Financially Planning for our First Child
I am not someone who makes new years resolutions, not because I don’t believe they are effective (although others have made that argument) but because I don’t need to wait for the calendar to change to begin setting goals for myself.
Every month I have specific financial goals based off what events are taking place in my life that month. My monthly savings goals are different in December than they are in February. Why? Because I would be setting myself up for failure if I expected to somehow save as much money during the holidays as I do during the dead of winter.
Having lofty goals is a good thing as it forces you to stretch yourself and be better than you were before. But your goals should be tailored to your life.
I approach my yearly financial goals in the same way, planned around the major life events I know will be coming up that year. In 2019 I have one major life event that will impact my finances.
My wife and I will be trying to have our first child.
Financially Planning for a Child
My wife and I are planners. Especially when it comes to money.
The week after we got engaged, we estimated how much our wedding would cost and immediately set up a new savings account called our “wedding fund”. We each set up automatic withdrawals from our checking account to our wedding fund each payday, and by the time the wedding rolled around, we had a surplus of funds available to cover every penny of the wedding.
Shortly after our wedding, we began the same process of financially planning for our first child.
We knew that we would want to start trying to conceive in February of 2019. Why did we have such a specific timeline? We had a destination wedding in Jamaica, which has travel advisories for Zika. We wanted to give ourselves a minimum of 6 months in a Zika free environment before we began trying.
Based on our February timeline we began planning as if we would conceive immediately which would put a potential baby arrival as soon as November 2019. I realize it can take a long time to conceive but it’s better to be financially ready for every scenario.
There were three major savings goals related to a baby arriving in November of 2019.
- Replacing my wife's income while she is on maternity leave
- Extra savings for “starter costs” for a baby
- Paying back into my wife's pension while she is on maternity leave
Replacing my Wife’s Income While she is on Maternity Leave
From a financial security perspective, this is number priority number one. Having a child can put duel income families in a precarious financial situation.
- They have additional expenses as a result of the new baby
- They have less income if one of the parents takes time off work
We decided our first priority was to ensure we have saved enough money to top up the maternity/parental benefits my wife will receive while she is off work.
For my American readers who may not be familiar with how Canadian parental benefits work let me give you a quick primer. Funded through the Canadian Employment Insurance (EI) program, there are two forms of child benefits new parents can receive after having a child.
- Maternity Benefits
- Parental Benefits
Maternity benefits are available to mothers up to 12 weeks prior to the due date and replace 55% of the mother's income up to a maximum of $562 per week. These benefits are available for up to 15 weeks.
Parental benefits are available to either parent after the maternity benefits run out and pay up to $562 per week for a maximum of 35 weeks.
Putting both the maternity and parental benefits together we essentially had a year of benefits worth $562 per week.
That made our financial planning simple. We had to save enough to cover the difference between my wife’s weekly take-home pay and $562 for one year.
My wife did not feel comfortable with me sharing her take-home pay number, but I’ll demonstrate what we did using a hypothetical number.
- Let’s say my wife’s weekly take-home pay was $1,000.
- The weekly shortfall we needed to save for was $438 ($1,000 -$562)
- The total amount we would need to save was $22,776 ($438 times 52 weeks)
- We began saving in July 2018 which gave us a 17-month runway to November of 2017
- So, we began saving $1,340 per month ($22,776 divided by 17) to fully replace my wife’s income while she is off
It helped that we were already saving an extra $800 per month in our wedding fund. Now that the wedding was done, we simply increased our wedding fund from $800 per month to $1,340 and renamed it our “baby fund”. It is one of the many short-term savings accounts we have.
Baby Starter Costs
We are fortunate enough that my wife is the youngest of three sisters. Her two sisters already have multiple children, live nearby and have no plans to have more kids.
That means we have tons of baby toys, clothes, cribs, strollers, baby monitors and other “baby starter costs” that we can inherit for free. Anything beyond that we will allocate out of our monthly income. Since we plan to fully replace my wife’s income and once the baby arrives, we no longer need to save $1,340 per month we expect we will have plenty of money available to cover the diaper and other baby start-up costs.
Paying back into my Wife’s Pension
Both my wife and I are extremely fortunate to have Defined Benefit pension plans. This makes retirement planning simple for us because we will have a predictable stream of income starting from day one of retirement.
A lot of people forget that when they are off on maternity leave, they are not paying into their pension. You have one of two options if you want to ensure you receive your full pension in retirement.
- Work an additional year to make up for the year of lost pension contributions
- Payback the pension contributions you would have made while on maternity leave
We opted to pay back my wife’s pension contributions rather than have her work an extra year at the end of her career.
- This meant we had approximately $10,000 to in contributions to pay
- We have up to a year from the end of her maternity leave to pay
- Assuming maternity leave started in November of 2019 and ended in November of 2020 we would have 29 months to save an additional $10,000
- These funds can be transferred from her other retirement accounts
- We began contributing an additional $345 every month ($10,000 divided by 29) into her retirement accounts which could then be used to pay back into her pension at the end of maternity leave
We know there will be surprises and bumps along the way. Starting a family can be an extremely stressful time. With our current financial planning, we are ensuring that money is not going to add to that stress.
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Consult a financial professional before making any major financial decisions.