You can always buy items as and when needed, and this could also help you save money.
Buy back your maternity leave
If you have a workplace pension, your contributions stop while you’re on maternity leave. But you can stay invested by buying back a year of your pension. Talk to your payroll or Human Resources department about how you can make that happen, as this will mean bigger pension payments when you do retire.
Save your RSP room
Most likely, the amount of income tax you’ll be required to pay for the year you’re on maternity leave will be lower than when you’re working full time. Save that contribution and apply it to the year you’re back at work and making more money. This will mean a bigger tax refund, as your income tax bracket will be higher. Use that money and re-invest it back into your Retirement Savings Plan (RSP) to see your nest egg grow even faster.
A year off with your new baby is financially stressful, but by keeping up with your savings and sticking to your retirement plan, you can make sure your finances stay in check after the baby arrives.
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